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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31,1996
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 33-44654C
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
(Name of small business issuer in its charter)
Delaware 38-3019164
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(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.)
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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) (Zip Code)
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Issuer's telephone number: (313) 994-5505
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act: None
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(Title of Class)
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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
At December 31, 1996 subscriptions for 3,881 units of limited partnership
interest (the "Units") had been accepted, representing an aggregate amount of
$1,940,500. At December 31, 1996, 3,881 Units were issued and outstanding.
The aggregate sales price does not reflect market value and reflects only the
price at which the Units were offered to the public. Currently, there is no
market for the Units and no market is expected to develop.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the Prospectus of the Registrant dated may 7, 1992, as
supplemented and filed pursuant to Rule 424(b) under the Securities Act of
1033, as amended, S.E.C. filed No. 33-44654C, and is incorporated by reference
in Part III of this Annual Report on Form 10-KSB.
The Plan of Liquidation filed as an exhibit to the Form 8-K, filed March 11,
1997, S.E.C. File No. 33-44654C, and is incorporated by reference in Part I ,II
and III of this Annual Report on Form 10-KSB.
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TABLE OF CONTENTS
PART I
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Item 1. Description of Business...................................................................................... 1
Item 2. Description of Properties.................................................................................... 1
Item 3. Legal Proceedings............................................................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 5
PART II
Item 5. Market for Registrant's Limited Partnership Interests
and Related Security Holder Matters.......................................................................... 6
Item 6. Management's Discussion and Analysis or Plan of Operation ................................................... 6
Item 7. Financial Statements......................................................................................... 8
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................................................... 8
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................................................ 9
Item 10. Executive Compensation....................................................................................... 10
Item 11. Security Ownership of Certain Beneficial Owners and Management............................................... 10
Item 12. Certain Relationships and Related Transactions............................................................... 10
Item 13. Exhibits and Reports on Form 8-K............................................................................. 12
SIGNATURES............................................................................................................ 13
INDEX TO FINANCIAL STATEMENTS......................................................................................... F-i
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PART I
Item 1. Description of Business.
Captec Franchise Capital Partners L.P. II (the "Partnership") is a
Delaware limited partnership formed in November 19, 1991 for the purpose of
acquiring income-producing commercial real 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 real properties will be leased
under long-term (10-20 year) operating leases and the equipment will be leased
under shorter-term (5-7 year) full payout direct financing leases. The general
partners of the Partnership are Captec Franchise Capital Corporation II (the
"Managing General Partner") and Patrick L. Beach, an individual (collectively,
the "General Partners"). The Managing General Partner is a Michigan
corporation which is a wholly-owned subsidiary of Captec Financial Group, Inc.
(the "Captec Group")
The principal investment objectives of the Partnership are: (i)
preservation and protection of capital; (ii) distribution of cash flow
generated by the Partnership's leases; (iii) capital appreciation; (iv)
generation of increased income and protection against inflation through
required escalation of base rents or participation in gross revenues of lessees
of Partnership properties; and (v) deferred taxation of Partnership cash
distributions for limited partners.
The Partnership commenced a public offering (the "Offering") of up to
15,000 units of limited partnership interest (the "Units") registered under the
Securities Act of 1933, as amended, by means of a Registration Statement on
Form S-18 which was declared effective by the Securities and Exchange
Commission on May 7, 1992. The Partnership closed the Offering on May 6, 1994,
having accepted subscriptions for 3,881 Units and offering proceeds totaling
$1,940,500 from 194 investors.
The Partnership also received in 1994 funds totaling $831,000 from the
issuance of a note payable, in accordance with the maximum borrowing
restrictions provided for in the Prospectus dated May 7, 1992, as amended (the
"Prospectus"). All of the offering proceeds and the funds from the note
payable (hereinafter referred to collectively as "Funds") have been invested in
real estate and equipment.
The Partnership competes with many other entities engaged in real estate
and equipment investment activities. The ability to locate purchasers at the
time of disposition of the Property and Equipment will depend primarily on the
success of the operating Properties, the location of the Properties and the
physical condition of the Property and Equipment. The General Partners and
their affiliates are not aware of any current favorable or unfavorable
competitive business conditions.
The Partnership has no employees. The General Partners and their
affiliates, however, are permitted to perform services for the Partnership.
Item 2. Description of Properties.
As further discussed in Item 4 and Item 6 herein, subsequent to December
31, 1996, in conjunction with the Plan of Liquidation approved on December 23,
1996, the Partnership assets were sold and a final liquidating distribution was
paid to the Limited Partners on January 29, 1997.
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REAL ESTATE
Taco Cabana Restaurant, Las Vegas, Nevada: On May 25, 1994 the
Partnership purchased the land and 3,800 square foot building to be used as a
Taco Cabana restaurant (the "Taco Cabana Property") located at 3575 West
Tropicana, Las Vegas, Nevada. The Partnership purchased a fee simple interest
in the Taco Cabana Property for a purchase price of $1,350,000, based on an MAI
appraisal. The Taco Cabana Property was constructed for its present use in
1993 and was fully operational at the time of purchase. The Partnership
initially purchased the Taco Cabana Property with cash from offering proceeds;
however, this property was subsequently leveraged as provided for in the
Prospectus.
The Taco Cabana Property was purchased from, and leased back to, Red Line
Taco Seven, Ltd., a Texas Limited Partnership ("Red Line"). Red Line owned and
operated the Taco Cabana restaurant under a franchise agreement. Red Line's
obligations under the Lease were guaranteed jointly and severally by Felix
Stehling, Charles Hatch and Dean Slover; provided, however, that Felix
Stehling's guarantee is limited to fifty (50%) percent of the purchase price,
and Charles Hatch's guarantee is limited to twenty-five (25%) percent of the
purchase price. Mr. Stehling is the Founder and former Chairman of Taco
Cabana, Inc., the Franchisor for the Taco Cabana restaurant chain. Red Line
and the Partnership entered into the Partnership's standard form of lease (the
"Lease"), which is an absolute net lease, whereby Red Line is responsible for
all expenses related to Taco Cabana including real estate taxes, insurance,
maintenance and repair cost related to the property. The Lease expires on June
1, 2014, and may be extended under the terms of two (2) renewal options of five
(5) years each.
On July 25, 1995, the Partnership, Red Line Taco Seven, Ltd., a Texas
Limited Partnership ("Original Tenant") and Tropicana Taco Cabana, Ltd., a
Texas Limited Partnership, ("Assignee Tenant") entered into a Lease Transfer
and Assumption Agreement whereby Original Tenant has assigned to Assignee
Tenant all of the Original Tenant's right, title and interest in a Lease
Agreement between the Partnership and Original Tenant dated March 31, 1994,
which became effective on May 25, 1994. The Assignee Tenant operated the Taco
Cabana Restaurant under a franchise agreement with Taco Cabana, Inc. until
September 5, 1996. The offices of the Assignee Tenant are located at 440
Broadway, Suite 420, San Antonio, Texas.
The initial annual rent equaled twelve (12%) percent of the purchase price
and is payable in monthly installments on the first day of each month. The
current annual rent at August 1, 1996 was $166,860. Although lease payments to
the Partnership were current as of August 1, 1996, the Assignee Tenant was
unable to generate sufficient cash flow to cover the lease payments. On
September 5, 1996, the Partnership entered into an agreement whereby the
Partnership took possession of the Property and the Assignee Tenant/Guarantor
paid $325,000 to the Partnership in settlement of all obligations.
The depreciable basis of the Taco Cabana Property for federal tax purposes
is $866,250 and will be depreciated using the straight line method over 39
years, at a rate of $22,212 per year. The current annual realty taxes are
$5,802.
The Partnership has received an offer to purchase the Taco Cabana Property
for $1,755,000. Please see Item 6, "Plan of Liquidation" for a more
comprehensive discussion of the proposed sale.
Kenny Rogers Roasters Restaurant, Tampa, Florida: On September 9, 1994,
the Partnership entered into an agreement with an affiliate of the Captec Group
to form CFCP II, L.C. (the "Joint Venture"), a joint venture to purchase the
land and 3,400 square foot building to be used as a Kenny
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Rogers Roasters restaurant located at 13606 Bruce B. Downs Blvd., Tampa,
Florida (the "KRR Property"). The KRR Property was purchased from and leased
back to Kenny Rogers Roasters of Tampa Bay, Inc. ("KRRT") on October 7, 1994.
The Joint Venture entered into the Partnership's standard form of Lease, which
is an absolute net lease, whereby KRRT is responsible for all expenses related
to KRR. The Lease expires on October 1, 2014, and may be extended under the
terms of two (2) renewal options of five (5) years each.
The Joint Venture purchased the KRR Property for $800,000. As of December
31, 1994, the Partnership invested $800,000 in the Joint Venture utilizing
proceeds from the issuance of notes payable and, thus, acquired 100% of the
Joint Venture. On March 1995, the Partnership reduced its investment in the
Joint Venture to $502,202, representing 61.4% of the Joint Venture. The
Partnership intended to reduce its investment in the Joint Venture when the KRR
Property was originally purchased in order to obtain the required ratio of
equipment and real estate in the Partnership as stated in the Prospectus. The
initial annual rent equaled eleven and forty-nine one hundredths percent
(11.49%) of the purchase price and is payable in monthly installments on the
first day of each month. Thus, the Partnership's share of the rental income
after it reduced it investment in this lease was equal to $57,680, or $4,807
per month. The Partnership's share of the annual rent was increased by three
percent (3%) on October 1, 1995 to $59,408 or $4,951 per month and is scheduled
to increase on each of the first through ninth anniversary dates of the lease
and by fifteen and nine tenths percent (15.9%) on the fifteenth anniversary
date.
KRRT has an option to purchase the KRR Property commencing on the first
day following the fifth (5th) anniversary date of the lease and expiring thirty
(30) days thereafter. The option price KRRT shall pay for the KRR Property
shall be calculated using an eleven percent (11%) capitalization rate applied
to the annualized rental revenue for the KRR Property during the sixth year of
the Lease.
The depreciable basis of the Partnership's share of the KRR Property, for
federal tax purposes, is $272,653 and it is being depreciated using the
straight line method over 39 years, at a rate of $6,991 per year. The
1995-1996 tax rate for the county in which the KRR Property is located is $2.54
per $100 of appraised value.
During 1996, the Tenant defaulted on the Lease due to non-payment of
rents. The last lease payment was received by the Partnership on February 1,
1996. As of December 31, 1996, the Partnership had written-off $49,512 of
rents which were receivable from March 1, 1996 and forward. The Partnership
holds a security deposit of $5,581 which will be used to offset these past due
rents.
The Partnership has received an offer to purchase the Partnership's
interest in the KRR Property for $580,000. Please see Item 6, "Plan of
Liquidation" for a more comprehensive discussion of the proposed sale.
GENERAL REAL ESTATE PROVISIONS
The General Partners have reviewed appraisals obtained during the last
quarter of 1996 on the Properties and, based upon such review, are unaware of
any unfavorable competitive conditions regarding the Properties. The General
Partners believe that the amount of insurance carried by the Tenants is
adequate.
The real estate leases contain material default provisions that include,
but are not limited to: (i) the vacating or abandonment of the Property by the
Tenant; (ii) the failure by the Tenant to make any payment due under the Lease;
(iii) the failure by the Tenant to observe or perform any of the covenants,
conditions, or provisions of the Lease; and (iv) the making by Tenant of any
general arrangement or general assignment for the benefit of creditors. In the
event of a material default by
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the Tenant, the Lease contains remedy provisions which are summarized as
follows: (i) the Partnership may terminate the Lease and take possession of the
Property, in which case the Partnership would be entitled to damages incurred
by reason of the material default; (ii) the Partnership may maintain Tenant's
right to possession of the Property, in which case the Lease would continue to
be in effect; or (iii) the Partnership may pursue any other legal remedy
available.
EQUIPMENT
Checkers Drive-In Restaurant: On September 7, 1994, the Partnership
purchased a modular building comprising a Checkers Drive-In-Restaurant located
in Kissimmee, Florida, from Champion Modular Restaurant Company, Inc. The
Partnership purchased the modular building for approximately $142,000 and is
leasing this building to BVL Foodservices, Inc. ("BVL") for a period of 5 years
under a full payout equipment lease. The Partnership and BVL entered into the
Partnership's standard form of lease whereby BVL is responsible for all
expenses related to the Equipment. The lease term is 60 months and the minimum
annual rent is $40,548 payable in monthly installments of $3,379 on the first
day of each month commencing October 1, 1994. The annual rent remains fixed
for the entire lease term.
At the end of the lease term, upon at least 90 days prior irrevocable
notice to the Partnership, BVL may purchase all of the Equipment for the fair
market value not to exceed the sum of $21,306. The General Partners believe
the amount of the insurance carried by the Lessee is adequate.
Popeyes Restaurant: On February 8, 1995, the Partnership purchased
restaurant equipment for a cost of $74,000 and leased it to Coastal Cuisine,
Inc. (Coastal) for use in a Popeyes restaurant located at 11211 Abercorn
Street, Savannah, Georgia. The Partnership and Coastal entered into the
Partnership's standard form of lease whereby Coastal is responsible for all
expenses related to the Equipment. The Lease term is 60 months and the minimum
annual rent is $20,334, payable in monthly installments of $1,695. The annual
rent remains fixed for the entire lease term. The Partnership was holding a
security deposit of $24,050.
On August 13, 1996, Coastal purchased the restaurant equipment for $7,400
and prepaid the lease, resulting in prepayment proceeds of approximately
$62,700.
Schlotzsky's Deli: On February 13, 1995, the Partnership purchased
restaurant equipment for $103,968 and leased it to Task Foods, Inc. (Task
Foods) which owns and operates a Schlotzsky's Deli located at 2835 N. Memorial
Parkway, Huntsville, Alabama. The Partnership and Task Foods entered into the
Partnership's standard form of lease whereby Task Foods would be responsible
for all expenses related to the Equipment. The lease term is 60 months and the
minimum annual rent is $28,572, payable in monthly installments of $2,381. The
annual rent remains fixed for the entire lease term.
At the end of the lease term, upon at least 90 days prior irrevocable
notice to the Partnership, Task Foods may purchase all of the Equipment for the
fair market value, not to exceed the sum of $10,396. The Guarantors on the
lease are Shefali K. Patel and Kumar M. Patel, jointly and severally. The
General Partners believe that the amount of insurance carried by Task Foods is
adequate.
Italian Oven: The Partnership purchased restaurant equipment for $227,063
on February 21, 1995, and leased the equipment to PCI Associates, Inc. (PCI)
who own and operate an Italian Oven restaurant located at Cedar Knoll Galleria,
a regional mall in Ashland, Kentucky. The Partnership and PCI entered into the
Partnership's standard form of lease whereby PCI is responsible for all
expenses related to the Equipment. The lease term is 60 months and the minimum
annual rent is $62,940
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payable in monthly installments of $5,245. The annual rent remains fixed for
the entire lease term.
At the end of the lease term, upon at least 90 days prior irrevocable
notice to the Partnership, PCI may purchase all of the Equipment for fair
market value, not to exceed the sum of $22,706. The Guarantors on the lease
are Stephen Vargosko, Kenneth Dzialowski and Kishor Joshi, jointly and
severally. The General Partners believe the amount of insurance carried by PCI
is adequate.
The Partnership has received an offer to purchase the remaining three
equipment packages for $425,000. Please see Item 6, "Plan of Liquidation" for
a more comprehensive discussion of the proposed sale.
Item 3. Legal Proceedings.
The Partnership is not a party to any material legal proceeding nor, to
the best of its knowledge, are any such proceedings either pending or
threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 18, 1996, a Plan of Liquidation (the "Plan") was mailed to all
limited partners requesting a vote on the sale of the Partnership's real estate
properties and equipment (the "Assets") and a vote to amend the Agreement of
Limited Partnership to facilitate the sale. The sale of the Assets and the
amendment to the Agreement of Limited Partnership was recommended by the
Managing General Partner of the Partnership. It was necessary to obtain a
majority in interest of the limited partners' vote both to amend the Agreement
of Limited Partnership and to approve the sale because the sale was to an
affiliate. The Plan was approved by a majority of the limited partners on
December 23, 1996.
The complete Plan of Liquidation was filed as an exhibit to Form 8-K as
filed with the SEC on March 11, 1997, and is incorporated herein by reference.
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PART II
Item 5. Market for Registrant's Limited Partnership Interests and Related
Security Holder Matters.
The Units are not readily transferable. There is no public market for the
Units and it is not currently expected that any will develop. There are
restrictions upon the transferability of Units, including the requirement that
the General Partners consent to any transferee becoming a substituted Limited
Partner (which consent may be granted or withheld at the sole discretion of the
General Partners). In addition, restrictions on transfer may be imposed under
state securities laws.
The Revenue Act of 1987 contains provisions which may have an adverse
impact on investors in certain "publicly traded partnerships". If the
Partnership were classified as a "publicly-traded partnership" for federal
income tax purposes, income attributable to the Units would be characterized as
portfolio income and the gross income attributable to Units acquired by
tax-exempt entities would be unrelated business income, with the result that
the Units could be less marketable. The General Partners will, if necessary,
take appropriate steps to ensure that the Partnership will not be deemed a
"publicly traded partnership."
At December 31, 1996, the Partnership had 3,881 Units issued and
outstanding representing funds totaling $1,940,000 from 194 limited partners.
Item 6. 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.
The Partnership completed its acquisition activities in 1995 and had
invested all available capital at December 31, 1995 in two net lease real
estate properties (including land and building) in amounts totaling $1,852,202
and four equipment leases in amounts totaling $547,069. During 1996, Coastal
Cuisine, Inc. prepaid an equipment lease resulting in prepayment proceeds of
$62,700 and acquired the equipment for a purchase price of $7,400. As of
December 31, 1996, all of the Partnership's available capital was invested in
two real estate properties (including land and building) in amounts totaling
$1,852,202 and three equipment leases in amounts totaling $473,069.
The Partnership believes that it has sufficient liquidity to maintain its
operations through cash reserves and cash flows from operations. Although some
of the Partnership's leases are currently in default, the Partnership had
sufficient funds from the payment of rents from the equipment and the
settlement of the lease obligations on the Taco Cabana property to pay all of
the Partnership's obligations. The Partnership anticipates incurring some
expenses prior to the sale or releasing of the real estate properties relating
to the maintenance of such properties. It is anticipated that the Assets of
the Partnership will be sold during the first quarter of 1997.
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As of December 31, 1996, the General Partners believe the outlook for
long-term cash generation is favorable, however, they do expect a material
change in the availability of such capital resources until such time as the
Properties are released or sold.
Results of Operations:
For the year ended December 31, 1996, the Partnership earned revenues
totaling approximately $519,000, compared to $350,000 for the previous year.
Revenues for the year ended December 31, 1996 were comprised of approximately
$444,000 of rental income from operating leases, $70,000 of financing income
from financing leases and approximately $5,000 of other income which includes
approximately $3,600 from a gain on sale of equipment. For the preceding year,
the Partnership's revenues were comprised of approximately $264,000 of rental
income from operating leases, $78,000 of financing income from financing leases
and $8,000 of other income. The increase in revenues over the prior year (48%)
was due to the effects of the payoff of the Coastal Cuisine equipment lease,
the non-accrual of rents associated with the delinquent lease to Kenny Rogers
Roasters of Tampa Bay and the accrual of settlement proceeds related to the
Taco Cabana Restaurant.
For the year ended December 31, 1996, the Partnership incurred expenses
totaling approximately $192,000, compared to $122,000 for the previous year.
Expenses for the year ended December 31, 1996 were comprised of approximately
$79,000 of interest expense, $29,000 of depreciation on buildings leased under
operating leases and $84,000 of general and administrative and other expenses.
For the preceding year, the Partnership's expenses were comprised of
approximately $84,000 of interest expense, $28,000 of depreciation on buildings
leased under operating leases and $10,000 of general and administrative and
other expenses. The increase in expenses over the prior year (57%) was
primarily due to the reverse of the accrual of unbilled rents that will not be
received as a result of the termination of the operating leases.
For the year ended December 31, 1996, the Partnership earned net income of
approximately $327,000, compared to $228,000, for the previous year. The
increase in net income over the prior year (43%) was due to the combined
effects of the equipment sale of Coastal Cuisine, the non-accrual of rents
associated the delinquent lease to Kenny Rogers Roasters of Tampa Bay, the
accrual of settlement proceeds and the reversal of the accrual of unbilled
rents, as mentioned above.
The Partnership is not subject to income taxation as all of its income and
expenses flow through to the Partners. The Partnership's net asset and
liabilities as reported in its financial statements exceeds tax basis by
$70,000, as of December 31, 1996.
During the year ended December 31, 1996, the Partnership made
distributions to limited partners totaling $293,500, as compared with $235,700
for the preceding year. This amount includes the proceeds from the prepayment
of the Coastal Cuisine, Inc. equipment lease totaling $62,700. The remaining
$230,800 represents cash flow from operations for the year.
Tenant Defaults:
The Partnership has invested in an operating lease under a joint venture
arrangement described in Note 6 to the consolidated financial statements
included herein. As of December 31, 1996, the Partnership's net investment in
the property subject to this lease is $512,344. 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 December 31,1996, the Partnership has
terminated the Lease and written off all rents past due thereunder. The
Partnership holds a $5,581 security deposit which will be applied against these
past due rents.
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The Partnership owns real estate which was leased Tropicana Taco Cabana
Ltd., a Texas limited partnership (the "Tenant") which assumed the lease and
operations of the Taco Cabana Restaurant located at 3575 W. Tropicana, Las
Vegas, Nevada (the "Property"). As of December 31, 1996, the Partnership's net
investment in the property subject to this lease is $1,361,555. During 1996,
the Tenant was unable to generate sufficient cash flow to cover the lease
payments to the Partnership. Although all lease payments were current as of
August 1, 1996, the Managing General Partner commenced negotiations to resolve
the imminent problem. On September 5, 1996, the Partnership and the Tenant
entered into an agreement whereby the Partnership took possession of the
Property and the Tenant paid $325,000 to the Partnership in settlement of all
obligations.
Plan Of Liquidation:
As a result of the defaults, The Managing General Partner proposed a plan
of liquidation ("Plan of Liquidation"). Under the Plan of Liquidation, the
Partnership would sell all of its assets, including the value of the settlement
noted above, to Captec Net Lease Realty, Inc., an affiliate of the General
Partners, for the sum of $2,760,000. Because the Partnership's Agreement of
Limited Partnership prohibited a sale to an affiliate of the General Partners,
it was necessary to obtain a majority in interest of the limited partners vote
both to amend the Agreement of Limited Partnership and to approve the sale.
The Plan of Liquidation was mailed to all limited partners on November 18, 1996
requesting they vote by December 23, 1996. At December 21, 1996, of the 76%
limited partnership units that voted, 96% were in favor of the Plan of
Liquidation.
Subsequent Event - Sale Of Assets:
As a result of the majority vote by the limited partners in favor of the
Plan of Liquidation, on January 29, 1997 the Partnership sold two net leased
real estate properties (including land and building) for $2,335,000 and three
net leased equipment packages for $425,000 (the "Assets") to Captec Net Lease
Realty, Inc., a Michigan corporation ("Purchaser") and an affiliate of Captec
Franchise Capital Corporation II, the Managing General Partner of the
Partnership. The sale was effective as of January 1, 1997. All rights and
obligations under the leases were assigned to the Purchaser. The total sale
price of $2,760,000 (the "Sale Price") included a $325,000 settlement paid to
the Partnership by Tropicana Taco Cabana, Ltd., which amount was transferred to
the Purchaser at the close of the sale. In addition, the Purchaser assumed the
note payable to Heller Financial, Inc. with a principal balance as of January
1, 1997 of $742,425 and assumed the accrued liability of $7,424 related to a
prepayment premium on the note.
Simultaneous with the sale, after paying all liabilities and expenses of
the Partnership, the Partnership was liquidated. The liquidation resulted in a
final distribution to the limited partners on January 28, 1997 in the amount of
$2,000,569, or $515.47 per Unit. The Plan of Liquidation was filed as an
exhibit to the Form 8-K filed with the Securities and Exchange Commission on
March 11, 1997 and is incorporated herein by reference.
Item 7. Financial Statements.
See Index to Financial Statements on Page F-i of this form 10-KSB for
Financial Statements and Financial Statement Schedules, where applicable.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act of the Registrant.
The Partnership does not have directors or officers. The General Partners
of the Partnership are Captec Franchise Capital Corporation II, a Michigan
corporation, as Managing General Partner, and Patrick L. Beach, an individual.
Captec Franchise Capital Corporation II is a wholly-owned subsidiary of the
Captec Group.
The following is a list of the executive officers and directors of the
Managing General Partner as of December 31, 1996:
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Name Age Position
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Patrick L. Beach 40 Chairman of the Board of Directors, President and Chief
Executive Officer
W. Ross Martin 36 Director, Vice President, Treasurer and Chief Financial
Officer
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Patrick L. Beach has served as Chairman of the Board of Directors,
President and Chief Executive Officer of the Managing General Partner since
1991. Mr. Beach is also the Chairman of the Board of Directors, President and
Chief Executive Officer of the Captec Group, Captec Franchise Capital
Corporation III ("Captec III")and Captec Franchise Capital Partners Corporation
IV ("Captec IV"). Captec III and Captec IV are a Michigan corporations which
serves as the Managing General Partner of Captec Franchise Capital Partners
L.P. III and Captec Franchise Capital Partners L.P. IV, respectively, Delaware
limited partnerships with investment objectives similar to the Partnership.
From 1977 until 1980 he was employed by the HydraMatic Division of General
Motors Corp., where he served in various manufacturing related positions. From
March 1980 until February 1981 he served as Production Manager for Quick
Industries, Inc. of Jackson, Michigan with responsibility for purchasing and
production management for five plastics manufacturing plants in five states.
In February 1981, Mr. Beach resigned from his previous position to found the
Captec Group. He is responsible for the day to day management of the Captec
Group and its Affiliates. From 1986 to 1990, Mr. Beach also served as Chairman
of Wendy's of San Diego, Inc., a 27-unit franchisee of Wendy's International.
In 1990, Mr. Beach sold his interest in Wendy's of San Diego, Inc. and resigned
as Chairman of the Board. Approximately twenty-two months thereafter, Wendy's
of San Diego, Inc. filed for protection under Chapter 11 of the Bankruptcy
Code. From 1989 to 1991 Mr. Beach served as Chairman and President of Illiana
Printing, Inc., the master franchisor for American Speedy Printing Centers,
Inc. in the states of Illinois and Indiana.
W. Ross Martin has served as a Director, Vice President, Treasurer and
Chief Financial Officer of the Managing General Partner since 1991. Mr. Martin
also serves as Director, Vice President, Treasurer and Chief Financial Officer
of Captec III and Director, Senior Vice President, Treasurer and Chief
Financial Officer Captec IV and as a Director, Chief Financial Officer and
Senior Vice President of the Captec Group. From 1982 until 1985, he was
employed by Deloitte Haskins & Sells, most recently as senior consultant in
that firm's Emerging Business Services practice. Mr. Martin joined the Captec
Group in 1985 as Controller, was promoted to Vice President Finance in 1986 and
Senior Vice President and Chief Financial Officer in 1994. He is responsible
for the treasury, corporate finance and strategic planning duties of the Captec
Group as well as overseeing the Accounting and Credit Departments. Mr. Martin
is also a Certified Public Accountant.
9
<PAGE> 12
There were no filings required in 1996 under Section 16(a) of the
Securities and Exchange Act of 1934 and the rules thereunder.
Item 10. Executive Compensation.
The Partnership has no officers or directors. Furthermore, the
Partnership is not required to pay the officers and directors of the General
Partners any current nor any proposed compensation in such capacities.
However, the Partnership is required to pay certain fees, make distributions
and allocate a share of the profits or losses of the Partnership to the General
Partners.
See "Item 12. Certain Relationships and Related Transactions."
Item 11. Security Ownership of Certain Beneficial Owners and Management.
As of December 31, 1996, the Partnership had accepted subscriptions for
3,881 Units totaling $1,940,500 from non-affiliates of the Partnership. The
General Partner does not currently hold any limited partnership units.
The following table sets forth as of December 31, 1996 certain information
regarding beneficial ownership of the Partnership Units by each person known by
the Partnership to beneficially own more than 5% of the Partnership's
outstanding Units:
<TABLE>
Name of Units of
Title of Class Beneficial Owner Beneficial Ownership Percentage of Class
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Units Virgil J. Ianni 200 Units 5.15%
</TABLE>
Item 12. Certain Relationships and Related Transactions.
During calendar year 1996, no acquisition fees were paid to any affiliates
of the General Partner. Total acquisition fees paid since inception were
$119,953 as of December 31, 1996.
During the fourth quarter of 1996, the Managing General Partner proposed a
Plan of Liquidation whereby an affiliate of the Managing General Partner would
purchase all of the assets of the Partnership. The affiliate and the Managing
General Partner of the Partnership have the following common directors;
shareholders and officers; Patrick L. Beach and W. Ross Martin. The Plan of
Liquidation was mailed to all limited partners and required a majority in
interest vote in favor of the Plan of Liquidation and amendment to the
Agreement of Limited Partnership, prior to a sale of the Partnership Assets.
The Managing General Partner obtained and reviewed independent MAI appraisals
on the Properties prior to sale. The General Partners and their affiliates
believe that the proposed Plan of Liquidation is consistent with the objectives
of the Partnership and that they are acting in conformity with their fiduciary
duty to the Partnership.
It is anticipated that the Captec Group, the parent of the Managing
General Partner and of which Mr. Patrick Beach is a Director, Officer and
Majority Shareholder, may provide property and equipment management services
for the Partnership. In such case, the General Partners believe that the
Captec Group would render management services to the Partnership on a
competitive basis in a manner consistent with customary business practices.
The General Partners further believe that the
10
<PAGE> 13
Captec Group has sufficient personnel and other required resources to discharge
all responsibilities to the various properties that the Captec Group manages
and will manage in the future.
The Asset Management Agreement entered into between the Partnership and
the Captec Group is on terms no less favorable to the Partnership than those
customary for similar services by independent firms in the relevant geographic
area. The Asset Management Agreement provides for termination by a majority
vote of the limited partners, without penalty, upon 60 days prior written
notice.
In connection with the Offering and throughout all stages of the
Partnership's operations, the General Partners and their affiliates will
receive compensation. All of the General Partners' fees with the exception of
Acquisition Fees will be subordinated to receipt by the limited partners of
preferential distributions. Acquisition Fees are payable whether or not funds
are available for distribution to the limited partners. The General Partners
may, under certain circumstances, benefit from the continued holding of
Partnership Properties and/or Equipment, while investors may be better served
by a sale or other disposition of such Properties and/or Equipment.
Furthermore, the receipt of certain fees and reimbursements is dependent upon
the ability of the General Partners to timely invest net offering proceeds.
Therefore, the interest of the General Partners in receiving such fees may
conflict with the interest of the limited partners. The General Partners and
their affiliates believe that their actions and decisions will be made in a
manner consistent with their fiduciary duty to the Partnership.
The agreements and arrangements, including those relating to compensation,
between the Partnership and the General Partners or any of their affiliates
will not be the result of arm's-length negotiations although the General
Partners believe that such agreements and arrangements will approximate those
which would be arrived at through arm's-length negotiations. While the
Partnership will make no loans to the General Partners or their affiliates, the
Partnership may borrow money from the General Partners or their affiliates but
only on such terms as to interest rate, security, fees and other charges at
least as favorable to the Partnership as are charged by unaffiliated lending
institutions in the same locality on comparable loans for the same purpose.
The General Partners and their affiliates are not prohibited from providing
services to, and otherwise dealing or doing business with, persons (for
example, franchisees) who may deal with the Partnership, although there are no
present arrangements with respect thereto. However, the Partnership Agreement
prohibits receipt of rebates or "give-ups" or participation in any reciprocal
business arrangements which would have the effect of circumventing any of the
provisions of the Partnership Agreement.
11
<PAGE> 14
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herein or incorporated by
reference:
Number Exhibit
- ------ -------
2 Plan of Liquidation. (Filed as an exhibit to Registrants
Form 8-K filed March 11, 1997 and incorporated by reference
from Registrant's SEC File No. 33-44654C).
4 Agreement of Limited Partnership of Registrant (Filed as
Exhibit A of the Registrant's Prospectus dated May 7, 1992, as
supplemented and incorporated by reference from Registrant's
S.E.C. File No. 33-44654C).
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of
1996. (Subsequent reports on Form 8-K, incorporated by
reference from Registrant's SEC File No. 33-44654C, filed
March 11, 1997).
12
<PAGE> 15
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
By: Captec Franchise Capital Corporation II
General Partner
By: /s/ Patrick L. Beach
--------------------
Patrick L. Beach
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: March 28,1997
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: /s/ Patrick L. Beach
------------------------------------
Patrick L. Beach
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: March 28, 1997
By: /s/ W. Ross Martin
------------------------------------
W. Ross Martin,
Director, Vice President,
Treasurer and Chief Financial Officer
Date: March 28, 1997
13
<PAGE> 16
INDEX TO
FINANCIAL STATEMENTS
Page
----
Captec Franchise Capital Partners L.P. II and Subsidiary F(a) - i
Captec Franchise Capital Corporation II F(b) - i
F - i
<PAGE> 17
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II
AND SUBSIDIARY
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
F(a) - i
<PAGE> 18
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGES
REPORT OF INDEPENDENT ACCOUNTANTS..................................................................... F(a) - 1
FINANCIAL STATEMENTS:
Consolidated Balance Sheet............................................................................ F(a) - 2
Consolidated Statement of Operations.................................................................. F(a) - 3
Consolidated Statement of Changes in Partners' Capital................................................ F(a) - 4
Consolidated Statement of Cash Flows.................................................................. F(a) - 5
Notes to Consolidated Financial Statements.......................................... F(a) - 6 through F(a) - 11
</TABLE>
F(a) - ii
<PAGE> 19
[LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Franchise Capital Corporation II
Managing General Partner of
Captec Franchise Capital Partners L.P. II:
We have audited the accompanying consolidated balance sheet of Captec Franchise
Capital Partners L.P. II and Subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in partners'
capital, and cash flows for the years then ended. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting financial statement amounts and disclosures. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Captec Franchise
Capital Partners L.P. II and Subsidiary as of December 31, 1996 and 1995, and
the consolidated results of its operations, changes in partners' capital and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
In December 1996, a majority of the Limited Partners voted in favor of a Plan
of Liquidation which proposed the sale of all the Partnership's assets to an
affiliate of the Sponsor. As discussed in Note 8 of the financial statements,
in January 1997 the Limited Partners received a liquidating distribution
representing the net sale proceeds.
/s/Coopers & Lybrand L.L.P.
Detroit, Michigan
March 14, 1997
F(a) - 1
<PAGE> 20
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
Cash $12,775 $118,413
Investment in property under leases:
Operating leases, net 0 1,900,963
Financing leases, net 357,411 498,184
Rent receivable 250 249
Unbilled rent 0 69,890
Due from related parties 332,584 7,584
Land and buildings available for operating leases 1,872,490 0
Total assets $2,575,510 $2,595,283
========== ==========
LIABILITIES & PARTNERS' CAPITAL
LIABILITIES:
Note payable $742,425 $785,768
Accounts payable 509 509
Due to related parties 29,725 1,800
Operating lease rents received in advance 0 13,500
Security deposits held on leases 19,081 43,131
-------- --------
Total liabilities 791,740 844,708
-------- --------
Partners' Capital:
Limited partners' capital accounts 1,776,522 1,746,594
General partners' capital account 7,248 3,981
-------- --------
Total partners' capital 1,783,770 1,750,575
-------- --------
Total liabilities & partners' capital $2,575,510 $2,595,283
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F(a) - 2
<PAGE> 21
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Operating revenue:
Rental income $ 444,116 $ 264,188
Finance income 69,578 77,870
---------- ----------
Total operating revenue 513,694 342,058
---------- ----------
Operating costs and expenses:
Depreciation 28,473 28,462
General and administrative 84,138 9,568
---------- ----------
Total operating costs and expenses 112,611 38,030
---------- ----------
Income from operations 401,083 304,028
---------- ----------
Other income (expense):
Gain on sale of equipment 3,652 0
Interest expense (79,309) (83,553)
Other 1,269 7,617
---------- ----------
Total other income, net (74,388) (75,936)
---------- ----------
Net income 326,695 228,092
Net income allocable to general partners 3,267 2,281
---------- ----------
Net income allocable to limited partners $323,428 $225,811
========== ==========
Net income per limited partnership unit $83.34 $58.18
========== ==========
Weighted average number of limited partnership
units outstanding 3,881 3,881
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F(a) - 3
<PAGE> 22
CAPTEC FRANCHISE CAPITAL PARTNERS L.P, II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN PARTNER'S CAPITAL
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Limited General Total
Partners' Partners' Partners'
Accounts Account Capital
--------- ------- -------
<S> <C> <C> <C>
Balance, January 1, 1995 $ 1,756,483 $ 1,700 $ 1,758,183
Distributions - ($60.73 per unit) (235,700) 0 (235,700)
Net income 225,811 2,281 228,092
----------- -------- -----------
Balance, December 31, 1995 1,746,594 3,981 1,750,575
Distributions - ($75.63 per unit) (293,500) 0 (293,500)
Net income 323,428 3,267 326,695
----------- -------- -----------
Balance, December 31, 1996 $ 1,776,522 $ 7,248 $ 1,783,770
=========== ======== ============
The accompanying notes are an integral part of the consolidatal statements.
</TABLE>
F(a) - 4
<PAGE> 23
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net Income $326,695 $228,092
Adjustments to net income:
Depreciation 28,473 28,462
Decrease (increase) in unbilled rent 69,890 (31,963)
Gain on sale of equipment (3,652) 0
Increase in payables 27,925 14,955
Decrease in rental payments paid in advance (13,500) 0
(Decrease) increase in security deposits (24,050) 21,798
-------- -------
Net cash provided by operating activities 411,781 261,344
-------- -------
Cash flows from investing activities:
Disposition of real estate for operating leases 0 326,760
Purchase of equipment for financing leases 0 (425,284)
Proceeds from sale of equipment 7,400 0
Decrease (increase) in receivables from related parties (325,000) 24,126
Reduction of net investment in financing leases 137,024 69,282
-------- -------
Net cash provided by (used in) investing activities (180,576) (5,116)
-------- -------
Cash flows from financing activities:
Principal payments on note payable (43,343) (39,099)
Distributions to limited partners (293,500) (235,700)
-------- -------
Net cash used in financing activities (336,843) (274,799)
-------- -------
Net decrease in cash (105,638) (18,571)
Cash, beginning of year 118,413 136,984
-------- -------
Cash, end of period $ 12,775 $ 118,413
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F(a) - 5
<PAGE> 24
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 has an investment in a joint venture,
CFCP II, L.L.C., a limited liability company, of which it owns 61.4%. CFCP
II, L.L.C. is accounted for as a subsidiary of the Partnership. 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,
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 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 December 31, 1996, 3,881 Units
were issued and outstanding.
In December 1996, a majority of the limited partners voted in favor of a
Plan of Liquidation which proposed a sale of all the Partnership's assets
to an affiliate of the Sponsor. See Note 8, Subsequent Event, for further
discussion.
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 AVAILABLE FOR OPERATING LEASES: Land and
buildings available for operating leases are stated at cost less
accumulated depreciation. Buildings are depreciated on the
straight-line method over their estimated useful life (40 years).
F(a) - 6
<PAGE> 25
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 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 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.
F(a) - 7
<PAGE> 26
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. The Partnership paid $0 and $5,351 in
acquisition fees during 1996 and 1995, respectively. The acquisition fees
were capitalized into net investment in financing leases.
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 1996 or 1995.
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 to the Sponsor during 1996 or 1995.
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.
F(a) - 8
<PAGE> 27
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LAND AND BUILDING ON OPERATING LEASES:
In September 1996, the Partnership and the tenant/guarantor of one of the
operating lease properties entered into an agreement whereby the
Partnership took possession of the property and the tenant/guarantor paid
$325,000 to the Partnership, recognized in rental income, in settlement of
all obligations. In December 1996, a second operating lease was terminated
due to default by the lessee. Accordingly, all related accrued receivable
amounts for both leases have been fully reserved and related property
balances have been reclassified to land and building available for
operating leases.
The net investment in land and building available for operating leases as
of December 31, 1996 and net investment in operating leases as of December
31, 1995 is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 805,900 $ 805,900
Building and improvements 1,138,902 1,138,902
---------- ----------
1,944,802 1,944,802
Less accumulated depreciation (72,312) (48,839)
---------- ----------
Total $1,872,490 $1,900,963
========== ==========
</TABLE>
5. NET INVESTMENT IN FINANCING LEASES:
The net investment in financing leases as of December 31, 1996 and 1995 is
comprised of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Minimum lease payments to be received $387,912 $ 601,314
Estimated residual value 47,307 54,707
-------- ---------
Gross investment in financing leases 435,219 656,021
Less unearned income (77,808) (157,837)
-------- ---------
Net investment in financing leases $357,411 $ 498,184
======== =========
</TABLE>
F(a) - 9
<PAGE> 28
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NET INVESTMENT IN FINANCING LEASES, CONTINUED:
The following is a schedule of future minimum lease payments to be received
on the financing leases as of December 31, 1996:
<TABLE>
<S> <C>
1997 $132,061
1998 132,061
1999 118,545
2000 5,245
--------
Total $387,912
========
</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 December 31, 1996, the Partnership had invested
approximately $491,000 in CFCP II, L.L.C., representing 61.4% ownership of
the joint venture after selling a 38.6% share to an affiliate of Captec for
$326,760.
The joint venture's assets and liabilities approximated $800,000 and $0,
respectively, at December 31, 1996. Revenues and expenses of the joint
venture were approximately $60,000 and $9,600, respectively, for the year
ended December 31, 1996.
In 1996 and 1995, the Partnership accounted for its investment in CFCP II,
L.L.C. on a flow-through basis, whereby the Partnership's share (61.4% for
1996 and 1995) of the assets and liabilities and income and expense of CFCP
II, L.L.C. were 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 December 31, 1996 of $742,425. 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
collateralized by a mortgage in the Partnership's two real estate
investments.
F(a) - 10
<PAGE> 29
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. II AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTE PAYABLE, CONTINUED:
At December 31, 1996, annual maturities of the note payable are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997 $48,051
1998 53,261
1999 641,113
--------
Total $742,425
========
</TABLE>
8. SUBSEQUENT EVENT:
In January 1997, the Partnership entered into an agreement with its
affiliate, Captec Net Lease Realty, Inc. ("Realty") to sell the assets of
the Partnership to Realty for the sum of $2,760,000. Upon closing, the
Partnership agreed to pay its liabilities and distribute the remaining
funds in accordance with the Partnership Agreement.
In conjunction with the sale and after receipt of the net sale proceeds
therefrom, the Partnership made a distribution to its limited partners in
January 1997, totaling $2,000,569, which represented the net funds
available for the liquidation of the partnership units. In addition, the
general partners contributed their respective investments in the
Partnership to the limited partners.
Use of proceeds of the sale and partners' capital following the liquidation
are as follows:
<TABLE>
<S> <C> <C>
Sale price of assets sold $ 2,760,000
Plus: cash at December 31, 1996 12,775
Less: repayment of note payable 742,425
repayment of net amounts due to related parties 22,141
loan prepayment penalty and other 7,640
----------
Proceeds available for distribution $ 2,000,569
===========
Limited General
-------------- ----------------
Partners' capital at December 31, 1996 $ 1,776,522 $ 7,248
Excess of sale price over book value of assets sold 216,799 -
Contribution of general partners' interests 7,248 (7,248)
Distribution of net proceeds (2,000,569) -
--------------- ---------------
Partners' capital after liquidation $ - $ -
=============== ===============
</TABLE>
F(a) - 11
<PAGE> 30
CAPTEC FRANCHISE CAPITAL CORPORATION II
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
F(b) - i
<PAGE> 31
CAPTEC FRANCHISE CAPITAL CORPORATION II
CONTENTS
<TABLE>
PAGES
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS ..................................................................... F(b) - 1
FINANCIAL STATEMENTS:
Balance Sheet........................................................................................... F(b) - 2
Statement of Operations ................................................................................ F(b) - 3
Statement of Cash Flows................................................................................. F(b) - 4
Statement of Changes in Stockholders' Equity............................................................ F(b) - 5
Notes to Financial Statements....................................................... (b) - 6 through F(b) - 7
</TABLE>
F(b) - ii
<PAGE> 32
[LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Captec Franchise Capital Corporation II:
We have audited the accompanying balance sheet of Captec Franchise Capital
Corporation II as of December 31, 1996 and 1995, and the related statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting financial statement amounts and disclosures. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Captec Franchise Capital
Corporation II as of December 31, 1995 and 1994, and the results of its
operations, changes in stockholders' equity and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.
In December, 1996, a Majority of the Limited Partners of Captec Franchise
Capital Partners, L.P. II voted in favor of a Plan of Liquidation which
proposed sale of all the Partnership's assets to an affiliate of the Sponsor.
As discussed in Note 3 of the financial statements, in January 1997, the
Limited Partners received a liquidating distribution representing the net sale
proceeds.
/s/Coopers & Lybrand L.L.P.
Detroit, Michigan
March 14, 1997
F(b) - 1
<PAGE> 33
CAPTEC FRANCHISE CAPITAL CORPORATION II
BALANCE SHEET
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
Cash $ 837 $ $953
Income tax receivable 263 -
Investment in partnership 3,624 1,990
-------- -------
Total assets $ 4,724 $ 2,943
======== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Total liabilities:
Payable to affiliate $ 5,122 $ 2,641
Income tax payable - 37
-------- -------
Total liabilities 5,122 2,678
-------- -------
Stockholders' equity:
Common stock, $1 par value; 100 shares authorized,
issued and outstanding 100 100
Paid-in capital 400 400
Retained earnings (accumulated deficit) (898) (235)
-------- -------
Total stockholders' equity (398) 265
-------- -------
Total liabilities & stockholders' equity $ 4,724 $ 2,943
======== =======
The accompanying notes are an integral part of the financial statements.
</TABLE>
F(b) - 2
<PAGE> 34
CAPTEC FRANCHISE CAPITAL CORPORATION II
STATEMENT OF OPERATIONS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Investment income from partnership $ 1,634 $ 1,140
General and administrative 2,597 1,736
-------- --------
Net loss before taxes (963) (596)
Income tax provision (300) (203)
-------- --------
Net loss $ (663) $ (393)
======== ========
The accompanying notes are an integral part of the financial statements.
</TABLE>
F(b) - 3
<PAGE> 35
CAPTEC FRANCHISE CAPITAL CORPORATION II
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON PAID-IN (ACCUM.
STOCK CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C>
Balance, January 1, 1995 $ 100 $ 400 $ 158 $ 658
Net income - - (393) (393)
------ ------- -------- -------
Balance, December 31, 1995 100 400 (235) 265
Net loss - - (663) (663)
------ ------- -------- -------
Balance, December 31, 1996 $ 100 $ 400 $ (898) $ (398)
====== ======= ========= =======
The accompanying notes are an integral part of the financial statements.
</TABLE>
F(b) - 4
<PAGE> 36
CAPTEC FRANCHISE CAPITAL CORPORATION II
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (663) $ (393)
Adjustments to net loss:
Undistributed income from partnership (1,634) (1,140)
Increase in income tax receivable (263) -
Decrease in income tax payable (37) (203)
--------- ---------
Net cash used in operating activities (2,597) (1,736)
--------- ---------
Cash flows from financing activities, proceeds from
borrowings from affiliates 2,482 1,641
--------- ---------
Net decrease in cash (115) (95)
Cash, beginning of year 952 1,048
--------- ---------
Cash, end of period $ 837 $ 953
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
F(b) - 5
<PAGE> 37
CAPTEC FRANCHISE CAPITAL CORPORATION II
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
Captec Franchise Capital Corporation II (the "Corporation") is a Michigan
corporation organized on November 18, 1991. The Corporation was formed for
the purpose of serving as the managing general partner of Captec Franchise
Capital Partners L.P. II (the "Partnership"), a Delaware limited
partnership.
The Corporation is a wholly owned subsidiary of Captec Financial Group,
Inc. ("Captec"). Captec has paid $500 in cash to the Corporation for the
purchase of all 100 shares of common stock of the Corporation. As a
general partner of the Partnership, the Corporation has contributed $100 to
the capital of the Partnership. Patrick L. Beach is also a general partner
of the Partnership and is the Chairman of the Board of Directors, President
and Chief Executive Officer of the Corporation and Captec. Each general
partner, hereinafter collectively referred to as the Sponsor, has a 0.5
percent share in the Partnership's net income or loss.
The Partnership undertook a public offering of limited partnership
interests ("Units") in 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, with the issuance of 3,881 Units.
In December 1996, a majority of the limited partners voted in favor of
a Plan of Liquidation which proposed a sale of all the Partnership's
assets to an affiliate of the Sponsor. See Note 8, Subsequent Events,
for further discussion.
Affiliates of the Corporation are expected to provide various services to
the Partnership and will be paid certain fees for such services as
specified in the Partnership Agreement.
Following is a summary of the Corporation's significant accounting
principles:
A. INCOME TAXES: The Corporation reports its income for federal
income tax purposes in the consolidated tax return of Captec. Income
taxes are allocated by Captec to the Corporation on the separate
return basis. The Corporation's income tax expense reflected in the
statement of operations and that computed by applying the statutory
federal income tax rate are approximately equal. Deferred income
taxes, for financial reporting purposes, are not material.
B. 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.
F(b) - 6
<PAGE> 38
CAPTEC FRANCHISE CAPITAL CORPORATION II
NOTES TO FINANCIAL STATEMENTS
2. OPERATIONS:
The Corporation's only source of revenue in 1996 and 1995 was from its
investment in the Partnership. See the accompanying financial statements
of the Partnership. The Corporation's expenses in 1996 and 1995 were the
result of professional fees and bank service charges.
3. SUBSEQUENT EVENT
In January 1997, the Partnership entered into an agreement with its
affiliate, Captec Net Lease Realty Inc. ("Realty"), to sell the assets of
the Partnership for the sum of $2,760,000. Upon closing, the Partnership
agreed to pay its liabilities and distribute the remaining funds in
accordance with the Partnership Agreement.
In conjunction with the sale, the Partnership made a distribution to its
limited partners in January 1997 totaling $2,000,569, which represented the
estimated net sale proceeds of the partnership units. In addition, the
general partners contributed their respective investments in the
Partnership to the limited partners.
Use of proceeds of the sale and partners' capital following the liquidation
are as follows:
<TABLE>
<S> <C> <C>
Sale price of assets sold $ 2,760,000
Plus: cash at December 31, 1996 12,775
Less: repayment of note payable 742,425
repayment of net amounts due to related parties 22,141
loan prepayment penalty and other 7,640
-----------
Proceeds available for distribution $ 2,000,569
============
Limited General
------------ ------------
Partners' capital at December 31, 1996 $ 1,776,522 $ 7,248
Excess of sale price over book value of assets sold 216,799 -
Contribution of general partners' interests 7,248 (7,248)
Distribution of net proceeds (2,000,569) -
---------------- ------------
Partners' capital after liquidation $ - $ -
================ ============
</TABLE>
F(b) - 7
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- --------------
<S> <C> <C>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,775
<SECURITIES> 0
<RECEIVABLES> 332,834
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 345,609
<PP&E> 2,258,374
<DEPRECIATION> 28,473
<TOTAL-ASSETS> 2,575,510
<CURRENT-LIABILITIES> 791,740
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,783,770
<TOTAL-LIABILITY-AND-EQUITY> 2,575,510
<SALES> 513,694
<TOTAL-REVENUES> 518,615
<CGS> 0
<TOTAL-COSTS> 112,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,309
<INCOME-PRETAX> 326,695
<INCOME-TAX> 0
<INCOME-CONTINUING> 326,695
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 326,695
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
