<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 June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission file number 33-77510-C
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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 38-3160141
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
24 Frank Lloyd Wright Drive, Lobby L, 4th Floor
P.O. Box 544, Ann Arbor, Michigan 48106-0544
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(Address of principal executive offices)
(313) 994-5505
---------------
(Issuer's telephone number)
Not Applicable
--------------
(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
---- ----
<PAGE> 2
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
<S> <C> <C>
Item 1. Financial Statements 1
Balance Sheet, June 30, 1996 2
Statement of Operations for the three month periods
ended June 30, 1996 and 1995 3
Statement of Operations for the six month periods
ended June 30, 1996 and 1995 4
Statement of Cash Flows for the six month periods
ended June 30, 1996 and 1995 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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</TABLE>
i
<PAGE> 3
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The balance sheet of Captec Franchise Capital Partners L.P. III (the
"Partnership") as of June 30, 1996 and the statements of operations and cash
flows for the periods ending June 30, 1996 and 1995 are unaudited and have not
been examined by independent public accountants. In the opinion of the
Management, these unaudited financial statements contain all adjustments
necessary to present fairly the financial position and results of operations
and cash flows of the Partnership for the periods then ended. All such
adjustments are of a normal and recurring nature.
These financial statements should be read in conjunction with the
audited financial statements and accompanying notes thereto included in the
Partnership's report on Form 10-KSB for the fiscal year ended December 31,
1995.
1
<PAGE> 4
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
BALANCE SHEET
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 4,847,244
Investment in leases:
Operating leases, net 7,292,506
Direct financing leases, net 2,708,245
Rent receivable -
Unbilled rent 113,426
Due from related parties 18,243
-----------
Total assets $14,979,664
===========
<CAPTION>
LIABILITIES & PARTNERS' CAPITAL
<S> <C>
Liabilities:
Accounts payable $ 47,713
Due to related parties 449,144
Operating lease rents paid in advance 9,396
Security deposits held on leases 52,223
-----------
Total liabilities 558,476
-----------
Partners' Capital:
Limited partners' capital accounts 14,413,569
General partners' capital accounts 7,619
-----------
Total partners' capital 14,421,188
-----------
Total liabilities & partners' capital $14,979,664
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 5
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
STATEMENT OF OPERATIONS
for the three month periods ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Operating revenue:
Rental income $216,890 $ 35,571
Finance income 89,732 18,972
-------- ---------
Total operating revenue 306,622 54,543
-------- ---------
Operating costs and expenses:
Depreciation 63,750 3,469
General and administrative 17,111 7,155
-------- ---------
Total operating costs and expenses 80,861 10,624
-------- ---------
Income from operations 225,761 43,919
-------- ---------
Other Income (expense):
Interest income 33,295 432
Other 96 40
-------- ---------
Total other income, net 33,391 472
-------- ---------
Net income 259,152 44,391
Net income allocable to general partners 2,592 444
-------- ---------
Net income allocable to limited partners $256,560 $ 43,947
======== =========
Net income per limited partnership unit $ 18.67 $ 16.04
======== =========
Weighted average number of limited partnership
units outstanding 13,744 2,740
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 6
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
STATEMENT OF OPERATIONS
for the six month periods ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Operating revenue:
Rental income $335,107 $ 57,698
Finance income 162,665 18,972
-------- --------
Total operating revenue 497,772 76,670
-------- --------
Operating costs and expenses:
Depreciation 85,344 5,781
General and administrative 31,910 11,631
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Total operating costs and expenses 117,254 17,412
-------- --------
Income from operations 380,518 59,258
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Other Income (expense):
Interest income 52,449 8,739
Other 1,003 40
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Total other income, net 53,452 8,779
-------- --------
Net income 433,970 68,037
Net income allocable to general partners 4,340 680
-------- --------
Net income allocable to limited partners $429,630 $ 67,357
======== ========
Net income per limited partnership unit $ 37.40 $ 30.66
======== ========
Weighted average number of limited partnership
units outstanding 11,486 2,197
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 7
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
STATEMENT OF CASH FLOWS
for the six month periods ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 433,970 $ 68,037
Adjustments to net income:
Depreciation 85,345 5,781
Increase in unbilled rent (66,275) (8,732)
Decrease (increase) in receivables (13,878) (1,267)
Increases in payables 480,632 38,622
Security deposits received 24,854 9,167
----------- -----------
Net cash provided by operating activities 944,648 111,608
----------- -----------
Cash flows from investing activities:
Purchase of real estate for operating leases (4,008,569) (1,040,000)
Purchase of equipment for financing leases (958,288) (787,500)
Reduction of net investment in financing leases 129,644 31,991
----------- -----------
Net cash used in investing activities (4,837,213) (1,795,509)
----------- -----------
Cash flows from financing activities:
Issuance of limited partnership units 9,110,562 3,690,550
Offering costs (1,168,083) (495,971)
Return of initial limited partner's capital contribution (100)
Distributions to limited partners (486,325) (22,900)
----------- -----------
Net cash provided by financing activities 7,456,154 3,171,579
----------- -----------
Net increase in cash 3,563,589 1,487,678
Cash, beginning of period 1,283,655 251
----------- -----------
Cash, end of period $ 4,847,244 $ 1,487,929
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 8
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
Captec Franchise Capital Partners L.P. III (the "Partnership"), a
Delaware limited partnership, was formed on February 18, 1994 for the
purpose of acquiring income-producing commercial real properties and
equipment leased on a "triple net" basis, primarily to operators of
national and regional franchised businesses. The general partners of the
Partnership are Captec Franchise Capital Corporation III (the
"Corporation"), a wholly owned subsidiary of Captec Financial Group, Inc.
("Captec") and Patrick L. Beach, an individual, hereinafter collectively
referred to as the Sponsor. Patrick L. Beach is also the Chairman of the
Board of Directors, President and Chief Executive Officer of the
Corporation and Captec. The general partners have each contributed $100
in cash to the Partnership as a capital contribution.
The Partnership commenced a public offering of limited partnership
interests ("Units") on August 12, 1994. A minimum of 1,150 Units and a
maximum of 20,000 Units, priced at $1,000 per Unit, were offered on a
"best efforts, part or none" basis. The Partnership broke impound on
January 24, 1995, at which time funds totaling $1,155,255 were released
from escrow and the Partnership immediately commenced operations. At
June 30, 1996, the Partnership had accepted subscriptions for 16,504.791
Units, and funds totaling $16,504,791.
Due to the nature of 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
are allocated among the limited partners based upon the number of Units
owned. In no event will the Sponsor be allocated less than one percent
of profits and losses in any year.
Following is a summary of the Partnership's significant accounting
policies:
A. RENTAL INCOME FROM OPERATING LEASES: The Partnership's operating leases
have scheduled rent increases which occur at various dates throughout the
lease terms. The Partnership recognizes the total rent, as stipulated by
the lease agreement, as income on a straight-line basis over the term of
each lease. To the extent rental income on the straight-line basis
exceeds rents billable per the lease agreement, an amount is recorded as
unbilled rent.
B. LAND AND BUILDING ON OPERATING LEASES: Land and buildings on operating
leases are stated at cost. Buildings are depreciated on the
straight-line method over their estimated useful lives (40 years).
6
<PAGE> 9
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
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 a ten percent (10%) preferred return
to the limited partners. Net sale or refinancing proceeds of the
Partnership will be allocated ninety percent (90%) to the limited
partners and ten percent (10%) to the Sponsor, except that the Sponsor's
share will be subordinated to a eleven percent (11%) preferred return
plus return of the original contributions to the limited partners.
The Partnership distributed $272,155 during the three month period ended
June 30, 1996, representing quarterly distributions of cash flow from
operations for the quarter ended March 31, 1996 and elective monthly
distributions for the current quarter.
7
<PAGE> 10
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS AND AGREEMENTS:
Organization and offering expenses, excluding selling commissions, are
paid initially by the General Partners and/or their Affiliates and will
be reimbursed by the Partnership in an amount equal to up to three
percent (3%) of the gross proceeds of the offering (less any amounts paid
directly by the Partnership). In addition, the Sponsors and/or their
affiliates will be paid a non-accountable expense allowance by the
Partnership in an amount equal to two percent (2%) of the gross proceeds
of the offering. The Sponsor was reimbursed $279,821 during the three
month period ended June 30, 1996. These costs were treated as capital
issuance costs and have been netted against the limited partners' capital
accounts.
The Partnership will also pay to Participating Dealers, including
affiliates of the general partners, selling commissions in an amount
equal to eight percent (8%) of the purchase price of all units placed by
them directly. Total commissions incurred during the three month period
ended June 30, 1996 were $437,479. These costs were treated as capital
issuance costs and have been netted against the limited partners' capital
accounts. The Sponsor has also guaranteed payment of organization and
offering expenses which exceed 13%, including selling commissions, of the
gross proceeds of the offering.
An acquisition fee is charged, not to exceed the lesser of: (i) four
percent (4%) of gross proceeds plus an additional .00624% for each 1% of
indebtedness incurred in acquiring properties and/or equipment but in no
event will acquisition fees exceed five percent (5%) of the aggregate
purchase prices of properties and equipment; or (ii) compensation
customarily charged in arm's length transactions by others rendering
similar services. The Partnership paid $59,431 in acquisition fees
during the three month period ended June 30, 1996. Of this amount,
$13,711 was capitalized into net investment in direct financing leases
and $45,720 was capitalized into land and building on operating leases.
The Partnership has entered into an asset management agreement with the
Sponsor and its affiliates, whereby the Sponsor provides various property
and equipment management services for the Partnership.
A subordinated asset management fee 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 ten percent (10%) per annum on their
adjusted invested capital. There were no subordinated asset management
fees paid to the Sponsor during the three month period ended June 30,
1996.
8
<PAGE> 11
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS AND AGREEMENTS, CONTINUED:
An equipment liquidation fee limited to the lesser of three percent (3%)
of the sales price or customary fees for similar services will be paid in
conjunction with asset liquidation services. There were no equipment
liquidation fees paid during the three month period ended June 30, 1996.
The Partnership Agreement provides for the Sponsor to receive a real
estate liquidation fee limited to the lesser of three percent (3%) of the
gross sales price or fifty percent (50%) of the customary real estate
commissions in the event of a real estate liquidation. This fee is
payable only after the limited partners have received distributions equal
to a cumulative, noncompounded return of eleven percent (11%) 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.
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 $1,853,279
Building and improvements 5,558,550
----------
7,411,829
Less accumulated depreciation (119,323)
----------
Total $7,292,506
==========
</TABLE>
The following is a schedule of future minimum lease payments to be
received on the operating leases as of June 30, 1996:
<TABLE>
<S> <C>
1996 $ 393,066
1997 796,631
1998 812,747
1999 829,303
2000 847,460
Thereafter 13,859,780
-----------
Total $17,538,987
===========
</TABLE>
9
<PAGE> 12
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NET INVESTMENT IN DIRECT FINANCING LEASES:
The net investment in direct financing leases as of June 30, 1996 is
comprised of the following:
<TABLE>
<S> <C>
Minimum lease payments to be received $3,355,931
Estimated residual value 239,075
----------
Gross investment in direct financing leases 3,595,006
Less unearned income (886,761)
----------
Net investment in direct financing leases $2,708,245
==========
</TABLE>
The following is a schedule of future minimum lease payments to be
received on the direct financing leases as of June 30, 1996:
<TABLE>
<S> <C>
1996 $ 393,350
1997 720,254
1998 720,254
1999 720,254
2000 523,013
Thereafter 278,806
----------
Total $3,355,931
==========
</TABLE>
6. SUBSEQUENT EVENT:
In July 1996, the Partnership made a distribution to its limited partners
totaling 328,323, which represented the aggregate quarterly distribution
of cash flow from operations for the quarter ended June 30, 1996 in the
amount of $369,571 less $41,248 of elective monthly distributions
previously distributed during that quarter.
10
<PAGE> 13
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL COMMITMENTS:
Captec Franchise Capital Partners L.P. III (the "Partnership")
commenced the Offering of up to 20,000 limited partnership units ("Units")
registered under the Securities Act of 1933, as amended by means of a
Registration Statement which was declared effective by the Securities and
Exchange Commission on August 12, 1994. The Offering will terminate August 12,
1996.
As of June 30, 1996, the Partnership had accepted subscriptions for
16,504.791 Units and funds totaling $16,504,791 from 1,193 investors. The
Partnership had cash totaling $4,847,244 as of June 30, 1996, approximately
$4,344,000 of which is available for investment.
The Partnership intends to utilize the proceeds of the offering to
acquire existing, income-producing commercial Properties and Equipment which
will be leased on a "triple net" basis primarily to operators of nationally
franchised fast-food, family style and dinner house restaurants as well as
other franchised service-type businesses. The property leases are expected to
provide for a base minimum annual rent, with provisions for fixed increases on
specific dates or indexation of rent to indices such as the Consumer Price
Index and/or percentage rents. Equipment will be leased only pursuant to Full
Payout Leases. The Partnership may incur secured indebtedness in connection
with the acquisition of its Properties and/or Equipment.
Net Offering Proceeds from future sales of Units, together with
leverage of up to 30% of the sum of gross proceeds and the aggregate amount of
Partnership indebtedness secured by Partnership assets (approximately 35% of
the aggregate purchase prices of Partnership assets) when incurred, will
provide additional funds to be used by the Partnership to purchase Properties
and Equipment.
Once substantially all of the Partnership's funds have been applied as
intended, the Partnership expects to require limited amounts of liquid assets
since the form of lease which it intends to use for its Properties and
Equipment will require lessee to pay all taxes and assessments, maintenance and
repairs and insurance premiums, including casualty insurance. The general
partners expect that the cash flow to be generated by the Partnership's
properties and equipment will be adequate to pay operating expenses and provide
distributions to Limited Partners.
11
<PAGE> 14
During the three month period ending June 30, 1996, the Partnership
acquired one real property for a total cost of $1,143,000 and one equipment
package for a total cost of $342,783. See Real Estate Acquisitions and
Equipment Acquisitions below. The number of Properties and/or the amount of
Equipment to be acquired will depend upon the number of Units sold in the
Offering.
Real Estate Acquisitions:
Boston Market - New Jersey: On June 6, 1996, the Partnership acquired the
land and 3,333 square foot building comprising a Boston Market restaurant
located at 1729 North Olden Ave., Ewing Twp., New Jersey (the "New Jersey
Property"). The New Jersey Property was constructed for its present use in May
of 1996 and was fully operational at the time of the purchase. The New Jersey
Property was purchased from BC Real Estate Investments, Inc., and leased back to
New Jersey Rose, L.L.C., a New Jersey limited liability company (the "Tenant").
The Tenant operates casual dining restaurants under the primary trade name of
Boston Market. The headquarters offices of the Tenant are located at 3 Terry
Drive, Suite 103, Newton, Pennsylvania. The Partnership purchased a fee simple
interest in the New Jersey Property for a purchase price of $1,143,000 which was
negotiated by an affiliate of the Managing General Partner who considered
factors such as the potential value of the site, the financial condition and
business and operating history of the Tenant and demographic data for the area
in which the New Jersey Property is located. The purchase price for the New
Jersey Property is supported by an independent MAI appraisal. The Partnership
purchased the New Jersey Property with cash from offering proceeds. It is
anticipated that the New Jersey Property will be leveraged as provided for in
the Prospectus, however, the Partnership presently does not have a financing
commitment.
The Tenant and the Partnership have entered into a lease (the "Lease"),
which is an absolute net lease, whereby the Tenant is responsible for all
expenses related to the New Jersey Property including real estate taxes,
insurance, maintenance and repair costs. The Lease term expires on July 1, 2011
with five renewal options of five years each. The initial annual rent is equal
to ten and one-half percent (10.5%) of the purchase price and will be payable in
monthly installments on the first day of each month. Thus, based on the
purchase price of $1,143,000 the rent in the first year of the Lease is $120,015
per year, or $10,001.25 per month. The Annual Rent shall be increased beginning
on the sixth lease year to $132,017; beginning on the eleventh lease year to
$142,275 and at the end of every five years thereafter by ten percent of the
Annual Rent payable during the lease year immediately preceding. Beginning in
the sixth year, and in addition to the Annual Rent provided above, the Tenant
shall pay Percentage Rent on an annual basis equal to the difference between
five percent of "gross sales" (as defined in the lease) for such lease year
minus the Annual Rent payable for such lease year.
The Tenant has an option to purchase and first right of refusal to purchase
the New Jersey Property. The Tenant shall have the right to purchase the New
Jersey Property on the same terms and conditions as set forth in the offer or
the Tenant may elect an alternate purchase price as follows: (a) during the
first and second lease year the purchase price shall be an amount equal to the
total rent payable for the lease year subsequent to the lease year in which the
option is exercised divided by 9.462%; (b) during the third lease year in an
amount equal to the Annual Rent for lease year 3 divided by 9.978%; (c) during
the fourth lease year in an amount equal to
12
<PAGE> 15
the Annual Rent for lease year four divided by 9.785% and in lease year five in
an amount equal to the Annual Rent for lease year five divided by 9.580%.
Tenant shall have the option to purchase the New Jersey Property any time
after the fifth year for the following option price: (a) if the Tenant
exercises its option to purchase during the sixth through eighth lease year, the
option price shall be equal to the total rent payable for the lease year
subsequent to the lease year in which the option is exercised, divided by ten
percent.; (b) if the Tenant exercises its option to purchase after the eighth
lease year, the option purchase price shall be the greater of the fair market
value of the New Jersey Property or an amount equal to the total rent payable
for the lease year subsequent to the lease year in which the option is
exercised, divided by ten percent.
An Affiliate of the Managing General Partner analyzed demographic,
geographic and market diversification data for the area in which the New Jersey
Property is located and reviewed the appraisal of the New Jersey Property and
the analysis regarding comparable properties contained therein. Based upon the
foregoing, the General Partners are unaware of any unfavorable competitive
conditions regarding the New Jersey Property. The General Partners believe that
the amount of insurance carried by the Tenant is adequate.
The current annual rent per square foot for the New Jersey Property is
$36.00. The depreciable basis of the New Jersey Property for federal tax
purposes is $763,000 and it will be depreciated using the straight line method
over 39 years, a rate of $19,564 per year. The 1996 tax rate of the township in
which the New Jersey Property is located is $2.63 per $100 of assessed value.
The realty taxes for the first six months of 1996 on the New Jersey Property
were $8,099 but the current assessed value is for the land only. It is
anticipated that there will be a new assessment to reflect the improvements to
the land (i.e., the restaurant facility).
The Lease contains a substitution option that in the event that the Tenant
determines that the New Jersey Property is inadequate or unprofitable or is
rendered unsuitable by condemnation or casualty, the Tenant may substitute
another property having a Boston Market restaurant located thereon, of equal or
greater current value. The substitute property shall be subject to the approval
of the Partnership.
The Lease contains material default provisions that include, but are not
limited to: (i) the vacating or abandonment of the New Jersey 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 the Tenant of any
general arrangement or general assignment for the benefit of creditors. In the
event of a material default by the Tenant, the Lease contains remedy provisions
which are summarized as follows: (i) the Partnership may terminate the Lease and
take possession of the New Jersey Property, in which case the Partnership would
be entitled to damages incurred by reason of the material default; (ii) the
Partnership may maintain the Tenant's right to possession of the New Jersey
Property, in which case the Lease would continue to be in effect; or (iii) the
Partnership may pursue any other legal remedy available.
13
<PAGE> 16
Equipment Acquisitions:
Denny's POS Equipment: On July 15, 1996 the Partnership purchased point of
sale equipment ("POS Equipment) pursuant to an assignment effective as of May 1,
1996, from an affiliate of the General Partner to be used in the operation of
twelve (12) Denny's restaurants located at the following locations:
425 N.E. Hassalo St., Portland, OR
12201 N. Center St., Portland, OR
7815 N.E 6th Ave., Vancouver, WA
8787 S.W. Scholls Ferry Rd., Portland, OR
12101 SE 82nd Ave., Portland, OR
105 E. Burnside R., Gresham, OR
10428 S. E. Stark, Portland, OR
1020 W. 6th Ave., Dalles, OR
10412 N. E. 4th Plain, Orchards, WA
400 E. Plain Mill Blvd., Vancouver, WA
15815 S. E. 82nd Dr., Clackamas, OR
3680 Market St., Salem, OR
The Partnership purchased the POS Equipment for $342,783 and leased it to The
Green Team Restaurants, LLC, a Delaware limited liability company, dba Denny's
(the "Lessee"). The Lessee owns and operates the twelve Denny's under a
franchise agreement. The purchase was made in cash from proceeds of the
Partnership; however, it is anticipated that the POS Equipment will
subsequently be leveraged as provided for in the Prospectus.
The Lessee and Partnership entered into the Partnership's standard form of
lease (the "Lease") commencing on May 1, 1996, whereby the Lessee is responsible
for all expenses related to the POS Equipment including taxes, insurance,
maintenance and repair costs. The Lease term is 60 months and the minimum
annual rent is $90,495.24 payable in monthly installments of $7,541.27 on the
first day of each month. The annual rent remains fixed for the entire Lease
term. Prior to entering into the lease an affiliate of the Managing General
Partner considered factors such as the financial condition and business and
operating history of the Lessee and demographic data for the area in which the
POS Equipment is located.
At the end of the Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, the Lessee may purchase all of the POS Equipment for
the Fair Market Value, not to exceed the sum of Thirty Four Thousand Two Hundred
Seventy Eight and 35/100 Dollars (34,278.35) The General Partners believe that
the amount of insurance carried by the Lessee is adequate. The Lease is
unconditionally guaranteed by the following individuals: Doug Koch, Robbie
Qualls and Justin M. Hathaway, jointly and severally.
14
<PAGE> 17
RESULTS OF OPERATIONS:
For the three and six month periods ended June 30, 1996, the
Partnership earned revenues totaling approximately $340,000 and $551,000,
respectively, compared to approximately $55,000 and $85,000 for the
corresponding period of the preceding year. The increase in year-to-date
revenues over the prior year's period (548%) was due to the effect of the
Partnership's progress between the comparable periods in selling Units and
investing the proceeds therefrom in income producing, net leased, real estate
properties and equipment.
For the three and six month periods ended June 30, 1996, the
Partnership incurred expenses totaling approximately $81,000 and $117,000,
respectively, compared to $11,000 and $17,000 for the corresponding periods of
the preceding year. The increase in year-to-date expenses over the prior
year's period (588%) was due to the same effects which produced the increase in
revenues. This growth caused corresponding increases in depreciation expense
(due to the growth in depreciable assets) and general and administrative
expenses.
For the three month and six month periods ended June 30, 1996, the
Partnership earned net income of approximately $259,000 and $434,000,
respectively, compared to approximately $44,000 and $68,000 for the
corresponding periods of the previous year. The increase in year-to-date net
income over the prior year's period (538%) was primarily due to the increase in
revenues discussed above.
Based upon the results of operations for the three month period ended
June 30, 1996, the Partnership distributed to its limited partners a total of
$369,571, representing cash flow from operations for that period. These
amounts were distributed as follows: $41,248 paid in May 1996 and June 1996 to
investors that have elected to receive monthly distributions and $328,323 paid
in July 1996 to all investors. On a comparative basis, the Partnership
distributed to its limited partners a total of $73,200 for the corresponding
three month period of the preceding year. The increase in distributions over
the prior year's period (405%) was due to the increase in net income discussed
above and the reduction in net investment in financing leases (i.e. capital
returned on equipment lease investments) resulting from the growth in the
equipment lease portfolio.
LEASE DEFAULT:
The Partnership has invested in a direct financing lease, which lease
has a net investment value of $241,765 as of June 30, 1996. The lessee under
this lease, Kenny Rogers Roasters of Arizona, Inc., has defaulted on the lease
agreement due to non-payment of rents. As of June 30, 1996, the Partnership is
owed $21,291 of rents past due from February 1, 1996 and forward. Presently,
this default has caused the suspension of cash flows from rents to the
Partnership in an amount equal to $4,258 per month, which amount represents
4.5% of the Partnership's aggregate current monthly rental income (excluding
additional rent which may be received from any future acquisitions). The
General Partners are unable to determine at this time whether any of these past
due rents will be recovered.
15
<PAGE> 18
The General Partners have been conducting ongoing discussions with the
lessee and with the franchisor and other franchisees in the Kenny Rogers
Roasters franchise system, as well as with other parties interested in the
equipment for operation of other restaurant and non-restaurant uses. These
discussions have been focused on determining whether the lessee can cure the
default, and identifying alternate lessees that are interested in taking over
the operations of this restaurant or purchasing the equipment for use in other
concepts.
To date, no agreements have been reached as a result of the
discussions described above. However, based upon these discussions the General
Partners believe that, if necessary, the equipment can be re-leased to a new
lessee within a 3 to 6 month period, although such new lease may not provide
for the same amount of monthly rent as required under the existing lease.
Furthermore, the General Partners will pursue the default remedy provisions
under the lease, to the extent that pursuing such remedies is determined to be
in the best interest of the Partnership, taking into account such factors as
the cost of any legal actions and the probability of recovery. The General
Partners will continue to seek a resolution to this lease default and will
report any commitments or definitive agreements regarding this default.
16
<PAGE> 19
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as a part of this report.
Number Exhibit
------ -------
27 Financial Data Schedule
Reports on Form 8-K. (Incorporated by reference from
Registrant's SEC File No. 33-77510C, filed January 2, 1996 (Form
8-K/A No. 1); January 3, 1996, and March 25, 1996. Subsequent
reports on Form 8-K were filed April 2, 1996 and April 3, 1996).
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BY: Captec Franchise Capital Corporation III
Managing General Partner of
Captec Franchise Capital Partners L.P. III
BY: /s/ W. Ross Martin
--------------------------------------
W. Ross Martin
Chief Financial Officer and Vice President,
a duly authorized officer
DATE: August 13, 1996
18
<PAGE> 21
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,847,244
<SECURITIES> 0
<RECEIVABLES> 2,839,914
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,687,158
<PP&E> 7,411,829
<DEPRECIATION> 119,323
<TOTAL-ASSETS> 14,979,664
<CURRENT-LIABILITIES> 558,476
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 14,421,188
<TOTAL-LIABILITY-AND-EQUITY> 14,979,664
<SALES> 306,622
<TOTAL-REVENUES> 340,013
<CGS> 0
<TOTAL-COSTS> 80,861
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 259,152
<INCOME-TAX> 0
<INCOME-CONTINUING> 259,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259,152
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
