<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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: 33-77510-C
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
38-3160141
(IRS Employer Identification Number)
24 Frank Lloyd Wright Drive, Lobby L, 4th Floor
P.O. Box 544, Ann Arbor, Michigan 48106-0544
(Address of principal executive offices, including zip code)
(734) 994-5505
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to 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: Not applicable
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>
<S> <C>
ITEM NO. PAGE
-------- ----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheet, September 30, 1999 and December 31, 1998 3
Statement of Operations for the three and nine months
ended September 30, 1999 and 1998 4
Statement of Changes in Partners' Capital for the nine months
ended September 30, 1999 5
Statement of Cash Flows for the nine months
ended September 30, 1999 and 1998 6
Notes to Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 10
PART II OTHER INFORMATION
Other Information 11 - 12
SIGNATURES 13
</TABLE>
2
<PAGE> 3
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 392,370 $ 493,136
Restricted cash 175,766 153,142
Investment in property under leases:
Operating leases, net 19,178,626 19,340,098
Financing leases, net 2,728,875 1,249,313
Impaired financing leases, net 27,492 50,000
Accounts receivable 97,575 154,948
Unbilled rent, net 775,489 571,705
Due from related parties 12,830 140,948
Deferred financing costs, net 438,299 390,066
------------- -------------
Total assets $ 23,827,322 $ 22,543,356
============= =============
LIABILITIES & PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued expenses $ 87,156 $ 165,907
Due to related parties 4,111 36,662
Notes payable 8,194,000 6,200,000
Security deposits held on leases 54,774 59,329
------------- -------------
Total liabilities 8,340,041 6,461,898
------------- -------------
Partners' capital:
Limited partners' capital accounts 15,467,770 16,035,439
General partner's capital accounts 19,511 46,019
------------- -------------
Total partners' capital 15,487,281 16,081,458
------------- -------------
Total liabilities & partners' capital $ 23,827,322 $ 22,543,356
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenue:
Rental income $ 571,628 $ 427,770 $ 1,704,590 $ 1,283,310
Finance income 66,116 44,633 143,262 152,473
Interest and other income 1,685 3,376 9,998 4,938
--------- --------- ----------- -----------
Total operating revenue 639,429 475,779 1,857,850 1,440,721
--------- --------- ----------- -----------
Operating costs and expenses:
Depreciation 72,870 54,700 217,041 164,100
General and administrative 13,352 15,401 56,497 61,826
Amortization of debt issuance costs 11,812 - 35,538 -
Interest expense 172,108 - 474,892 -
--------- --------- ----------- -----------
Total operating costs and expenses 270,142 70,101 783,968 225,926
--------- --------- ----------- -----------
Income from operations 369,287 405,678 1,073,882 1,214,795
--------- --------- ----------- -----------
Other income (loss):
Gain on sale of equipment 6,528 - 1,012 4,713
Loss on sale of real estate - - (159,422) -
--------- --------- ----------- -----------
Net income 375,815 405,678 915,472 1,219,508
Net income allocable to general partner 3,758 4,057 9,155 12,195
--------- --------- ----------- -----------
Net income allocable to limited partners $ 372,057 $ 401,621 $ 906,317 $ 1,207,313
========= ========= =========== ===========
Net income per limited partnership unit $ 18.64 $ 20.12 $ 45.40 $ 60.48
========= ========= =========== ===========
Weighted average number of limited partnership
units outstanding 19,963 19,963 19,963 19,963
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
For the Nine Months Ended September 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Limited Limited General Total
Partners' Partners' Partner's Partners'
Units Accounts Accounts Capital
----- -------- -------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 19,963 $ 16,035,439 $ 46,019 $ 16,081,458
Distributions - ($73.84 per unit) - (1,473,986) (35,663) (1,509,649)
Net income - 906,317 9,155 915,472
------- ------------- ---------- -------------
Balance, September 30, 1999 19,963 $ 15,467,770 $ 19,511 $ 15,487,281
======= ============= ========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 6
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 915,472 $ 1,219,508
Adjustments to net income:
Depreciation 217,041 164,100
Amortization of debt issuance costs 35,538 -
Gain on sale of equipment (1,012) (4,713)
Loss on sale of real estate 159,422 -
Increase in unbilled rent (203,784) (126,065)
Decrease in accounts receivable 57,373 11,361
Decrease in security deposits (4,555) -
Decrease in accounts payable and accrued expenses (78,751) (5,147)
Increase in restricted cash (22,624) -
Decrease (increase) in due from related parties 128,118 (300,355)
(Decrease) increase in due to related parties (32,551) 43,725
----------- -------------
Net cash provided by operating activities 1,169,687 1,002,414
----------- -------------
Cash flows from investing activities:
Purchase and construction advances for properties subject
to operating leases (1,127,119) -
Proceeds from disposition of properties subject to operating leases 912,128 -
Proceeds from sale of equipment 98,389 -
Purchase of equipment for financing leases (1,955,999) -
Principal payments on financing leases 401,568 571,256
----------- -------------
Net cash used in investing activities (1,671,033) 571,256
----------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 1,994,000 -
Debt issuance costs (83,771) -
Distributions to limited partners (1,473,986) (1,614,845)
Distributions to general partner (35,663) -
----------- -------------
Net cash provided by financing activities 400,580 (1,614,845)
----------- -------------
Net (decrease) increase in cash and cash equivalents (100,766) (41,175)
Cash and cash equivalents, beginning of period 493,136 553,680
----------- -------------
Cash and cash equivalents, end of period $ 392,370 $ 512,505
=========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 7
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS
1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:
Captec Franchise Capital Partners L.P. III (the "Partnership"), a
Delaware limited partnership, was formed on February 18, 1994 for the
purpose of acquiring income-producing commercial real properties and
equipment leased on a "triple net" or "double net" basis, primarily to
operators of national and regional chain and nationally franchised fast
food and family style restaurants, as well as other national and
regional retail chains. The general partners of the Partnership upon
formation of the Partnership were 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. In August, 1998 the
general partnership interest of the Partnership was acquired by Captec
Net Lease Realty, Inc., an affiliate of Captec, for $1,483,000.
The Partnership commenced a public offering of 20,000 limited
partnership interests ("Units") on August 12, 1994 and reached final
funding in August, 1996. Net proceeds after offering expenses were
approximately $17.4 million. During 1997, the Partnership repurchased a
total of 37 units. At September 30, 1999, the Partnership had 19,963
Units issued and outstanding.
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.
The balance sheet of the Partnership as of September 30, 1999 and the
statements of operations and cash flows for the period ending September
30, 1999 and 1998 have not been audited. 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. Results of operations for the interim periods are not
necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
2. LAND AND BUILDING SUBJECT TO OPERATING LEASES:
The net investment in operating leases as of September 30, 1999 is
comprised of the following:
<S> <C>
Land $ 8,163,346
Building and improvements 11,796,894
------------
19,960,240
Less accumulated depreciation (781,614)
------------
Total $ 19,178,626
============
</TABLE>
7
<PAGE> 8
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
3. NET INVESTMENT IN FINANCING LEASES:
The net investment in financing leases as of September 30, 1999 is
comprised of the following:
<S> <C>
Minimum lease payments to be received $ 3,269,497
Estimated residual value 177,101
---------------
Gross investment in financing leases 3,446,598
Less unearned income (717,723)
---------------
Net investment in financing leases $ 2,728,875
===============
</TABLE>
4. NOTES PAYABLE:
In November, 1998, the Partnership entered into a $6.2 million term
note, the proceeds of which were used to acquire additional properties.
The note has a 10-year term, is collaterized by certain properties
subject to operating leases, and bears an interest rate of 8.37% per
annum.
In March, 1999, the Partnership entered into an additional $2.0 million
term note. The note also has a 10-year term, is collaterized by certain
properties subject to operating leases, and bears an interest rate of
8.5% per annum.
Debt issuance costs of approximately $474,000 in aggregate were
incurred in connection with the issuance of the notes, and are being
amortized using the straight-line method over the 10-year term.
8
<PAGE> 9
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
When used in this discussion, the words, "intends", "anticipates", "expects",
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Such risks and
uncertainties include the following: (i) a tenant may default in making rent
payments, (ii) a fire or other casualty may interrupt the cash flow stream from
a property, (iii) the properties may not be able to be leased at the assumed
rental rates, (iv) unexpected expenses may be incurred in the ownership of the
properties, and (v) properties may not be able to be sold at the presently
anticipated prices and times.
As a result of these and other factors, the Partnership may experience material
fluctuations in future operating results on a quarterly or annual basis, which
could materially and adversely affect its business, financial condition and
operating results. These forward-looking statements speak only as of the date
hereof. The Partnership undertakes no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
LIQUIDITY AND CAPITAL COMMITMENTS
The Partnership commenced the offering (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 reached
final funding on August 12, 1996 with subscriptions for the entire offering of
20,000 Units. Net proceeds after offering expenses were approximately $17.4
million.
In November, 1998 the Partnership entered into a $6.2 million term note. The
Partnership entered into an additional $2.0 million term note in March, 1999.
Proceeds from the notes were used to acquire additional properties. The notes
have a 10-year term, are collaterized by certain properties subject to operating
leases, and bear interest at rates ranging from 8.37 to 8.5% per annum.
During the nine months ended September 30, 1999, the Partnership funded
approximately $1.1 million for four real estate properties. The Partnership also
purchased seven equipment leases during the nine months ended September 30, 1999
for approximately $2.0 million.
At September 30, 1999 the Partnership had a portfolio of 15 properties located
in 10 states, with a cost of $20.0 million, and 12 performing equipment leases
with an original investment of $4.0 million. As of September 30, 1999 the
Partnership's investments were allocated approximately 83% to properties and 17%
to equipment.
The Partnership expects to require limited amounts of liquid assets since the
properties and equipment leases require the lessees to pay all taxes and
assessments, maintenance and repair items (except, with respect to double net
properties, costs associated with maintenance and repair of the exterior walls
and roof of the property) 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.
9
<PAGE> 10
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I - FINANCIAL INFORMATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999. During the three months ended September
30, 1999 (the "Quarter") total revenue increased 34% to $639,000 as compared to
$476,000 for the three months ended September 30, 1998 (the "1998 Quarter").
Rental revenue from operating leases for the Quarter increased 34% to $572,000
as compared to $428,000 for the 1998 Quarter primarily from the benefit of a
full period of rental revenue from properties acquired and leased in preceding
periods. Earned income from financing leases for the Quarter increased 47% to
$66,000 as compared to $45,000 for the 1998 Quarter as a result of the addition
of seven equipment leases in the preceding periods offset by the impairment of
two equipment leases.
Operating expenses were approximately $270,000 for the Quarter as compared to
$70,000 for the 1998 Quarter. Total operating expenses for the Quarter is
comprised of $73,000 of depreciation expense, $13,000 of general and
administrative expenses, $12,000 of amortization costs, and $172,000 of interest
expense. The increase in operating expenses for the Quarter as compared to the
1998 Quarter is due to interest expense and amortization related to the debt
financing and increased depreciation expense for new property acquisitions.
As a result of the foregoing, the Partnership's net income decreased 7% to
$376,000 for the Quarter as compared to $406,000 for the 1998 Quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1999. During the nine months ended September 30,
1999 ("1999") total revenue increased 29% to $1,858,000 as compared to
$1,441,000 for the nine months ended September 30, 1998 ("1998"). Rental revenue
from operating leases for 1999 increased 33% to $1,705,000 as compared to
$1,283,000 for 1998 primarily from the benefit of a full period of rental
revenue from properties acquired and leased in preceding periods. Earned income
from financing leases for 1999 decreased 6% to $143,000 as compared to $153,000
for 1998 as a result of the impairment of two equipment leases offset by the
addition of four financing leases in April, 1999 and three financing leases in
June, 1999.
Operating expenses were approximately $784,000 for 1999 as compared to $226,000
for 1998. Total operating expenses for 1999 is comprised of $217,000 of
depreciation expense, $56,000 of general and administrative expenses, $36,000 of
amortization costs, and $475,000 of interest expense. The increase in operating
expenses for 1999 as compared to 1998 is due to interest expense and
amortization related to the debt financing and increased depreciation expense
for new property acquisitions.
The Partnership incurred a net loss of approximately $159,000 on the disposition
of vacant property and impaired equipment leases for the nine months ended
September 30, 1999.
As a result of the foregoing, the Partnership's net income decreased 25% to
$915,000 for 1999 as compared to $1,220,000 for 1998.
DISTRIBUTIONS. The Partnership announced third quarter distributions of
$512,000, of which $440,644 was distributed to its Limited Partners on October
15, 1999 and the remaining $71,356 will be distributed to those limited partners
who elected to receive distributions on a monthly basis.
10
<PAGE> 11
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.
11
<PAGE> 12
CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein or incorporated by
reference:
Number Exhibit
------ -------
4 Agreement of Limited Partnership of Registrant. (Incorporated
by reference from Exhibit B of the final Prospectus dated
August 12, 1994, as supplemented and filed with the Securities
and Exchange Commission, SEC File No. 33-77510C)
4.1 Amended Agreement of Limited Partnership of Registrant.
(Incorporated by reference to the corresponding exhibit in the
Registrant's Form 10-K for the year ended December 31, 1998)
10.1 Promissory Note dated November 28, 1998 between Registrant and
National Realty Funding L.C. (Incorporated by reference to the
corresponding exhibit in the Registrant's Form 10-K for the
year ended December 31, 1998)
10.2 Promissory Note dated March 31, 1999 between Registrant and
National Realty Funding L.C. (Incorporated by reference to the
corresponding exhibit in the Registrant's Form 10-QSB for the
quarter ended March 31, 1999)
27 Financial Data Schedule
99.1 Pages 12-16 of the final Prospectus dated August 12, 1994, as
supplemented. (Incorporated by reference from the final
Prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) promulgated under the Securities Act
of 1933, as amended. SEC File No. 33-77510C)
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the third quarter ended
September 30, 1999.
12
<PAGE> 13
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 Net Lease Realty, Inc.
Managing General Partner of
Captec Franchise Capital Partners L.P. III
By: /s/ W. Ross Martin
-------------------------------------------
W. Ross Martin
Executive Vice President,
Chief Financial Officer
Date: November 15, 1999
13
<PAGE> 14
<TABLE> Exhibit Index
<CAPTION> -------------
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 568,136
<SECURITIES> 0
<RECEIVABLES> 110,405
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 678,541
<PP&E> 22,716,607
<DEPRECIATION> (781,614)
<TOTAL-ASSETS> 23,827,322
<CURRENT-LIABILITIES> 146,041
<BONDS> 8,194,000
0
0
<COMMON> 0
<OTHER-SE> 15,487,281
<TOTAL-LIABILITY-AND-EQUITY> 23,827,322
<SALES> 0
<TOTAL-REVENUES> 1,857,850
<CGS> 0
<TOTAL-COSTS> 309,076
<OTHER-EXPENSES> 158,410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 474,892
<INCOME-PRETAX> 915,472
<INCOME-TAX> 0
<INCOME-CONTINUING> 915,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 915,472
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
