Item 1. Business
Captec Franchise Capital Partners L.P. IV (the “Partnership”) is a Delaware limited partnership formed on July 23, 1996 for the purpose of acquiring income-producing commercial real properties and equipment which are leased primarily to operators of national chain and nationally franchised fast-food, family style and dinner house restaurants as well as other franchised or chain businesses pursuant to leases requiring the lessee to pay all taxes, assessments, utilities, insurance, maintenance, and repair costs associated with such properties or leases differing only in that the Partnership is responsible for the maintenance of the exterior walls and roof of the property. The Partnership also acquires properties that are leased to prominent national and regional retail concerns. The general partners upon formation of the Partnership were Captec Franchise Capital Corporation IV (“Captec”) and Patrick L. Beach, an individual. In August, 1998, the general partnership interest in the Partnership was acquired by Captec Net Lease Realty, Inc. (“Captec Net Lease”), an affiliate of Captec, for $2,912,000. Captec Net Lease, Captec, and Mr. Beach are collectively referred to as the “General Partners.”
The Partnership commenced a public offering (the “Offering”) of up to 30,000 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-11 which was declared effective by the Securities and Exchange Commission on December 23, 1996. Capitalized terms not defined herein shall have the meaning ascribed to them in the Partnership’s Prospectus dated December 23, 1996. Through December 31, 1998, the Partnership had accepted subscriptions for the entire offering of 30,000 Units from 1,587 investors. During 1999 the Partnership repurchased a total of 117 Units for $105,399, or 90% of the investor’s capital account. In April 2000 the Partnership repurchased a total of 110 Units for $99,282, or 90% of the investor’s capital account. An additional 148 Units were repurchased in October 2000 for $131,080, or 89% of the investor’s capital account. The repurchase of the Units was completed pursuant to the terms of the Repurchase Plan set forth in the Partnership’s Prospectus. At December 31, 2000, the Partnership had 29,625 Units issued and outstanding.
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 of Partnership properties; (iv) generation of increased income and protection against inflation through 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 expects to have not less than 75%, but not more than 90% of total investments in properties and up to 25%, but not less than 10% in equipment. The Partnership does not intend to have more than 25% of properties to be leased to retail concerns. The properties generally will be leased on terms which provide for a base minimum annual rent with fixed increases on specific dates or indexation of rent to indices such as the Consumer Price Index. The equipment will be leased only pursuant to leases under which the present value of non-cancelable rental payments payable during the initial term of the lease is at least sufficient to permit a lessor to recover the purchase price of the equipment.
The Partnership has no employees. The General Partners and their affiliates, however, are permitted to perform services for the Partnership.
Item 2.
Item 2. Description of Properties
As of December 31, 2000, the Partnership had a portfolio of 21 properties located in 10 states, with a cost basis of $31.9 million and 23 equipment leases with an original investment of $7.7 million. The properties are leased to 10 operators of restaurant concepts and four retail operators.
As of December 31, 2000, leases to S&A Restaurants Corporation, Kona Restaurant Group, Inc. and United Supermarkets, Inc. represented 19.0%, 17.3% and 14.8% of the annualized rent from the properties, respectively. Equipment leases to Champps Americana, Inc. represented 27.2% of the annualized rent from the equipment. Any performance failure under these leases could materially affect the Partnership’s income and financial position.
All of the properties in the Partnership are performing at December 31, 2000. In October of 1998, Boston Chicken Inc. and the majority of its subsidiaries filed for Chapter 11 bankruptcy protection. The Partnership has one lease to a Boston Chicken franchisee who did file bankruptcy. This lease was assumed under the bankruptcy court with slightly modified terms. Annualized rent from this lease was $80,166 at December 31, 2000.
The following is a summary description of the property and equipment leases as of December 31, 2000.
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(1)
Rent Increase equals the lesser of CPI or 10%.
(2)
Rate of increase calculated on a compounded annual basis.
(3)
Rent Increase is based on CPI increase.
Real Estate
General Real Estate Lease Provisions: All of the properties are subject to leases which are triple net leases whereby the tenant is responsible for all expenses related to the cost of operating the properties including real estate taxes, insurance, maintenance and repair costs.
The General Partners or their affiliates analyzed demographic, geographic and market diversification data for the areas in which each of the properties are located and reviewed the appraisals of the properties and the analysis regarding comparable properties contained therein. All of the purchase prices were negotiated by General Partners or their affiliates, considering factors such as the potential value of the site, the financial condition and business and operating history of the tenants and demographic data for the areas in which the properties are located.
The lessees generally pay all expenses incident to the closing of these transactions including, the Partnership’s attorney’s fees, title insurance premiums, recording fees and expenses and transfer.
Equipment
General Equipment Lease Provisions: All of the equipment leases are on the Partnership’s standard form of lease whereby the lessee is responsible for all expenses related to the equipment including taxes, insurance, maintenance and repair costs. Prior to entering into the leases, an affiliate of the General Partner considered factors such as the financial condition and business and operating history of the lessees and demographic data for the area in which the equipment is located. All of the equipment was purchased with cash from offering proceeds. The General Partner believes that the amount of insurance carried by each lessee is adequate.
Summary of Investment Objectives and Policies
The Partnership acquires income-producing property and equipment which are leased primarily to operators of nationally franchised fast-food, family style and dinner house restaurants as well as other franchised service-type businesses such as automotive and specialty retail franchises. Properties are selected for acquisition based on an examination and evaluation by the General Partners or an affiliate of the potential value of the site, the financial condition and business history of the proposed lessee, the demographics of the area in which the property is located, the proposed purchase price and lease terms, geographic and market diversification, and potential operating results. Similar analyses are utilized in selecting equipment. The Partnership anticipates that only fee interests in real property will be acquired, although other interests (including acquisitions of buildings, with the underlying land being subject to a long-term ground lease) may be acquired if it is deemed to be advantageous to the Partnership. At December 31, 2000 the Partnership has one property subject to a ground lease.
In making investments, the General Partners consider relevant factors, including the condition and proposed use of the property and/or equipment, income-producing capacity, the financial condition of the lessee, and with respect to properties, the prospects for long-term appreciation. In no event will property or equipment be acquired unless a satisfactory lease commitment has been obtained from a suitable lessee as further described below.
In selecting specific properties, the General Partners generally require the following:
(i) Base annual rent will provide a specified minimum return on the contract purchase price of the property; the majority of the leases will provide for fixed increases on specific dates or indexation of rents to indices such as the Consumer Price Index. Leases may also provide for percentage rents calculated to provide rents equal to a percentage of the lessee’s gross sales if greater than the base rent; and
(ii)The initial lease will have a term of between ten and twenty years.
In selecting specific equipment, the General Partners typically require the following:
(i) Full Payout Leases providing for fixed rents structured to return 100% of the cost of the equipment plus yield a return equivalent to market interest rates over the lease term; and
(ii) The leases are expected to have terms of five to seven years with residual values of equipment at the end of such terms expected to be minimal (approximately 10% of original cost).
The determination of whether particular properties or equipment should be sold or otherwise disposed of will be made after consideration of relevant factors, including performance or projected performance of the property or equipment and market conditions, with a view toward achieving the principal investment objectives of the Partnership.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during 2000.
PART II Item 5.
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 to be classified as a “publicly traded partnership,” 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.”
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. 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.
Results of Operations - 2000 to 1999
For the year ended December 31, 2000, operating revenue increased 3% to $3.6 million as compared to $3.5 million for the year ended December 31, 1999. Rental income from operating leases for 2000 increased 12% to $3.0 million as compared to $2.7 million for 1999 due to the acquisition of one real estate property and the benefit of a full year of rental income from properties acquired and leased in preceding periods. Earned income from financing leases for 2000 decreased 27% to $588,000 as compared to $805,000 for 1999 due to the sale of one equipment lease and the amortization of principal balances.
General and administrative expenses decreased 6% to $101,000 for 2000 as compared to $108,000 for 1999. The decrease is primarily the result of a decrease in professional fee expense. Depreciation expense increased 20% to $394,000 for 2000 as compared to $328,000 for 1999 due to the acquisition of one real estate property and the effect of a full period of depreciation of properties acquired and leased in the preceding year. Interest expense increased 17% to $924,000 during 2000 as compared to $788,000 for 1999. The increase is due to a full year of interest expense for the $3.3 million term note that the Partnership entered into in March 1999, as well as the additional interest expense incurred for the $3.75 million term note that the Partnership entered into in October 2000.
Interest and other income decreased to $722 for 2000 as compared to $34,000 for 1999 primarily as a result of idle funds being invested in properties and no longer earning interest.
During 2000, the Partnership recognized a gain of $42,000 on the sale of equipment. Proceeds of approximately $611,000 were reinvested in a real estate property. During 1999, the Partnership recognized a gain of $5,858 on the sale of real estate. Proceeds of approximately $953,000 were reinvested in a real estate property.
As a result of the foregoing, the Partnership’s net income for 2000 decreased 3% to approximately $2.2 million as compared to $2.3 million in 1999. The Partnership is not subject to income taxation as all of its income and expenses flow through to the Partners. During the year ended December 31, 2000, the Partnership made distributions to limited partners totaling $3.6 million, as compared to $3.4 million for the preceeding year.
Results of Operations - 1999 to 1998
For the year ended December 31, 1999, operating revenue increased 94% to $3.5 million as compared to $1.8 million for the year ended December 31, 1998. Rental income from operating leases for 1999 increased 115% to $2.7 million as compared to $1.2 million for 1998 due to the acquisition or completed construction funding of seven properties and the benefit of a full year of rental income from properties acquired and leased in preceding periods. Earned income from financing leases for 1999 increased 47% to $805,000 as compared to $548,000 for 1998 as a result of the addition of one real estate property treated as a direct finance lease and from the benefit of a full year of finance income from leases originated in preceeding periods.
General and administrative expenses increased 34% to $108,000 for 1999 as compared to $81,000 for 1998. The significant factor resulting in the increase is due to management fees that are incurred and payable to the General Partner. During 1999 the Partnership incurred $40,000 in management fees as compared to $23,300 in 1998 due solely to the increased acquisition of net leased properties during 1999. Depreciation expense increased 148% to $328,000 for 1999 as compared to $132,000 for 1998 due to the acquisition of net leased properties and the effect of a full period of depreciation of properties acquired and leased in the preceding year. Interest expense increased to $788,000 during 1999 as compared to $24,000 for 1998. The increase is the result of the $6.4 million term note that the Partnership entered into in December 1998 and the $3.3 million term note that the Partnership entered into in March 1999.
Interest and other income decreased 87% to $34,000 for 1999 as compared to $255,000 for 1998 primarily as a result of idle funds being invested in properties and no longer earning interest.
During 1999, the Partnership recognized a gain of $5,858 on the sale of real estate. Proceeds of approximately $953,000 were reinvested in another real estate property.
As a result of the foregoing, the Partnership’s net income for 1999 increased 27% to approximately $2.3 million as compared to $1.8 million in 1998. The Partnership is not subject to income taxation as all of its income and expenses flow through to the Partners. During the year ended December 31, 1999, the Partnership made distributions to limited partners totaling $3.4 million, as compared to $2.1 million for the preceeding year.
Liquidity and Capital Resources
The Partnership commenced the Offering of up to 30,000 Units registered under the Securities Act of 1933, as amended, by means of a Registration Statement filed on Form S-11 which was declared effective by the Securities and Exchange Commission on December 23, 1996.
The Partnership accepted subscriptions for the Minimum Number of Units on March 5, 1997 and immediately commenced operations. The offering reached final funding in December 1998 with subscriptions for the entire 30,000 Units. Net proceeds after offering expenses were approximately $26.1 million.
In December, 1998, the Partnership entered into a $6.4 million term note. The Partnership entered into an additional $3.3 million term note in March 1999. Proceeds from the notes were used to acquire additional properties. The notes have a 10 year term, are collateralized by certain properties subject to operating leases, and bear interest at rates ranging from 8.13 to 8.5% per annum. Debt issuance costs of approximately $595,000 in aggregate incurred in connection with the issuance of the notes are being amortized into interest expense over the life of the notes using the straight-line method.
The Partnership purchased one net leased real estate property in October 2000. The Partnership assumed a $3.75 million term note in connection with the acquisition. The note has a 10 year term and bears interest at the rate of 8.35% per annum. As of December 31, 2000, the Partnership had invested $31.9 million in 21 net leased real estate properties and $7.7 million in 23 equipment packages.
The Partnership expects that only limited amounts of liquid assets will be required for existing properties since the form of lease which it uses for its properties and equipment requires lessees to pay all taxes and assessments, maintenance and repairs and insurance premiums, including casualty insurance. The General Partners expect that the cash flow to be generated by the Partnership’s properties and equipment will provide adequate liquidity and capital resources to pay operating expenses and provide distributions to Limited Partners.
Item 7a.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk. None
Item 8.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on Page F-I of this Form 10-K for Financial Statements and Financial Statement Schedules, where applicable.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Partnership does not have directors or officers.
Item 11.
Item 11. Executive Compensation
The Partnership does not have directors or officers.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
To the best knowledge of the Partnership, as of December 31, 2000 no person known by the Partnership, beneficially owned more than 5% of the outstanding Units.
Item 13.
Item 13. Certain Relationships and Related Transactions
During 1999, the General Partners received acquisition fees from the Partnership in an amount equal to $279,146 for services rendered in connection with the selection, evaluation and acquisition of properties and equipment, as provided in the Partnership Agreement. During 2000, no acquisition fee was earned by the General Partners.
The General Partners believe that the Asset Management Agreement entered into 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. During 2000 and 1999 the Partnership incurred $45,556 and $39,507 respectively, of management fees to the General Partner.
In connection with the Offering and throughout all stages of the Partnership’s operations, the General Partners and their affiliates will receive compensation as described more fully in the “Compensation Table” on pages 35 through 42 of the Partnership’s Prospectus. 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 will be 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 have not and 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. However, the Partnership Agreement prohibits receipt of rebates or participation in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the Partnership Agreement.
Item 14.
Item 14. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein or incorporated by reference:
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the fourth quarter ended December 31, 2000.
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. IV
By:
Captec Net Lease Realty, Inc.,
Managing General Partner
By:
/s/ W. Ross Martin
W. Ross Martin
Executive Vice President,
Chief Financial Officer
Date:
March 30, 2001
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
of Captec Net Lease Realty, Inc.
Date:
March 30, 2001
By:
/s/ W. Ross Martin
W. Ross Martin
Executive Vice President,
Chief Financial Officer
of Captec Net Lease Realty, Inc.
Date:
March 30, 2001
Captec Franchise Capital Partners, L.P. IV
Contents
Report of Independent Accountants To the Board of Directors of
Captec Net Lease Realty, Inc.
Managing General Partner of
Captec Franchise Capital Partners, L.P. IV
In our opinion, the accompanying balance sheets and the related statements of operations, of partners capital and of cash flows present fairly, in all material respects, the financial position of Captec Franchise Capital Partners L.P. IV at December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000, 1999, and 1998, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Detroit, Michigan
March 9, 2001
Captec Franchise Capital Partners, L.P. IV
Balance Sheets
December 31, 2000 and 1999
The accompanying notes are an integral part of the financial statements.
Captec Franchise Capital Partners, L.P. IV
Statements of Operations
For the Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of the financial statements.
Captec Franchise Capital Partners, L.P. IV
Statements of Changes in Partners’ Capital
For the Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of the financial statements.
Captec Franchise Capital Partners, L.P. IV
Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
The accompanying notes are an integral part of the financial statements.
Captec Franchise Capital Partners, L.P. IV
Notes to Financial Statements
1.
The Partnership and Its Significant Accounting Principles
Captec Franchise Capital Partners L.P. IV (the “Partnership”), a Delaware limited partnership, was organized on July 23, 1996 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 franchised fast food and family style restaurants, as well as other national and regional retail chains.
The general partners upon formation of the Partnership were Captec Franchise Capital Corporation IV (the “Corporation”), a wholly owned subsidiary of Captec Financial Group, Inc. (“Captec”), and Patrick L. Beach, 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.
The Partnership commenced a public offering of 30,000 limited partnership interests (“Units”), priced at $1,000 per unit, on December 31, 1996. The Partnership commenced operations on March 5, 1997. At December 31, 1998, the Partnership had accepted subscriptions for all 30,000 Units. During 1999 the Partnership repurchased a total of 117 Units for $105,339, or 90% of the investor’s capital account. On April 3, 2000 the partnership repurchased a total of 110 units for $99,282, or 90% of the investors account. An additional 148 units were repurchased on October 2, 2000 for $131,080 or 89% of the investors account. The repurchase of the Units was completed pursuant to the terms of the Repurchase Plan set forth in the Partnership’s Prospectus. At December 31, 2000, the Partnership had 29,625 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.
Following is a summary of the Partnership’s significant accounting policies:
Cash and cash equivalents
The Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Restricted cash
The Partnership is required to maintain a cash balance in an escrow account until specific post closing requirements have been satisfied related to a note payable.
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. In addition to scheduled rent increases, certain of the Partnership’s leases also have percentage and overage rent clauses, which the Partnership recognizes after the tenants’ reported sales have exceeded the applicable sales breakpoint.
Captec Franchise Capital Partners, L.P. IV
Notes to Financial Statements
1.
The Partnership and Its Significant Accounting Principles (continued)
Land and building subject to operating leases
Land and buildings subject to operating leases are stated at cost less accumulated depreciation. Buildings are depreciated on the straight-line method over their estimated useful lives (40 years). The Partnership periodically reviews its real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. If an impairment loss were indicated using undiscounted cash flows, the loss is measured as the amount by which the carrying amount of the asset exceeds the estimated fair or present value of the asset on a discounted cash flow basis.
Net investment in financing leases
Net investment in financing leases primarily represents equipment used in restaurant operations and are leased under a triple-net basis. 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. Direct origination costs are deferred and amortized over the life of the lease as an adjustment to yield. Financing leases delinquent for 90 or more days are determined to be impaired, and income accrual is suspended at that time. A loss reserve is calculated based on the estimated amounts recoverable. At December 31, 2000 no financing leases have been determined to be impaired and, thus, the Partnership has not provided for an allowance for uncollectible amounts associated with its financing leases.
Note payable
The fair value of fixed rate debt approximates the book value, and is estimated based on current rates offered for notes payable of the equivalent remaining maturity.
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.
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.
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.
Reclassifications
Certain prior period financial statement amounts have been reclassified to conform to the 2000 presentations.
Captec Franchise Capital Partners, L.P. IV
Notes to Financial Statements
2.
Distributions
Cash flows of the Partnership are allocated 99% to the limited partners and 1% to the General Partner, except that the General Partner’s share is subordinated to a 10% per annum cumulative, non-compounded preferred return to the limited partners. Net sale or refinancing proceeds of the Partnership will be allocated 90% to the limited partners 10% to the General Partner, except that the General Partner’s share will be subordinated to a 10.5% per annum cumulative, non-compounded return on their Adjusted Investment plus return of the original contributions to the limited partners.
Distributions of cash flow from operations are paid quarterly in arrears.
3.
Related Party Transactions and Agreements
Organization and offering expenses, excluding selling commissions, were paid initially by the General Partners and/or their affiliates and subsequently reimbursed by the Partnership in an amount equal to up to 3% of the gross proceeds of the offering (less any amounts paid directly by the Partnership). In addition, the General Partner and/or its affiliates were paid a non-accountable expense allowance by the Partnership in an amount equal to 2% of the gross proceeds of the offering. These costs were treated as capital issuance costs and have been netted against the limited partners’ capital accounts.
The Partnership paid to Participating Dealers, including affiliates of the general partners, selling commissions in an amount equal to 8% of the purchase price of all Units placed by them directly. There were $0 and $1,156,562 of selling commissions incurred during 2000 and 1999, respectively. These costs were treated as capital issuance costs and have been netted against the limited partners’ capital accounts.
Pursuant to the Partnership Agreement, acquisition fees of 4%, plus an additional .00624% for each 1% of indebtedness incurred in acquiring properties and equipment, of the aggregate purchase prices of properties and equipment (not to exceed a total 5% acquisition fee) are incurred to the General Partner. The Partnership incurred $240,772, $279,146 and $1,088,073 in acquisition fees during 2000, 1999 and 1998, respectively. The acquisition fees were capitalized as part of the Partnership’s investment in land and buildings subject to operating leases and net investment in financing leases.
The Partnership has entered into an asset management agreement with the General Partner and its affiliates, whereby the General Partner and the General Partner’s affiliates provide various property and equipment management services for the Partnership. A subordinated asset management fee is charged, in an amount equal to 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, non-compounded return of 10% per annum on their adjusted invested capital. Management fees of $45,556, $39,507 and $22,934 were incurred during 2000, 1999 and 1998, respectively.
The Partnership Agreement provides for the General Partner to receive liquidation fees limited to the lesser of 3% of the gross sales price or 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, non-compounded return of 10.5% per annum, cumulative non-compounded preferred return on their adjusted invested capital plus distributions of sale or refinancing proceeds equal to 100% of their original contributions. The Partnership’s Prospectus provides for the reinvestment of net sale proceeds during the four year period beginning on the date the Partnership terminated the offering, December 23, 1998. The Partnership did not pay any liquidation fees during 2000 or 1999.
Captec Franchise Capital Partners, L.P. IV
Notes to Financial Statements
4.
Land and Building Subject to Operating Leases
The net investment in operating leases as of December 31, 2000 and 1999 is comprised of the following:
All construction draws are subject to the terms of a standard lease agreement with the Partnership. Upon completion of construction and when the tenant lease payments begin, the construction draws are then capitalized as land and building. There were no outstanding construction draws on properties as of December 31, 2000 and 1999.
The following is a schedule of future minimum lease payments to be received on the operating leases as of December 31, 2000:
5.
Net Investment in Financing Leases
The net investment in financing leases as of December 31, 2000 and 1999 is comprised of the following:
Captec Franchise Capital Partners, L.P. IV
Notes to 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, 2000:
6.
Notes Payable
In December 1998, the Partnership entered into a $6.4 million term note, the proceeds of which were used to acquire properties. The note has a 10-year term, is collateralized by certain properties subject to operating leases, and bears an interest rate of 8.13% per annum.
In March 1999, the Partnership entered into an additional $3.3 million term note. The note has a 10-year term, is collateralized by certain properties subject to operating leases, and bears an interest rate of 8.5% per annum.
In October 2000, the Partnership assumed a $3.7 million term note in connection with the acquisition of a United Supermarket property. The note has a 10-year term, and bears an interest rate of 8.35% per annum.
At December 31, 2000, annual maturities on the notes in aggregate are as follows:
Debt issuance costs of $595,194 in aggregate were incurred in connection with the issuance of the notes, and are being amortized to interest expense using the straight-line method over the 10-year term.
7.
Subsequent Event
Based upon the results of operations for the three month period ended December 31, 2000, the Partnership declared distributions of $835,000 to its limited partners on January 15, 2001.
Report of Independent Accountants
To the Board of Directors of
Captec Net Lease Realty, Inc.
Managing General Partner of
Captec Franchise Capital Partners L.P. IV
In connection with our audit of the financial statements of Captec Franchise Capital Partners L.P. IV as of December 31, 2000, 1999 and 1998, which financial statements are included in this Form 10-K, we have also audited the financial statement schedule listed in the index to Financial Statements contained in this Form 10-K.
In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material aspects, the information required to be included therein.
PricewaterhouseCoopers LLP
Detroit, Michigan
March 9, 2001
SCHEDULE III
PROPERTIES AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2000
Notes:
The changes in total properties for the years ended December 31, 2000 and 1999 are as follows:
The changes in accumulated depreciation for the years ended December 31, 2000 and 1999 are as follows:
F(a)-12