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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended                     June 30, 2005
 OR
 o
    
    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
  Delaware
 38-3160141
 th  P.O. Box 544, Ann Arbor, Michigan 48106-0544
 (734) 994-5505
 Not Applicable
 þ o
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
 Not applicable
 APPLICABLE ONLY TO CORPORATE ISSUERS
 Not applicable
 o þ




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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
 Index to Form 10-QSB
 Item No.
    
    
    
    PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Balance Sheets, June 30, 2005 and December 31, 2004
    
    
    3Statements of Discontinued Operations for the three and six months ended June 30, 2005 and 2004
    
    
    4Statement of Changes in Partners Capital for the six months ended June 30, 2005
    
    
    5Statements of Cash Flows for the six months ended June 30, 2005 and 2004
    
    
    6Notes to Financial Statements
    
    
    7  9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9  12Item 3.
    
    Controls and Procedures
    
    
    12PART II
    
    OTHER INFORMATIONOther Information
    
    
    13SIGNATURES
    
    
    
    
    14CERTIFICATION
    
    Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
    
    
    15  17Certification Pursuant to Section 302Certification Pursuant to Section 906
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Captec Franchise Capital Partners L.P. III
 
 Balance Sheets
 June 30,
    
    December 31,2005
    
    2004(Unaudited)AssetsCash and cash equivalents
    
    $
    11,017,601
    
    
    $
    1,556,320Restricted cash
    
    
    
    
    
    
    664,680Assets Held for Sale:Operating leases, net
    
    
    3,140,865
    
    
    
    12,987,161Financing leases, net
    
    
    107,940
    
    
    
    267,429Unbilled rent, net
    
    
    201,208
    
    
    
    955,171Deferred financing costs, net
    
    
    
    
    
    
    191,163Accounts receivable
    
    
    
    
    
    
    4,228Due from related parties
    
    
    151
    
    
    
    151Total assets
    
    $
    14,467,765
    
    
    $
    16,626,303Liabilities and Partners CapitalLiabilities:Notes payable
    
    $
    
    
    
    $
    5,548,515Accounts payable and accrued expenses
    
    
    70,349
    
    
    
    126,361Security deposits held on leases
    
    
    
    
    
    
    7,106Total liabilities
    
    
    70,349
    
    
    
    5,681,982Partners capital:Limited partners capital accounts
    
    
    14,332,732
    
    
    
    10,919,279General partners capital account
    
    
    64,684
    
    
    
    25,042Total partners capital
    
    
    14,397,416
    
    
    
    10,944,321Total liabilities and partners capital
    
    $
    14,467,765
    
    
    $
    16,626,303
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##### Table of Contents



Captec Franchise Capital Partners L.P. III
 
 Statements of Discontinued Operations
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Operating revenue:Rental income
    
    $
    359,721
    
    
    $
    448,780
    
    
    $
    773,135
    
    
    $
    897,546Finance income
    
    
    2,404
    
    
    
    5,989
    
    
    
    6,568
    
    
    
    14,586Total operating revenue
    
    
    362,125
    
    
    
    454,769
    
    
    
    779,703
    
    
    
    912,132Operating costs and expenses:Interest expense
    
    
    104,053
    
    
    
    130,592
    
    
    
    232,123
    
    
    
    261,991Depreciation
    
    
    
    
    
    
    59,519
    
    
    
    
    
    
    
    119,039General and administrative
    
    
    60,275
    
    
    
    45,027
    
    
    
    110,277
    
    
    
    90,409Debt Retirement Costs
    
    
    905,118
    
    
    
    
    
    
    
    905,118
    
    
    
    Total operating costs and expenses
    
    
    1,069,446
    
    
    
    235,138
    
    
    
    1,247,518
    
    
    
    471,439Income (loss) from discontinued operations before other income
    
    
    (707,321
    )
    
    
    219,631
    
    
    
    (467,815
    )
    
    
    440,693Other income (expense):Loss on sale of equipment
    
    
    (581
    )
    
    
    (5,852
    )
    
    
    (581
    )
    
    
    (3,938
    )Gain on sale of assets
    
    
    4,431,118
    
    
    
    
    
    
    
    4,431,118
    
    
    
    Interest and other income
    
    
    1,237
    
    
    
    1,580
    
    
    
    1,458
    
    
    
    7,235Total other income (expense)
    
    
    4,431,774
    
    
    
    (4,272
    )
    
    
    4,431,995
    
    
    
    3,297Net Income from discontinued operations
    
    $
    3,724,453
    
    
    $
    215,359
    
    
    $
    3,964,180
    
    
    $
    443,990Net income from discontinued operations allocable to general partner
    
    $
    37,245
    
    
    $
    2,154
    
    
    $
    39,642
    
    
    $
    4,440Net income from discontinued operations allocable to limited partners
    
    $
    3,687,208
    
    
    $
    213,205
    
    
    $
    3,924,538
    
    
    $
    439,550Net income from discontinued operations per limited partnership unit
    
    $
    187.81
    
    
    $
    10.86
    
    
    $
    199.89
    
    
    $
    22.39Weighted average number of limited partnership
units outstanding
    
    
    19,633
    
    
    
    19,633
    
    
    
    19,633
    
    
    
    19,633
 The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. III
 
 Statement of Changes in Partners Capital
  Limited
    
    Limited
    
    General
    
    TotalPartners
    
    Partners
    
    Partners
    
    PartnersUnits
    
    Accounts
    
    Account
    
    CapitalBalance, December 31, 2004
    
    
    19,633
    
    
    $
    10,919,279
    
    
    $
    25,042
    
    
    $
    10,944,321Distributions
 ($26.03 per weighted average limited partnership unit)
    
    
    
    
    
    
    (511,085
    )
    
    
    
    
    
    
    (511,085
    )Net income from discontinued operations
    
    
    
    
    
    
    3,924,538
    
    
    
    39,642
    
    
    
    3,964,180Balance, June 30, 2005
    
    
    19,633
    
    
    $
    14,332,732
    
    
    $
    64,684
    
    
    $
    14,397,416
 The accompanying notes are an integral part of the financial statements.
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Captec Franchise Capital Partners L.P. III
 
 Statements of Cash Flows
 
 2005
    
    2004Cash flows from operating activities:Net Income from discontinued operations
    
    $
    3,964,180
    
    
    $
    443,990Adjustments to net income:Depreciation
    
    
    
    
    
    
    119,039Amortization of debt issuance costs
    
    
    19,912
    
    
    
    23,895Loss on sale of equipment
    
    
    581
    
    
    
    3,938Gain on sale of real estate
    
    
    (4,431,118
    )
    
    
    Loss on investments in financing leases
    
    
    17,515
    
    
    
    Increase in unbilled rent
    
    
    (33,997
    )
    
    
    (45,979
    )Decrease in accounts receivable
    
    
    4,228
    
    
    
    18,168Decrease in accounts payable and accrued expenses
    
    
    (56,012
    )
    
    
    (7,854
    )Decrease (increase) in restricted cash
    
    
    664,680
    
    
    
    (80,481
    )Decrease in due from related parties
    
    
    
    
    
    
    3,200Net cash provided by operating activities
    
    
    149,969
    
    
    
    477,916Cash flows from investing activities:Net proceeds from sale of real estate
    
    
    15,229,519
    
    
    
    149,315Net proceeds from sale of equipment
    
    
    75,501
    
    
    
    Principal payments on financing leases
    
    
    65,892
    
    
    
    69,356Net cash provided by investing activities
    
    
    15,370,912
    
    
    
    218,671Cash flows from financing activities:Repayments of notes payable
    
    
    (5,548,515
    )
    
    
    (76,400
    )Repurchase of limited partnership units
    
    
    
    
    
    
    Distributions to limited partners
    
    
    (511,085
    )
    
    
    (895,516
    )Net cash used in financing activities
    
    
    (6,059,600
    )
    
    
    (971,916
    )Net increase (decrease) in cash and cash equivalents
    
    
    9,461,281
    
    
    
    (275,329
    )Cash and cash equivalents, beginning of year
    
    
    1,556,320
    
    
    
    537,442Cash and cash equivalents, end of period
    
    $
    11,017,601
    
    
    $
    262,113
 The accompanying notes are an integral part of the financial statements.
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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 basis, primarily to
operators of national and regional franchised businesses.The initial general partners upon formation of the Partnership were Captec Franchise
Capital Corporation III (the Corporation), a wholly-owned subsidiary of Captec Financial
Group, Inc. (Captec), an affiliate, and Patrick L. Beach, the Chairman of the Board of
Directors, President and Chief Executive Officer of the Corporation and Captec. In August
1998, Captec Net Lease Realty, Inc. (Captec Net Lease Realty), an affiliate, acquired the
general partnership interests of the Partnership. In December 2001, Captec Net Lease Realty
merged with and into Commercial Net Lease Realty, Inc. (Commercial Net Lease). In
connection with the merger, Commercial Net Lease agreed to sell and assign its general
partnership interest in the Partnership to GP3 Asset Acquisition, LLC (GP3 Asset
Acquisition), which is wholly-owned by Mr. Beach and is an affiliate of Captec. Effective
January 15, 2002, the limited partners consented to the transfer of the general partnership
interest. On September 11, 2003, the Partnerships secured lender consented to the
transfer of the general partnership interest to GP3 Asset Acquisition. Upon receipt of the
secured lenders consent, GP3 Asset Acquisition became the general partner of the
Partnership.The Partnership commenced a public offering (the Offering) of up to 20,000 units (the
Units) of limited partnership interests, priced at $1,000 per Unit, by means of a
Registration Statement on Form SB-2, under the Securities Act of 1933, as amended, which
was declared effective by the Securities and Exchange Commission on August 12, 1994. The
Partnership accepted subscriptions for the minimum number of Units on January 24, 1995 and
immediately commenced operations. The Offering was fully subscribed in August 1996. Since
1997, 367 Units have been repurchased by the Partnership pursuant to the terms of the
Repurchase Plan set forth in the Partnerships August 12, 1994 prospectus with respect to
the Offering. At June 30, 2005, the Partnership had 19,633 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 the Partnerships properties; (iv) generation of increased income
and protection against inflation through contractual escalation of base rents or
participation in gross revenues of tenants of the Partnerships properties; and (v)
deferred taxation of cash distributions to the limited partners.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.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.Distributions per limited partnership Unit are calculated using the actual distributions
disbursed during the period to the weighted average number of limited partnership Units
during the period. Actual individual limited partner distributions realized may vary from
this calculation as a result of a variety of factors including: (i) actual distributions
are computed based on quarterly operating results and outstanding limited partnership
units, which are disbursed in the subsequent quarter; (ii) certain limited partners have
elected to receive monthly distributions versus quarterly
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distributions which creates timing differences between comparative calculations, (iii)
liquidating distributions are calculated using capital balances and (iv) the calculation
ignores the timing of repurchases.In November 2004, the limited partners approved a plan to liquidate the Partnership and
dispose of all the assets of the Partnership. With this approval, the Partnership
commenced activities to liquidate and dispose of the assets of the Partnership, which
included entering into an exclusive listing agreement with a third party, who will oversee
the marketing and offering for sale of all the real estate assets and equipment leases and
loans on behalf of the Partnership. In accordance with Financial Accounting Standards No.
144 Accounting for the Impairment or Disposal of Long Lived-Assets (FAS 144), as a
result of the approval of this plan, all assets except cash are classified as Assets Held
for Sale and depreciation on these assets is discontinued, all liabilities are classified
as Liabilities Held for Sale and the results of the operations in their entirety are
classified as discontinued operations for all years presented, since the operations are
directly related to the assets or liabilities held for sale. The assets of the Partnership
will be sold and the net proceeds of such sale will be distributed to the partners after
the repayment of all debt in accordance with the partnership agreement.On February 15, 2005, the Partnership executed an Agreement of Sale (the Agreement)
pursuant to which the Partnership agreed to sell ten of the Partnerships properties and
certain real property leases related to such properties for an aggregate purchase price of
$17,125,000. On March 14, 2005, the Agreement was amended to remove one of the properties
and the real property lease related to such property, and the Purchase Price was reduced to
$15,375,000. On June 16, 2005, the Partnership consummated the sale of the remaining nine
properties. Simultaneous with the closing of the sale, the Partnership repaid
approximately $5,465,000 of its notes payable and paid related debt retirement costs of
approximately $905,000. After setting aside reserves for outstanding liabilities and
expenses of the ongoing liquidation, the Partnership made a special partial liquidating
distribution on August 5, 2005 to the limited partners from the proceeds of this sale in
the aggregate amount of approximately $9,850,000. In accordance with the Partnership
agreement, this special distribution was allocated among partners in proportion to their
capital accounts.The balance sheet of the Partnership as of June 30, 2005, the statements of discontinued
operations and cash flows for the periods ending June 30, 2005 and June 30, 2004 and the
statement of changes in partners capital for the period ending June 30, 2005 have not been
audited. In the opinion of 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. These
unaudited financial statements should be read in conjunction with the financial statements
and notes thereto included in the Partnerships annual report on Form 10-KSB for the year
ended December 31, 2004 filed with the United States Securities and Exchange Commission on
March 30, 2005.2.
    
    LAND AND BUILDING SUBJECT TO OPERATING LEASES:The net investment in operating leases as of June 30, 2005 is comprised of the following:
 Land
    
    $
    1,236,275Building and improvements
    
    
    2,352,6253,588,900Less accumulated depreciation
    
    
    (448,035
    )Total
    
    $
    3,140,865
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3.
    
    NET INVESTMENT IN FINANCING LEASES:The net investment in financing leases as of June 30, 2005 is comprised of the following:
 Minimum lease payments to be received
    
    $
    132,398Less unearned income
    
    
    (24,458
    )Net investment in financing leases
    
    $
    107,940
 4.
    
    NOTES PAYABLE:In November 1998, the Partnership entered into a $6.2 million term note. The note had a
ten-year term, was collateralized by certain properties subject to operating leases which
had a carrying value of approximately $7.6 million, and bore interest at a rate of 8.37%
per annum. In September 2003, the Partnership defeased approximately $1,979,000 of this
note payable with proceeds from the sale of a property. The Partnership incurred
approximately $481,000 of yield maintenance costs and $49,000 of professional fees related
to the defeasance. Using the proceeds from the sale of nine properties on June 16, 2005,
the Partnership defeased the remaining amounts payable under this note. The Partnership
incurred approximately $539,000 of yield maintenance costs and $36,000 of professional fees
in connection with the defeasance of this note.In March 1999, the Partnership entered into an additional $2.0 million term note. The note
had a ten-year term, was collateralized by certain properties subject to operating leases
which had a carrying value of approximately $3.7 million, and bore interest at a rate of
8.5% per annum. Using the proceeds from the sale of nine properties on June 16, 2005, the
Partnership defeased the remaining amounts payable under this note. The Partnership
incurred approximately $295,000 of yield maintenance costs and $36,000 of professional fees
in connection with the defeasance of this note.Debt issuance costs of $477,909 were incurred in connection with the issuance of the notes,
and were amortized over the life of the notes to interest expense using the straight-line
method, which is not materially different than the interest rate method. In connection
with the defeasance of the two notes on June 16, 2005, the remaining unamortized debt
issuance costs were expensed.
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
 Three Months Ended June 30, 2005
     Six Months Ended June 30, 2005
  10




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LIQUIDITY AND CAPITAL COMMITMENTS
    11




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ITEM 3. CONTROLS AND PROCEDURES
   12




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PART
II  OTHER INFORMATION
 ITEM 1.
    
    LEGAL PROCEEDINGS.None.
 ITEM 2.
    
    CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY 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
  Number
    
    Exhibit2
    
    Plan of Liquidation and Dissolution (Incorporated by reference to the
Registrants Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004)4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated by
reference to the corresponding exhibit in the Registrants Form 10-KSB 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-KSB for the year ended December 31, 1998)10.2
    
    Promissory Note dated June 30, 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 June 30, 1999)31
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  By:
    
    Captec Franchise Capital Partners L.P. IIIGP3 Asset Acquisition, LLCIts ManagerBy:
    
    /s/ Patrick L. BeachPatrick L. BeachPresidentDate:
    
    August 15, 2005
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EXHIBIT INDEX
 Number
    
    Exhibit2
    
    Plan of Liquidation and Dissolution (Incorporated by reference to the
Registrants Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004)4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated by
reference to the corresponding exhibit in the Registrants Form 10-KSB 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-KSB for the year ended December 31, 1998)10.3
    
    Promissory Note dated June 30, 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 June 30, 1999)31
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 15