##### Table of Contents



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, 2004 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  Delaware   38-3160141   24 Frank Lloyd Wright
Drive, Lobby L, 4th Floor
P.O. Box 544, Ann Arbor, Michigan 48106-0544   (734) 994-5505   Not Applicable   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]




---



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III Index to Form 10-QSB  
 Item No.
    
    PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements:Balance Sheets, September 30, 2004 and December 31, 2003
    
    
    3Statements of Operations for the three and nine months
ended September 30, 2004 and 2003
    
    
    4Statement of Changes in Partners Capital for the nine months
ended September 30, 2004
    
    
    5Statement of Cash Flows for the nine months
ended September 30, 2004 and 2003
    
    
    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
    
    
    12-14SIGNATURES
    
    
    15EX- 31 and 32 Certifications Pursuant to Section 302(a) and 906 of the
Sarbanes-Oxley Act of 2002
    
    
    16-18Certification Pursuant to Section 302Certification Pursuant to Section 906
  2




---



##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III 
 PART I  FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Captec Franchise Capital Partners L.P. III 
 Balance Sheets
 September 30,2004
    
    December 31,(Unaudited)
    
    2003Cash and cash equivalents
    
    $
    240,434
    
    
    $
    537,442Restricted cash
    
    
    579,829
    
    
    
    454,540Investment in leases:Operating leases, net
    
    
    14,307,301
    
    
    
    14,485,860Financing leases, net
    
    
    295,410
    
    
    
    532,700Impaired financing leases, net
    
    
    
    
    
    
    12,693Accounts receivable
    
    
    
    
    
    
    18,168Unbilled rent, net
    
    
    1,074,270
    
    
    
    1,013,362Due from related parties
    
    
    5,016
    
    
    
    8,216Deferred financing costs, net
    
    
    203,111
    
    
    
    238,954Total assets
    
    $
    16,705,371
    
    
    $
    17,301,935Liabilities and Partners CapitalLiabilities:Notes payable
    
    $
    5,588,768
    
    
    $
    5,704,585Accounts payable and accrued expenses
    
    
    144,849
    
    
    
    120,873Security deposits held on leases
    
    
    7,106
    
    
    
    7,106Total liabilities
    
    
    5,740,723
    
    
    
    5,832,564Partners capital:Limited partners capital accounts
    
    
    10,942,139
    
    
    
    11,453,527General partners capital account
    
    
    22,509
    
    
    
    15,844Total partners capital
    
    
    10,964,648
    
    
    
    11,469,371Total liabilities and partners capital
    
    $
    16,705,371
    
    
    $
    17,301,935
 The accompanying notes are an integral part of the financial statements. 3




---



##### Table of Contents



Captec Franchise Capital Partners L.P. III 
 Statement of Operations
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Operating revenue:Rental income
    
    $
    448,780
    
    
    $
    450,614
    
    
    $
    1,346,326
    
    
    $
    1,363,101Finance income
    
    
    5,393
    
    
    
    11,456
    
    
    
    19,979
    
    
    
    38,272Total operating revenue
    
    
    454,173
    
    
    
    462,070
    
    
    
    1,366,305
    
    
    
    1,401,373Operating costs and expenses:Interest expense
    
    
    129,769
    
    
    
    132,521
    
    
    
    391,760
    
    
    
    401,889Depreciation
    
    
    59,520
    
    
    
    59,520
    
    
    
    178,559
    
    
    
    178,559General and administrative
    
    
    42,565
    
    
    
    38,413
    
    
    
    132,974
    
    
    
    111,407Total operating costs and expenses
    
    
    231,854
    
    
    
    230,454
    
    
    
    703,293
    
    
    
    691,855Income from operations
    
    
    222,319
    
    
    
    231,616
    
    
    
    663,012
    
    
    
    709,518Otherincome :(Loss) Gain on sale of equipment
    
    
    
    
    
    
    
    
    
    
    (3,938
    )
    
    
    6,177Interest and other income
    
    
    171
    
    
    
    267
    
    
    
    7,406
    
    
    
    9,745Total other income
    
    
    171
    
    
    
    267
    
    
    
    3,468
    
    
    
    15,922Income from continuing operations
    
    
    222,490
    
    
    
    231,883
    
    
    
    666,480
    
    
    
    725,440Discontinued Operations:Net gain on sale of properties
    
    
    
    
    
    
    498,240
    
    
    
    
    
    
    
    498,240Income from discontinued operations, net
    
    
    
    
    
    
    40,242
    
    
    
    
    
    
    
    125,070Debt Retirement Costs
    
    
    
    
    
    
    (530,035
    )
    
    
    
    
    
    
    (530,035
    )Income from discontinued operations
    
    
    
    
    
    
    8,447
    
    
    
    
    
    
    
    93,275Net income
    
    $
    222,490
    
    
    $
    240,330
    
    
    $
    666,480
    
    
    $
    818,715Net income allocable to general partner
    
    $
    2,225
    
    
    $
    2,403
    
    
    $
    6,665
    
    
    $
    8,187Net income allocable to limited partners
    
    $
    220,265
    
    
    $
    237,927
    
    
    $
    659,815
    
    
    $
    810,528Net income per limited partnership unit
from continuing operations
    
    
    11.22
    
    
    
    11.68
    
    
    
    33.61
    
    
    
    36.54Net income per limited partnership unit
from discontinued operations
    
    
    
    
    
    
    0.43
    
    
    
    
    
    
    
    4.70Net income per limited partnership unit
    
    $
    11.22
    
    
    $
    12.11
    
    
    $
    33.61
    
    
    $
    41.24Weighted average number of limited partnership
units outstanding
    
    
    19,633
    
    
    
    19,653
    
    
    
    19,633
    
    
    
    19,653
 The accompanying notes are an integral part of the financial statements. 4




---



##### Table of Contents



Captec Franchise Capital Partners L.P. III 
 Statements of Changes in Partners Capital
 Limited
    
    Limited
    
    General
    
    TotalPartners
    
    Partners
    
    Partners
    
    PartnersUnits
    
    Accounts
    
    Account
    
    CapitalBalance, January 1, 2004
    
    
    19,633
    
    
    $
    11,453,527
    
    
    $
    15,844
    
    
    $
    11,469,371Repurchase of limited partnership units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions  ($59.65 per weighted
average limited partnership unit)
    
    
    
    
    
    
    (1,171,203
    )
    
    
    
    
    
    
    (1,171,203
    )Net income
    
    
    
    
    
    
    659,815
    
    
    
    6,665
    
    
    
    666,480Balance, September 30, 2004
    
    
    19,633
    
    
    $
    10,942,139
    
    
    $
    22,509
    
    
    $
    10,964,648
 The accompanying notes are an integral part of the financial statements. 5




---



##### Table of Contents



Captec Franchise Capital Partners L.P. III 
 Statements of Cash Flows
 2004
    
    2003Cash flows from operating activities:Net Income
    
    $
    666,480
    
    
    $
    818,715Adjustments to net income:Depreciation
    
    
    178,559
    
    
    
    206,759Amortization of debt issuance costs
    
    
    35,843
    
    
    
    35,843Loss (gain) on sale of equipment
    
    
    3,938
    
    
    
    (6,177
    )Gain on sale of real estate
    
    
    
    
    
    
    (498,240
    )Increase in unbilled rent
    
    
    (60,908
    )
    
    
    (74,037
    )Decrease (increase) in accounts receivable
    
    
    18,168
    
    
    
    (15,329
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    23,976
    
    
    
    (22,495
    )Increase in restricted cash
    
    
    (125,289
    )
    
    
    (141,442
    )Decrease in due from related parties
    
    
    3,200
    
    
    
    868Decrease in security deposits
    
    
    
    
    
    
    (24,854
    )Net cash provided by operating activities
    
    
    743,967
    
    
    
    279,611Cash flows from investing activities:Net proceeds from sale of equipment
    
    
    149,315
    
    
    
    24,075Net proceeds from sale of real estate
    
    
    
    
    
    
    3,428,472Principal payments on financing leases
    
    
    96,730
    
    
    
    181,731Net cash provided by investing activities
    
    
    246,045
    
    
    
    3,634,278Cash flows from financing activities:Repayments of notes payable
    
    
    (115,817
    )
    
    
    (2,122,726
    )Distributions to limited partners
    
    
    (1,171,203
    )
    
    
    (1,027,819
    )Net cash used in financing activities
    
    
    (1,287,020
    )
    
    
    (3,150,545
    )Net (decrease) increase in cash and cash equivalents
    
    
    (297,008
    )
    
    
    763,344Cash and cash equivalents, beginning of year
    
    
    537,442
    
    
    
    286,511Cash and cash equivalents, end of period
    
    $
    240,434
    
    
    $
    1,049,855
 The accompanying notes are an integral part of the financial statements. 6




---



##### Table of Contents



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 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, the general partnership
interest was immediately transferred to GP3 Asset Acquisition.
Therefore, as of September 11, 2003, 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 September 30, 2004, 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 activities 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 may vary from this calculation as a result
of a 7




---



##### Table of Contents



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
distributions which creates timing differences between comparative
calculations, and (iii) the calculation ignores the timing of
repurchases. The balance sheet of the Partnership as of September 30, 2004, the
statements of operations and cash flows for the periods ending September
30, 2004 and September 30, 2003 and the statement of changes in partners
capital for the period ending September 30, 2004 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, 2003 filed
with the United States Securities and Exchange Commission on March 28,
2004. 2. LAND AND BUILDING SUBJECT TO OPERATING LEASES: The net investment in operating leases as of September 30, 2004 is
comprised of the following: Land
    
    $
    6,540,429Building and improvements
    
    
    9,522,84816,063,277Less accumulated depreciation
    
    
    (1,755,976
    )Total
    
    $
    14,307,301
 3. NET INVESTMENT IN FINANCING LEASES: The net investment in financing leases as of September 30, 2004 is
comprised of the following: Minimum lease payments to be received
    
    $
    352,408Less unearned income
    
    
    (56,998
    )Net investment in financing leases
    
    $
    295,410
 4. NOTES PAYABLE: In November 1998, the Partnership entered into a $6.2 million term note.
The note has a ten-year term, is collateralized by certain properties
subject to operating leases which have a carrying value of approximately
$7.6 million, and bears an interest rate of 8.37% per annum. In March 1999, the Partnership entered into a $2.0 million term note. The
note has a ten-year term, is collateralized by certain properties subject
to operating leases which have a carrying value of approximately $3.7
million, and bears interest at a rate of 8.5% per annum. In September 2003, the Partnership defeased approximately $1,979,000 of these
notes payable with proceeds from the sale of a Red Robin property. The
Partnership incurred approximately $481,000 of yield maintenance costs and
$49,000 of professional fees related to the defeasance. Debt issuance costs of approximately $477,909 were incurred in connection
with the issuance of the notes, and are being amortized over the life of
the notes to interest expense using the straight-line method, which is
not materially different than the interest method. 8




---



##### Table of Contents



5. EARNINGS FROM DISCONTINUED OPERATIONS: In accordance with SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets, the Company has classified the operations of the
property sold during 2003 as discontinued operations. Accordingly, the
results of operations related to the property have been reclassified to
earnings from discontinued operations. Expenses include an allocation of
interest expense based on the outstanding debt required to be repaid. In
2004, the Company corrected the previous reporting of discontinued
operations relating to the disposal in 2003. This reclassification has no
impact on the reported net income for the three and nine months ended
September 30, 2003. The following is a summary of earnings from
discontinued operations: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Operating lease rents
    
    $
    
    
    
    $
    76,189
    
    
    $
    
    
    
    $
    266,661Expenses:Interest expense
    
    
    
    
    
    
    28,135
    
    
    
    
    
    
    
    110,725Provision for depreciation
    
    
    
    
    
    
    7,050
    
    
    
    
    
    
    
    28,199Management Fees
    
    
    
    
    
    
    762
    
    
    
    
    
    
    
    2,667Income from discontinued operation, net
    
    $
    
    
    
    $
    40,242
    
    
    $
    
    
    
    $
    125,070
 6. LIQUIDATION PLAN: On or about September 24, 2004, the Partnership filed with the Securities
and Exchange Commission and mailed to its limited partners a consent
solicitation statement pursuant to which the Partnership began soliciting
the consent of its limited partners to (i) dissolve the Partnership,
liquidate its assets and wind up its affairs; and (ii) amend the
partnership agreement to permit, on a limited basis, the sale of
Partnership assets to certain affiliates in connection with the
dissolution, liquidation and winding up of the Partnership. On November
8, 2004, the requisite limited partner consents for each proposal were
obtained, the consent solicitation was closed and the plan of liquidation
and the amendment to the partnership agreement became effective. As a
result, the general partner is authorized to liquidate the assets of the
Partnership and distribute the net proceeds from such liquidation in
accordance with the partnership agreement, without any further action by
the limited partners. The Partnership is undertaking steps to commence
the liquidation in accordance with the adopted Plan of Liquidation and
Dissolution. 
 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. Forward-looking statements are subject to
certain risks and uncertainties, some of which are beyond the
Partnerships control, 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. Any statements
contained in this report or any documents incorporated herein by
reference that are not statements of historical fact may be deemed to be
forward-looking statements. You should not place undue reliance on these
forward-looking 9




---



##### Table of Contents



statements, which speak only as of the date of this report. The
Partnership disclaims, except as may be required by law, any obligation
to update or release revisions to these forward-looking statements to
reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS Three Months Ended September 30, 2004. During the three months ended September 30, 2004, total operating revenue
was approximately $454,000, compared to $462,000 for the three months
ended September 30, 2003. Rental revenue from operating leases for the
three months ended September 30, 2004 remained nearly unchanged. Earned
income from financing leases for the three months ended September 30,
2004 decreased 52.9% to approximately $5,000 compared to approximately
$11,000 for the three months ended September 30, 2003 as a result of the
amortization of the principal balances on the financing leases and the
disposition of two equipment leases, one in the fourth quarter of 2003
and the other in the first quarter of 2004. Operating expenses for the three months ended September 30, 2004,
remained nearly unchanged at approximately $231,000. Interest expense
decreased by approximately $3,000 for the three months ended September
30, 2004. General and administrative expenses increased by approximately
$4,000 as a result of increased professional fees. As a result of the foregoing, the Partnerships net income from
continuing operations decreased 4.1% to approximately $222,000 for the
three months ended September 30, 2004, compared to approximately $232,000
for the three months ended September 30, 2003. Discontinued operations in the third quarter of 2003 reflect the sale of
the Red Robin property that was sold in the third quarter of 2003. The
sale was triggered by the tenants exercise of a purchase option clause
in the lease agreement. As a result of the foregoing, the Partnerships net income decreased 7.4%
to approximately $222,000 for the three months ended September 30, 2004,
compared to approximately $240,000 for the three months ended September
30, 2003. Nine Months Ended September 30, 2004 During the nine months ended September 30, 2004 total operating revenue
was approximately $1,366,000, compared to $1,401,000 for the nine months
ended September 30, 2003. Rental revenue from operating leases for the
nine months ended September 30, 2004 decreased 1.2% to approximately
$1.3 million, compared to $1.4 million for the nine months ended
September 30, 2003. Earned income from financing leases for the nine
months ended September 30, 2004 decreased 47.8% to approximately $20,000
compared to approximately $38,000 for the nine months ended September 30,
2003 as result of the amortization of the principal balances on the
financing leases and the disposition of two equipment leases. Operating expenses were approximately $703,000 for the nine months ended
September 30, 2004, an increase of 1.7% compared to approximately $692,000
for the nine months ended September 30, 2003. Interest expense decreased
by approximately $10,000 for the nine months ended September 30, 2004 due
to repayments of notes payable. General and administrative expenses
increased by approximately $22,000 primarily due to an increase in
reserve for bad debts in the second quarter of 2004 and increased
professional fees. Other income for the nine months ended September 30, 2004 was
approximately $3,000 compared to approximately $16,000 for the nine
months ended September 30, 2003. Other income for the nine months ended
September 30, 2004 is principally attributable to the sale of an
equipment lease 10




---



##### Table of Contents



with an investment value of approximately $140,000 for net cash proceeds
of approximately $142,000, which resulted in a gain of approximately
$2,000 and miscellaneous income from late charges of approximately
$7,000. These income amounts are partially offset by an expense of
approximately $6,000 relating to the final settlement on a repossessed
equipment package which yielded net proceeds of approximately $6,000. The
other income for the nine months ended September 30, 2003 is primarily
due to the sale of an equipment lease for net cash proceeds of
approximately $24,000, resulting in a gain of approximately $6,000, and
miscellaneous income from late charges of approximately $9,000. Discontinued operations in the third quarter of 2003 reflect the sale of
the Red Robin property in the third quarter of 2003. The sale was
triggered by the tenants exercise of a purchase option clause in the
lease agreement As a result of the foregoing, the Partnerships net income decreased
18.6.% to approximately $666,000 for the nine months ended September 30,
2004 as compared to approximately $819,000 for the nine months ended
September 30, 2003. The Partnership announced third quarter distributions of $275,000, of
which $236,593 was distributed to limited partners on October 15, 2004.
The balance of $38,407 was distributed on August 16, 2004 and September
15, 2004 to those partners who elected to receive distributions on a
monthly basis. LIQUIDITY AND CAPITAL COMMITMENTS The Partnership commenced the Offering of up to 20,000 Units, priced at
$1,000 per Unit, 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 on
August 12, 1996. Net proceeds after Offering expenses were $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 and equipment. The notes have a 10-year term, are
collateralized by certain properties subject to operating leases, and
bear interest at rates of 8.37% and 8.50% per annum, respectively. In
September 2003, the partnership defeased approximately $1,979,000 of
these notes payable with proceeds from the sale of the Red Robin
property. The partnership incurred approximately $481,000 of yield
maintenance costs and $49,000 of professional fees related to the
defeasance. Debt issuance costs of approximately $478,000 incurred in
connection with the issuance of the notes are being 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. As of September 30, 2004, the Partnership had invested $16.1 million in
13 net leased real estate properties and $943,000 in 4 performing
equipment leases. The remaining net investment in the Partnerships
leased equipment is $295,000, after cumulative principal collections of
$648,000. Inclusive of the above amount, the Partnership has received
approximately $3.3 million of aggregate principal collections on its
financing leases during the life of those investments. As of September
30, 2004, the Partnership has not made any commitments to purchase
additional properties or equipment, nor does it intend to make any such
commitments. The Partnership annually considers written requests to repurchase Units
pursuant to the terms of the repurchase plan set forth in the
Partnerships prospectus with respect to the Offering. Since 1997, a
total of 367 Units have been repurchased by the Partnership. The
Partnership is not obligated to accept Unit repurchase requests if the
General Partner determines that such purchases would impair the capital
or operation of the Partnership and the Partnership may suspend or cancel
the Repurchase Plan at any time in its sole discretion. In connection
with the announcement of the Partnerships liquidation plans, the General
Partner has indefinitely suspended the Repurchase Plan. 11




---



##### Table of Contents



The Partnership expects that only limited amounts of liquid assets will
be required for existing properties since its property and equipment
leases require tenants and lessees to pay all taxes and assessments,
maintenance and repairs and insurance premiums, including casualty
insurance thereby minimizing the Partnerships operating expenses and
capital requirements. The General Partner expects 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 3. CONTROLS AND PROCEDURES Mr. Beach acting in his capacity as the principal executive officer of
GP3 Asset Acquisition is ultimately responsible for the disclosure
controls and procedures of the Partnership. Disclosure controls and
procedures are established and maintained by the Partnership to ensure
the information required to be disclosed by the Partnership in the
reports that it files or submits pursuant to the Securities Exchange Act
of 1934, as amended (the Act), is recorded, processed, summarized and
reported within the time periods specified in the Commissions rules and
forms. Mr. Beach has evaluated the effectiveness of the Partnerships
disclosure controls and procedures and has determined that these controls
and procedures effectively communicate the information required to be
disclosed by the Partnership in the report it files or submits under the
Act in a manner that allows timely decisions regarding such disclosures. There have been no changes in the Partnerships internal controls over
financial reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Partnerships internal control over financial reporting. 
 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. On or about September 24, 2004, the Partnership filed with the Securities
and Exchange Commission and mailed to its limited partners a consent
solicitation statement pursuant to which the Partnership began soliciting
the consent of its limited partners to (i) dissolve the Partnership,
liquidate its assets and wind up its affairs; and (ii) amend the
partnership agreement to permit, on a limited basis, the sale of
Partnership assets to certain affiliates in connection with the
dissolution, liquidation and winding up of the Partnership. The Partnerships liquidation plans, as stated in the offering materials
delivered in connection with the Offering, indicated that the Partnership
intended to dispose of its properties and liquidate the Partnership in
approximately February 2001 through January 2005, the seventh and tenth
years after the Partnership commenced operations. These liquidation plans
were partly based upon the then-general partners belief that the
equipment leases would have expired by the time of liquidation, and that
the return of the investment in such assets would have been received
through the full payout of rental payments. As of September 30, 2004,
substantially all of the Partnerships 12




---



##### Table of Contents



investments in equipment leases have expired and the related capital
returned to the limited partners. The general partner believes that market conditions for selling retail
net leased real estate are presently favorable, due to the limited supply
of, and high demand for, such assets, as well as the low interest rate
environment. As a result, the general partner believes that net leased
real estate assets are presently being sold at high prices relative to
their annual income. Although market conditions are presently favorable,
the general partner believes that the current expectations for increases
in interest rates could result in reduced real estate values over time,
due to the effect of increased borrowing costs and increased yield
expectations (in comparison to other investments). In light of these
trends, the general partner has concluded that it would be preferable to
sell the Partnerships assets as soon as practicable to benefit from the
existing favorable environment. As part of the consent solicitation, the Partnership also solicited the
consent of the limited partners to an amendment to the Partnerships
partnership agreement, which would permit the general partner and/or its
affiliates to purchase Partnership assets under certain limited
circumstances. The general partner believes that there is a chance that
the general partner will be unable to sell all of the Partnerships
assets to third parties in connection with the liquidation. Since the
partnership agreement prohibits distributions in kind, the Partnership
cannot be liquidated until all of the Partnerships assets are sold.
Failure to sell all of the Partnerships assets in a timely manner will
result in a delay in the liquidating distribution to the partners and

result in continued administrative costs to the Partnership. The general
partner believes that if it is permitted to purchase these unsold assets,
if any, the partners will materially benefit because they will receive
their liquidating distributions sooner and less of the Partnerships
financial resources will be devoted to administrative costs incurred in
connection with the continuation of the Partnership. Effective November 8, 2004, the requisite limited partner consents for
each proposal were obtained and the consent solicitation was closed.
Limited partners holding 10,758 units and 10,137 units consented to the
liquidation proposal and the amendment to the limited partnership
agreement, respectively. Limited partners holding 152 units and 658
units did not consent to the liquidation proposal and the amendment to
the limited partnership agreement, respectively. Limited partners
holding 122 units and 237 units abstained from consenting to the
liquidation proposal and the amendment to the limited partnership
agreement, respectively. In summary, 97.5% of the units voted approved
the liquidation proposal and 91.9% of the units voted approved the
amendment to the limited partnership agreement. The Partnership has undertaken steps to commence the liquidation of the
Partnership. The Partnership has entered into an exclusive listing
agreement with CB Richard Ellis. CB Richard Elliss Net Leased Property
Group will oversee the brokerage activity on behalf of the Partnership.
Partnership assets will be marketed on a local, regional and national
basis and to a limited number of international investors. The general
partner believes this will provide for very broad exposure of the assets
to potential purchasers. ITEM 5. OTHER INFORMATION.None 13




---



##### Table of Contents



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.  (a)
    
    The following exhibits are included herein or incorporated by
reference: 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 Registrants Definitive Proxy
Statement on Schedule 14A, filed on September 21, 2004 and 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 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)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
  (b)
    
    Reports on Form 8-K:  There were no reports filed on Form 8-K for the quarter ended September
30, 2004. 14




---



##### Table of Contents



SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized. By:
    
    Captec Franchise Capital Partners L.P. IIIGP3 Asset Acquisition, LLCIts ManagerBy:
    
    /s/ Patrick L. BeachPatrick L. BeachPresidentDate:
    
    November 12, 2004
 15




---



##### Table of Contents



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 Registrants Definitive Proxy
Statement on Schedule 14A, filed on September 21, 2004 and 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 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)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
 16