##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-QSB

|                                                                                 
|---------------------------------------------------------------------------------
|QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended    June 30, 2001

OR

|                                                                                  
|----------------------------------------------------------------------------------
|TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

|                        |  |           
|----------------------- |  | ----------
|Commission file number: |  | 33-77510-C

CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

38-3160141
(IRS Employer Identification Number)

24 Frank Lloyd Wright Drive, Lobby L, 4th FloorP.O. Box 544, Ann Arbor, Michigan 48106-0544
(Address of principal executive offices, including zip code)

(734) 994-5505
(Issuers telephone number)

Not Applicable
(Former name, former address and former fiscal year, if changed since last year)

Indicate by check mark whether the registrant(1) as 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       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





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TABLE OF CONTENTS



|                                                                                              |                                                                                   |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I Financial Information                                                                 
|Item 1. Financial Statements                                                                 
|                                                                                              | Balance Sheet June 30, 2001 and December 31, 2000                                
|                                                                                              | Statement of Operations for the three and six months
ended June 30, 2001 and 2000
|                                                                                              | Statement of Changes in Partners' Capital for the six months
ended June 30, 2001 
|                                                                                              | Statement of Cash Flows for the six months ended June 30, 2001 and 2000          
|                                                                                              | Notes to Financial Statements                                                    
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
|Part II Other Information                                                                    
|                                                                                              | Other Information                                                                
|Signatures                                                                                   



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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

Index to Form 10-QSB

|           |  |                                                                                       |  |  |  |      |         | 
|---------- |  | ------------------------------------------------------------------------------------- |  |  |  | ---- | ------- | 
|Item No.   |  |                                                                                       |  |  |  | Page |        
|           |  |                                                                                       |  |  |  |      |        
|PART I     |  | FINANCIAL INFORMATION                                                                 | 
|          
|          
|          
|          
|Item 1.    |  | Financial Statements:                                                                 | 
|          
|          
|          
|          
|           |  | Balance Sheet, June 30, 2001 and December 31, 2000                                    |  |  |  |      | 3       | 
|          
|          
|          
|          
|           |  | Statement of Operations for the three and six months
ended June 30, 2001 and 2000     |  |  |  |      | 4       | 
|          
|          
|          
|          
|           |  | Statement of Changes in Partners' Capital for the six months
ended June 30, 2001      |  |  |  |      | 5       | 
|          
|          
|          
|          
|           |  | Statement of Cash Flows for the six months                                            | 
|          
|          
|          
|          
|           |  | ended June 30, 2001 and 2000                                                          |  |  |  |      | 6       | 
|          
|          
|          
|          
|           |  | Notes to Financial Statements                                                         |  |  |  |      | 7 - 8   | 
|          
|          
|          
|          
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition
and Results of Operations |  |  |  |      | 9 - 11  | 
|          
|          
|          
|          
|PART II    |  | OTHER INFORMATION                                                                     | 
|          
|          
|          
|          
|           |  | Other Information                                                                     |  |  |  |      | 12 - 13 | 
|          
|          
|          
|          
|SIGNATURES |  |                                                                                       |  |  |  |      | 14      | 

2



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Captec Franchise Capital Partners L.P. III
Balance Sheet

|                                     |                                       |                                       |                                 |            |            |             |            |            |              |  |  | 
|------------------------------------ | ------------------------------------- | ------------------------------------- | ------------------------------- | ---------- | ---------- | ----------- | ---------- | ---------- | ------------ |  |  | 
|                                     |                                       |                                       |                                 |            |            | (Unaudited) |           
|                                     |                                       |                                       |                                 |            |            | June 30,    |            |            | December 31, | 
|                                     |                                       |                                       |                                 |            |            | 2001        |            |            | 2000         | 
|                                     |                                       |                                       |                                 |            |           
|                                     |                                       |                                       |                                 | Assets    
|                                    
|                                    
|                                    
|                                    
|Cash and cash equivalents            |                                       | $                                     | 109,061                         |            |            | $           | 95,992     |           
|                                    
|                                    
|                                    
|                                    
|Restricted cash                      |                                       |                                       | 312,562                         |            |            |             | 269,437    |           
|                                    
|                                    
|                                    
|                                    
|Investment in property under leases:
|                                    
|                                    
|                                    
|                                    
|                                     | Operating leases, net                 |                                       |                                 | 18,662,468 |            |             |            | 18,809,942 |             
|                                    
|                                    
|                                    
|                                    
|                                     | Financing leases, net                 |                                       |                                 | 1,331,403  |            |             |            | 2,049,441  |             
|                                    
|                                    
|                                    
|                                    
|                                     | Impaired financing leases, net        |                                       |                                 | 251,555    |            |             |            | 27,492     |             
|                                    
|                                    
|                                    
|                                    
|Accounts receivable                  |                                       |                                       | 86,722                          |            |            |             | 60,198     |           
|                                    
|                                    
|                                    
|                                    
|Unbilled rent, net                   |                                       |                                       | 1,087,843                       |            |            |             | 1,074,434  |           
|                                    
|                                    
|                                    
|                                    
|Due from related parties             |                                       |                                       | 8,737                           |            |            |             |           |           
|                                    
|                                    
|                                    
|                                    
|Deferred financing costs, net        |                                       |                                       | 358,432                         |            |            |             | 382,327    |           
|                                    
|                                    
|                                    
|                                    
|                                     |                                       |                                       |                                 |            |           
|                                    
|                                    
|                                    
|                                    
|                                     |                                       | Total assets                          |                                 | $          | 22,208,783 |             |            | $          | 22,769,263   | 
|                                     |                                       |                                       |                                 |            |           
|                                    
|                                    
|                                    
|                                    
|                                     |                                       |                                       | Liabilities & Partners Capital
|                                    
|                                    
|                                    
|                                    
|Liabilities:                        
|                                    
|                                    
|                                    
|                                    
|                                     | Notes payable                         |                                       | $                               | 8,146,422  |            |             | $          | 8,194,000  |             
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable and accrued expenses |                                       |                                 | 132,176    |            |             |            | 83,147     |             
|                                    
|                                    
|                                    
|                                    
|                                     | Due to related parties                |                                       |                                 | 690        |            |             |            | 3,405      |             
|                                    
|                                    
|                                    
|                                    
|                                     | Security deposits held on leases      |                                       |                                 | 54,774     |            |             |            | 54,774     |             
|                                     |                                       |                                       |                                 |            |           
|                                    
|                                    
|                                    
|                                    
|                                     |                                       | Total liabilities                     |                                 |            | 8,334,062  |             |            |            | 8,335,326    | 
|                                     |                                       |                                       |                                 |            |           
|                                    
|                                    
|                                    
|                                    
|Partners capital:                  
|                                    
|                                    
|                                    
|                                    
|Limited partners capital accounts   |                                       |                                       | 13,843,738                      |            |            |             | 14,407,068 |           
|                                    
|                                    
|                                    
|                                    
|General partners capital accounts   |                                       |                                       | 30,983                          |            |            |             | 26,869     |           
|                                     |                                       |                                       |                                 |            |           
|                                    
|                                    
|                                    
|                                    
|                                     |                                       | Total partners capital               |                                 |            | 13,874,721 |             |            |            | 14,433,937   | 
|                                     |                                       |                                       |                                 |            |           
|                                    
|                                    
|                                    
|                                    
|                                     |                                       | Total liabilities & partners capital |                                 | $          | 22,208,783 |             |            | $          | 22,769,263   | 
|                                     |                                       |                                       |                                 |            |           

The accompanying notes are an integral part of the financial statements.

3



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Captec Franchise Capital Partners L.P. IIIStatement of Operations
(Unaudited)

|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |           |   |         |           |           | 
|---------------------------------------------------------------- | --------------------------------------- | ---------------------------------- | ------- | ------------------ | ------- | - | ---------------- | ------- | ------- | ---- | ------- | --------- | --------- | - | ------- | --------- | --------- | 
|                                                                 |                                         |                                    |         | Three months ended |         |   | Six months ended |        
|                                                                 |                                         |                                    |         | June 30,           |         |   | June 30,         |        
|                                                                 |                                         |                                    |         |                    |         |   |                  |        
|                                                                 |                                         |                                    |         | 2001               |         |   | 2000             |         |         | 2001 |         |           | 2000      |  
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |           |  
|Operating revenue:                                              
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Rental income                           |                                    | $       | 540,993            |         |   | $                | 584,084 |         |      | $       | 1,081,987 |           |   | $       | 1,158,628 |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Finance income                          |                                    |         | 31,202             |         |   |                  | 51,266  |         |      |         | 68,171    |           |   |         | 106,730   |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                                         | Total operating revenue            |         |                    | 572,195 |   |                  |         | 635,350 |      |         |           | 1,150,158 |   |         |           | 1,265,358 | 
|                                                                
|                                                                
|                                                                
|                                                                
|Operating costs and expenses:                                   
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Interest expense                        |                                    |         | 182,991            |         |   |                  | 186,445 |         |      |         | 366,623   |           |   |         | 372,890   |          
|                                                                 | Depreciation                            |                                    |         | 73,737             |         |   |                  | 73,737  |         |      |         | 147,474   |           |   |         | 147,474   |          
|                                                                 | General and administrative              |                                    |         | 24,079             |         |   |                  | 11,514  |         |      |         | 40,967    |           |   |         | 32,009    |          
|                                                                 | Provision for unbilled rent             |                                    |         |                   |         |   |                  |        |         |      |         | 77,000    |           |   |         |          |          
|                                                                 | Provision for impaired financing leases |                                    |         |                   |         |   |                  |        |         |      |         | 92,908    |           |   |         |          |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                                         | Total operating costs and expenses |         |                    | 280,807 |   |                  |         | 271,696 |      |         |           | 724,972   |   |         |           | 552,373   | 
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                                         | Income from operations             |         |                    | 291,388 |   |                  |         | 363,654 |      |         |           | 425,186   |   |         |           | 712,985   | 
|                                                                
|                                                                
|                                                                
|                                                                
|Other income (expense):                                         
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Interest and other income               |                                    |         | 2,792              |         |   |                  | 3,271   |         |      |         | 4,525     |           |   |         | 2,910     |          
|                                                                 | (Loss) gain on sale of equipment        |                                    |         | (27,357            | )       |   |                  | 15,000  |         |      |         | (18,271   | )         |   |         | 15,000    |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                 |                                         | Total other income (expense)       |         |                    | (24,565 | ) |                  |         | 18,271  |      |         |           | (13,746   | ) |         |           | 17,910    | 
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                
|                                                                
|                                                                
|                                                                
|Net income                                                       |                                         |                                    | 266,823 |                    |         |   | 381,925          |         |         |      | 411,440 |           |           |   | 730,895 |          
|                                                                
|                                                                
|                                                                
|                                                                
|Net income allocable to general partner                          |                                         |                                    | 2,668   |                    |         |   | 3,819            |         |         |      | 4,114   |           |           |   | 7,309   |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                
|                                                                
|                                                                
|                                                                
|Net income allocable to limited partners                         |                                         | $                                  | 264,155 |                    |         | $ | 378,106          |         |         | $    | 407,326 |           |           | $ | 723,586 |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                
|                                                                
|                                                                
|                                                                
|Net income per limited partnership unit                          |                                         | $                                  | 13.31   |                    |         | $ | 19.02            |         |         | $    | 20.53   |           |           | $ | 36.39   |          
|                                                                 |                                         |                                    |         |                    |         |   |                  |         |         |      |         |           |          
|                                                                
|                                                                
|                                                                
|                                                                
|Weighted average number of limited partnership
units outstanding |                                         |                                    | 19,842  |                    |         |   | 19,884           |         |         |      | 19,842  |           |           |   | 19,884  |          

The accompanying notes are an integral part of the financial statements.

4



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Captec Franchise Capital Partners L.P. III
Statement of Changes in Partners Capital
for the six months ended June 30, 2001
(Unaudited)

|                                  |  |           |        |  |           |   |            |           |  |   |           |  |  |   |            |  
|--------------------------------- |  | --------- | ------ |  | --------- | - | ---------- | --------- |  | - | --------- |  |  | - | ---------- | -
|                                  |  | Limited   |        |  | Limited   |   |            | General   |  |   | Total     | 
|                                  |  | Partners |        |  | Partners |   |            | Partners |  |   | Partners | 
|                                  |  | Units     |        |  | Accounts  |   |            | Accounts  |  |   | Capital   | 
|                                  |  |           |        |  |           |   |            |           |  |   |           | 
|                                 
|                                 
|                                 
|                                 
|Balance, December 31, 2000        |  |           | 19,842 |  |           | $ | 14,407,068 |           |  | $ | 26,869    |  |  | $ | 14,433,937 |  
|                                 
|                                 
|                                 
|                                 
|Distributions  ($48.92 per unit) |  |           |       |  |           |   | (970,656   | )         |  |   |          |  |  |   | (970,656   | )
|                                 
|                                 
|                                 
|                                 
|Net income                        |  |           |       |  |           |   | 407,326    |           |  |   | 4,114     |  |  |   | 411,440    |  
|                                  |  |           |        |  |           |   |            |           |  |   |           | 
|                                 
|                                 
|                                 
|                                 
|Balance, June 30, 2001            |  |           | 19,842 |  |           | $ | 13,843,738 |           |  | $ | 30,983    |  |  | $ | 13,874,721 |  
|                                  |  |           |        |  |           |   |            |           |  |   |           | 

The accompanying notes are an integral part of the financial statements.

5



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Captec Franchise Capital Partners L.P. III
Statement of Cash Flows
for the six months ended June 30, 2001 and 2000
(Unaudited)

|                                               |                                        |                                                              |            |          |         |   |            |            |          |  
|---------------------------------------------- | -------------------------------------- | ------------------------------------------------------------ | ---------- | -------- | ------- | - | ---------- | ---------- | -------- | -
|                                               |                                        |                                                              |            | 2001     |         |   | 2000       |           
|                                               |                                        |                                                              |            |          |         |   |            |           
|Cash flows from operating activities:         
|                                              
|                                              
|                                              
|                                              
|                                               | Net Income                             |                                                              | $          | 411,440  |         |   | $          | 730,895    |         
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to net income:            
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | Depreciation                                                 |            |          | 147,474 |   |            |            | 147,474  |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | Amortization of debt issuance costs                          |            |          | 23,895  |   |            |            | 28,675   |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | Loss (gain) on sale of equipment                             |            |          | 18,271  |   |            |            | (15,000  | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | Provision for credit losses                                  |            |          | 77,000  |   |            |            |         |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | Increase in unbilled rent                                    |            |          | (13,409 | ) |            |            | (129,739 | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | (Increase) decrease in accounts receivable                   |            |          | (26,524 | ) |            |            | 47,519   |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | Increase (decrease) in accounts payable and accrued expenses |            |          | 49,029  |   |            |            | (12,527  | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | (Increase) decrease in restricted cash                       |            |          | (43,125 | ) |            |            | 4,868    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | (Increase) decrease in due from related parties              |            |          | (8,737  | ) |            |            | 4,352    |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                        | Decrease in due to related parties                           |            |          | (2,715  | ) |            |            | (22,800  | )
|                                               |                                        |                                                              |            |          |         |   |           
|Net cash provided by operating activities      |                                        |                                                              | 632,599    |          |         |   | 783,717    |           
|                                               |                                        |                                                              |            |          |         |   |           
|                                              
|                                              
|                                              
|                                              
|Cash flows from investing activities:         
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sale of equipment        |                                                              |            | 267,745  |         |   |            | 75,000     |         
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments on financing leases |                                                              |            | 130,959  |         |   |            | 252,508    |         
|                                               |                                        |                                                              |            |          |         |   |           
|Net cash provided by investing activities      |                                        |                                                              | 398,704    |          |         |   | 327,508    |           
|                                               |                                        |                                                              |            |          |         |   |           
|Cash flows from financing activities:         
|                                              
|                                              
|                                              
|                                              
|                                               | Repayments of notes payable            |                                                              |            | (47,578  | )       |   |            |           |         
|                                              
|                                              
|                                              
|                                              
|                                               | Distributions to limited partners      |                                                              |            | (970,656 | )       |   |            | (1,011,726 | )       
|                                              
|                                              
|                                              
|                                              
|                                               | Distributions to general partner       |                                                              |            |         |         |   |            | (5,326     | )       
|                                               |                                        |                                                              |            |          |         |   |           
|Net cash used in financing activities          |                                        |                                                              | (1,018,234 | )        |         |   | (1,017,052 | )         
|                                               |                                        |                                                              |            |          |         |   |           
|                                              
|                                              
|                                              
|                                              
|Net increase in cash and cash equivalents      |                                        |                                                              | 13,069     |          |         |   | 94,173     |           
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                        |                                                              | 95,992     |          |         |   | 327,903    |           
|                                               |                                        |                                                              |            |          |         |   |           
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, end of period       |                                        | $                                                            | 109,061    |          |         | $ | 422,076    |           
|                                               |                                        |                                                              |            |          |         |   |           

The accompanying notes are an integral part of the financial statements.

6



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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 or double net" basis, primarily to operators of national and
regional chain and nationally franchised fast food and family style restaurants, as well as other
national and regional retail chains. The general partners of the Partnership upon formation of the
Partnership were Captec Franchise Capital Corporation III (the Corporation), a wholly owned subsidiary
of Captec Financial Group, Inc. (Captec), and Patrick L. Beach, an individual, hereinafter
collectively referred to as the Sponsor. Patrick L. Beach is also the Chairman of the Board of
Directors, President and Chief Executive Officer of the Corporation and Captec. In August, 1998 the
general partnership interest of the Partnership was acquired by Captec Net Lease Realty, Inc., an
affiliate of Captec, for $1,483,000.
|  
|  
|  
|  
|   |  | The Partnership commenced a public offering of 20,000 limited partnership interest units on August 12,
1994 and reached final funding in August, 1996. Net proceeds after offering expenses were approximately
$17.4 million. During 1997, the Partnership repurchased a total of 37 units for $31,450, or 85% of the
investors capital account. During 1999, the Partnership repurchased 79 units for $59,625, or 75% of
the investors capital account. An additional 42 Units were repurchased in December 2000 for $28,432, or
69% of the investorÎs 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 June 30, 2001, the Partnership had
19,842 units issued and outstanding.                                                                                                                                                                                                                                                                           
|  
|  
|  
|  
|   |  | Allocation of profits, losses and cash distributions from operations and cash distributions from sale or
refinancing are made pursuant to the terms of the Partnership Agreement. Profits and losses from
operations are allocated among the limited partners based upon the number of Units owned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|  
|  
|  
|   |  | The balance sheet of the Partnership as of June 30, 2001 and the statements of operations and cash flows
for the periods ending June 30, 2001 and 2000 have not been audited. In the opinion of the Management,
these unaudited financial statements contain all adjustments necessary to present fairly the financial
position and results of operations and cash flows of the Partnership for the periods then ended.
Results of operations for the interim periods are not necessarily indicative of results for the full
year. 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, 2000 filed with the United States Securities and Exchange Commission on March 30, 2001.                                                                                                                                                                                                                          
|  
|  
|  
|  
|2. |  | LAND AND BUILDING SUBJECT TO OPERATING LEASES:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|  
|  
|  
|   |  | The net investment in operating leases as of June 30, 2001 is comprised of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                               |  |            |            |  
| | ----------------------------- |  | ---------- | ---------- | -
| | Land                          |  | $          | 8,163,346  |  
|
|
|
|
| | Building and improvements     |  |            | 11,796,894 |  
| |                               |  |            |           
| |                               |  | 19,960,240 |           
|
|
|
|
| | Less accumulated depreciation |  |            | (1,297,772 | )
| |                               |  |            |           
| | Total                         |  | $          | 18,662,468 |  
| |                               |  |            |           

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##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
NOTES TO FINANCIAL STATEMENTS

|   |  |                                                                                          
|-- |  | -----------------------------------------------------------------------------------------
|3. |  | NET INVESTMENT IN FINANCING LEASES:                                                      
|  
|  
|  
|  
|   |  | The net investment in financing leases as of June 30, 2001 is comprised of the following:

|                                      |  |   |           |  
|------------------------------------- |  | - | --------- | -
|Minimum lease payments to be received |  | $ | 1,492,946 |  
|                                     
|                                     
|                                     
|                                     
|Estimated residual value              |  |   | 89,678    |  
|                                      |  |   |          
|Gross investment in financing leases  |  |   | 1,582,624 |  
|                                     
|                                     
|                                     
|                                     
|Less unearned income                  |  |   | (195,509  | )
|                                     
|                                     
|                                     
|                                     
|Less direct origination costs         |  |   | (55,712   | )
|                                      |  |   |          
|Net investment in financing leases    |  | $ | 1,331,403 |  
|                                      |  |   |          

|   |  |                                                                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4. |  | NOTES PAYABLE:                                                                                                                                                                                                                                                                            
|  
|  
|  
|  
|   |  | In November, 1998, the Partnership entered into a $6.2 million term note, the proceeds of which were
used to acquire additional properties. The note has a 10-year term, is collaterized by certain
properties subject to operating leases, and bears an interest rate of 8.37% per annum.
|  
|  
|  
|  
|   |  | In March, 1999, the Partnership entered into an additional $2.0 million term note. The note also has a
10-year term, is collaterized by certain properties subject to operating leases, and bears an interest
rate of 8.5% per annum.                                                     
|  
|  
|  
|  
|   |  | Debt issuance costs of approximately $478,000 in aggregate were incurred in connection with the issuance
of the notes, and are being amortized using the straight-line method over the 10-year term.                                                                                      

8



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##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I  FINANCIAL INFORMATION




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When used in this discussion, the words, intends, anticipates, expects, and similar expressions are
intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected. Such risks and uncertainties include
the following: (i) a tenant may default in making rent payments, (ii) a fire or other casualty may interrupt the
cash flow stream from a property, (iii) the properties may not be able to be leased at the assumed rental rates,
(iv) unexpected expenses may be incurred in the ownership of the properties, and (v) properties may not be able
to be sold at the presently anticipated prices and times.

As a result of these and other factors, the Partnership may experience material fluctuations in future operating
results on a quarterly or annual basis, which could materially and adversely affect its business, financial
condition and operating results. These forward-looking statements speak only as of the date hereof. The
Partnership undertakes no obligation to publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2001.   During the three months ended June 30, 2001 total operating revenue decreased
9.9% to approximately $572,000 as compared to approximately $635,000 for the three months ended June 30, 2000.
Rental revenue from operating leases for the three months ended June 30, 2001 decreased to approximately $541,000
as compared to approximately $584,000 for the three months ended June 30, 2000 due to the impairment of the
Raleigh, North Carolina Boston Market property. Earned income from financing leases for the three months ended
June 30, 2001 decreased 39.1% to approximately 31,000 as compared to approximately $51,000 for the three months
ended June 30, 2000 as a result of the disposition of one equipment lease in January 2001 as well as amortization
of principal balances.

Operating expenses were approximately $281,000 for the three months ended June 30, 2001, nearly unchanged as
compared to approximately $272,000 for the three months ended June 30, 2000.

Other expense for the three months ended June 30, 2001 was approximately $25,000 as compared to other income of
approximately $18,000 for the three months ended June 30, 2000. The other expense is primarily due to a loss on
the sale of equipment during the three months ended June 30, 2001. The other income for the three months ended
June 30, 2000 is primarily due to a gain on the sale of equipment.

As a result of the foregoing, the Partnerships net income decreased 30.1% to approximately $267,000 for the
three months ended June 30, 2001 as compared to approximately $382,000 for the three months ended June 30, 2000.

Six Months Ended June 30, 2001.   During the six months ended June 30, 2001 total operating revenue decreased
9.1% to approximately $1,150,000 as compared to approximately $1,265,000 for the six months ended June 30, 2000.
Rental revenue from operating leases for the six months ended June 30, 2001 decreased to approximately $1,082,000
as compared to approximately $1,159,000 for the six months ended June 30, 2000 due to the impairment of the
Raleigh, North Carolina Boston Market property. Earned

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I  FINANCIAL INFORMATION

income from financing leases for the six months ended June 30, 2001 decreased 36.1% to approximately $68,000 as
compared to approximately $107,000 for the six months ended June 30, 2000 as a result of the disposition of two
equipment leases, one in April 2000 and the other in January 2001, as well as the amortization of principal
balances.

Operating expenses were approximately $725,000 for the six months ended June 30, 2001, an increase of 31% as
compared to approximately $552,000 for the six months ended June 30, 2000. The increase is principally due to a
reserve for unbilled rent of approximately $93,000 and a reserve for impaired financing leases of $77,000, both
of which were non-recurring charges incurred in the first quarter of 2001.

The reserve for unbilled rent is for the Raleigh, North Carolina Boston Market property, which was vacated by
Platinum Properties in January 2001. The Partnership recognized a one-time charge of approximately $93,000 to
write-off the unbilled rent related to this lease and is seeking a new tenant for this property.

The reserve for impaired financing leases relates to the equipment contract with Olajuwon Holdings, which has
filed under Chapter 11 bankruptcy. The Partnership is in the process of selling the equipment and has reserved
for a loss of $77,000, based upon the estimated proceeds expected to be realized from that sale.

Other expense for the six months ended June 30, 2001 was approximately $14,000 as compared to other income of
approximately $18,000 for the six months ended June 30, 2000. The other expense is primarily due to a loss on
the sale of equipment during the six months ended June 30, 2001. The other income for the six months ended June
30, 2000 is primarily due to a gain on the sale of equipment.

As a result of the foregoing, the Partnerships net income decreased 43.7% to approximately $411,000 for the six
months ended June 30, 2001 as compared to approximately $731,000 for the six months ended June 30, 2000.
Exclusive of non-recurring items described above, the Partnerships net income decreased approximately 20.5% for
the six months ended June 30, 2001 as compared to the same period in 2000.

Distributions.   The Partnership announced second quarter distributions of $425,000, including net sale proceeds
of $85,000, of which $353,719 was distributed to its Limited Partners on July 16, 2001. The balance of $71,281
was distributed to those partners who elected to receive distributions on a monthly basis on May 15, 2001 and
June 15, 2001.

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##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART I  FINANCIAL INFORMATION

LIQUIDITY AND CAPITAL COMMITMENTS

The Partnership commenced the offering of up to 20,000 limited partnership units registered under the Securities
Act of 1933, as amended, by means of a Registration Statement which was declared effective by the Securities and
Exchange Commission on August 12, 1994. The offering reached final funding on August 12, 1996 with subscriptions
for the entire offering of 20,000 units. Net proceeds after offering expenses were approximately $17.4 million.

In November, 1998 the Partnership entered into a $6.2 million term note. The Partnership entered into an
additional $2.0 million term note in March, 1999. Proceeds from the notes were used to acquire additional
properties. The notes have a 10-year term, are collaterized by certain properties subject to operating leases,
and bear interest at rates ranging from 8.37 to 8.5% per annum. Debt issuance costs of approximately $478,000 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.

At June 30, 2001 the Partnership had a portfolio of 15 properties located in 10 states, with a cost of $20.0
million, and 8 performing equipment leases with an original investment of $2.3 million. As of June 30, 2001 the
Partnerships investments were allocated approximately 87% to properties and 13% to equipment.

In December of 2000, Platinum Properties, LLC abandoned the Boston Market property in Raleigh, North Carolina.
Annualized rent prior to abandonment was approximately $124,000. The Partnership is seeking a new tenant for
this property.

The Partnership has two impaired equipment leases at June 30, 2001, with a recorded investment of $482,392 offset
by an impairment allowance of $230,837. The net investment in the impaired leases represent the estimated net
proceeds that the Partnership expects to receive from the sale or re-leasing of these assets.

The Partnership expects to require limited amounts of liquid assets since the properties and equipment leases
require the lessees to pay all taxes and assessments, maintenance and repair items (except, with respect to
double net properties, costs associated with maintenance and repair of the exterior walls and roof of the
property) and insurance premiums, including casualty insurance. The general partners expect that the cash flow
to be generated by the Partnerships properties and equipment will be adequate to pay operating expenses and
provide distributions to Limited Partners.

11



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##### Table of Contents









CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS. None.

ITEM 2. CHANGES IN SECURITIES. None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.

ITEM 5. OTHER INFORMATION. Captec Net Lease Realty, Inc. (CRRR), the general partner of Captec Franchise
Capital Partners L.P. III (the Partnership), has entered into a definitive merger agreement with Commercial Net
Lease Realty, Inc. (NYSE: NNN). The proposed merger is expected to close in the fourth quarter of 2001.
In connection with the merger, CRRR has agreed to sell its general
partnership interest in the partnership to a wholly-owned subsidiary
of CRC Acquisition LLC which is a Michigan liability company of which
Patrick L. Beach, the Chairman of the Board of Directors and
President and Chief Executive officer of CRRR, is the sole member.
This will insure continuity of the management of the Partnership
following the acquisition of CRRR by CNL pursuant to the merger.

In recognition of the above facts and to facilitate the transaction, an affiliate of Mr. Beach will purchase,
immediately after the closing of the merger, certain non-real estate assets of CRRR and assume liabilities
associated with those assets. The assets to be purchased by Mr. Beach include the general partners interest in
the Partnership.

In order to complete this transition, the limited partners will need to consent to the transfer of the general
partner interest to the affiliate of Mr. Beach. A proxy statement regarding this consent will be filed with the
Securities and Exchange Commission. Once declared effective, the proxy statement will be mailed to all limited
partners.

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##### Table of Contents



CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
PART II  OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.



| | (a) |  | The following exhibits are included herein or incorporated by reference:
| | --- |  | ------------------------------------------------------------------------

|       |  |                                                                                                                                                                                                                                                                                             
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Exhibit                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                             
|4      |  | Agreement of Limited Partnership of Registrant. (Incorporated by reference
from Exhibit B of the final Prospectus dated August 12, 1994, as supplemented and
filed with the Securities and Exchange Commission, SEC File No. 33-77510C)                                                     
|      
|      
|      
|      
|4.1    |  | Amended Agreement of Limited Partnership of Registrant. (Incorporated by reference to the corresponding
exhibit in the Registrants Form 10-K for the year ended December 31, 1998)                                                                                                         
|      
|      
|      
|      
|10.1   |  | Promissory Note dated November 28, 1998 between Registrant and National Realty Funding
L.C. (Incorporated by reference to the corresponding exhibit in the Registrants Form
10-K for the year ended December 31, 1998)                                                                     
|      
|      
|      
|      
|10.2   |  | Promissory Note dated March 31, 1999 between Registrant and National Realty Funding L.C. (Incorporated
by reference to the corresponding exhibit in the Registrants Form 10-QSB for the
quarter ended March 31, 1999)                                                                      
|      
|      
|      
|      
|99.1   |  | Pages 12-16 of the final Prospectus dated August 12, 1994, as supplemented. (Incorporated by reference
from the final Prospectus filed with the Securities and Exchange Commission pursuant
to Rule 424(b) promulgated under the Securities Act of 1933, as amended. SEC File No.
33-77510C)



| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------

There were no reports filed on Form 8-K for the quarter ended June 30, 2001.

13



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.

| |       |                                           
| | ----- | ------------------------------------------
| | By:   | Captec Net Lease Realty, Inc.             
|
|
|
|
| |       | Managing General Partner of               
|
|
|
|
| |       | Captec Franchise Capital Partners L.P. III
|
|
|
|
| | By:   | /s/ W. Ross Martin                        
| |       |                                           
|
|
|
|
| |       | W. Ross Martin                            
|
|
|
|
| |       | Executive Vice President,                 
|
|
|
|
| |       | Chief Financial Officer                   
|
|
|
|
| | Date: | August 14, 2001                           

14