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U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition period from  to  Commission file number 33-77510C
 CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
  Delaware
    
    38-3160141(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, P.O. Box 544, Ann Arbor, Michigan
    
    48106-0544(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number: (734) 994-5505Securities registered under Section 12(b) of the Exchange Act:
    
    NoneSecurities registered under Section 12(g) of the Exchange Act:
    
    Units of limited partnership interest(Title of Class)
 o
 þ o
 þ
 
 o þ
     (1)
    
    Portions of the Registrants Form 10-KSB for the fiscal year ended December 31, 1998; and(2)
    
    A portion of the Registrants Form 10-QSB for the quarter ended March 31, 1999.




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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2. Description of PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Limited Partnership Interests and Related Security Holder Matters and Small Business Issuer Purchase of Equity SecuritiesItem 6. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7. Financial StatementsItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors and Executive Officers of the RegistrantItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Securityholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESCertification Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350    Table of Contents  
 PART I
 
 Item 1. Description of Business.
  
      
 Item 2. Description of Properties.




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OriginalAsset Cost
    
    
    Asset
    
    
    
    
    
    
    Date of
    
    
    AnnualConcept
    
    
    Date of
    
    
    Date of
    
    
    Including
    
    
    State
    
    
    Monthly
    
    
    Next Rent
    
    
    Rate ofTenant/Lessee Name
    
    Name
    
    
    Commence
    
    
    Expiration
    
    
    Acquisition Fees
    
    
    Location
    
    
    Rent
    
    
    Increase
    
    
    Increase(1)
    
    
    Sq. Ft.PROPERTIESGolden Restaurant Operations, Inc.
    
    Boston Market
    
    
    7/1/96
    
    
    
    11/1/11
    
    
    
    1,200,150
    
    
    NJ
    
    
    11,551
    
    
    
    7/1/06
    
    
    
    1.70
    %
    
    
    3,294Hollywood Entertainment Corp.
    
    Hollywood Video
    
    
    9/1/96
    
    
    
    5/1/11
    
    
    
    1,102,500
    
    
    OK
    
    
    11,025
    
    
    
    9/1/06
    (2)
    
    
    
    
    
    
    7,500Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,303,650
    
    
    
    
    
    
    $
    22,576
 
 (1)
    
    Rate of increase was calculated on a compounded annual basis.(2)
    
    Rent Increase equals the lesser of CPI or 12.0%. Leases
 Real Estate Leases:
  Equipment Leases
 Summary of Investment Objectives and Policies




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Item 3. Legal Proceedings.
  
 Item 4 Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5. Market for Registrants Limited Partnership Interests and Related Security Holder Matters
and Small Business Issuer Purchase of Equity Securities.
  
 Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Results of Operations




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Liquidity and Capital Resources




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Critical Accounting Policies




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Item 7. Financial Statements.
  Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 8A. Controls and Procedures.
   
 Item 8B. Other Information.
  
 PART III
 
 Item 9. Directors and Executive Officers of the Registrant.
     
 Item 10. Executive Compensation.




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Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Securityholder
Matters.
  
 Item 12. Certain Relationships and Related Transactions.




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Item 13. Exhibits.
  Number
    
    Exhibit2
    
    Plan of Liquidation and Dissolution (Incorporated by reference to the
Registrants Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004)4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated by
reference to the 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




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Item 14. Principal Accountant Fees and Services.
 Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees




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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
By: GP3 Asset Acquisition, LLC.
Its ManagerBy:
    
    /s/ Patrick. L. BeachPatrick L. BeachPresidentDate:
    
    March 29, 2006
  By:
    
    /s/ Patrick L. BeachPatrick L. BeachPresidentof GP3 Asset Acquisition, LLC.Date:
    
    March 29, 2006




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Captec Franchise Capital Partners L.P. III
Index to Financial Statements
 Page(s)Report of Independent Registered Public Accounting Firm
    
    F
- 1Financial StatementsBalance Sheets
    
    F - 2Statements of Operations
    
    F - 3Statements of Changes in Partners Capital
    
    F - 4Statements of Cash Flows
    
    F - 5Notes to Financial Statements
    
    F - 6




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Report of Independent Registered Public Accounting Firm
     /s/ Ernst & Young LLP




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Captec Franchise Capital Partners L.P. III
 Balance Sheets
  2005
    
    
    2004AssetsCash and cash equivalents
    
    $
    935,510
    
    
    $
    1,556,320Restricted cash
    
    
    
    
    
    
    664,680Assets held for sale:Operating leases, net
    
    
    1,052,218
    
    
    
    12,069,002Financing leases, net
    
    
    
    
    
    
    267,429Unbilled rent, net
    
    
    121,650
    
    
    
    955,171Investment in leases:Operating leases, net
    
    
    896,038
    
    
    
    918,159Deferred financing costs, net
    
    
    
    
    
    
    191,163Accounts receivable
    
    
    
    
    
    
    4,228Due from related parties
    
    
    151
    
    
    
    151Total assets
    
    $
    3,005,567
    
    
    $
    16,626,303Liabilities and Partners CapitalLiabilities:Notes payable
    
    $
    
    
    
    $
    5,548,515Accounts payable and accrued expenses
    
    
    57,626
    
    
    
    89,158Due to affiliates
    
    
    145,371
    
    
    
    37,203Security deposits held on leases
    
    
    
    
    
    
    7,106Total liabilities
    
    
    202,997
    
    
    
    5,681,982Partners capital:Limited partners capital accounts
    
    
    2,772,309
    
    
    
    10,919,279General partners capital account
    
    
    30,261
    
    
    
    25,042Total partners capital
    
    
    2,802,570
    
    
    
    10,944,321Total liabilities and partners capital
    
    $
    3,005,567
    
    
    $
    16,626,303




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Captec Franchise Capital Partners L.P. III
 Statements of Operations
  2005
    
    
    2004Operating revenue:Rental income
    
    $
    132,300
    
    
    $
    132,300Total operating revenue
    
    
    132,300
    
    
    
    132,300Operating costs and expenses:Depreciation
    
    
    22,121
    
    
    
    22,121General and administrative
    
    
    225,137
    
    
    
    221,168Total operating costs and expenses
    
    
    247,258
    
    
    
    243,289Loss from continued operations before other income
    
    
    (114,958
    )
    
    
    (110,989
    )Other income:Interest and other income
    
    
    81,906
    
    
    
    7,593Total other income
    
    
    81,906
    
    
    
    7,593Loss from continued operations
    
    
    (33,052
    )
    
    
    (103,396
    )Discontinued operations:Net income from discontinued operations, net
    
    
    573,000
    
    
    
    943,690Loss on sale of equipment
    
    
    (18,096
    )
    
    
    (3,938
    )Gain on sale of real estate
    
    
    4,900,241
    
    
    
    83,424Debt retirement costs
    
    
    (905,118
    )
    
    
    Income from discontinued operations
    
    
    4,550,027
    
    
    
    1,023,176Net income
    
    $
    4,516,975
    
    
    $
    919,780Net income allocable to general partner
    
    $
    5,219
    
    
    $
    9,198Net income allocable to limited partners
    
    $
    4,511,756
    
    
    $
    910,582Net loss from continued operations per limited partnership unit
    
    $
    (1.67
    )
    
    $
    (5.21
    )Net income from discontinued operations per limited partnership unit
    
    $
    231.47
    
    
    $
    51.59Net income per limited partnership unit
    
    $
    229.80
    
    
    $
    46.38Weighted average number of limited partnership
units outstanding
    
    
    19,633
    
    
    
    19,633




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Captec Franchise Capital Partners L.P. III
Statement of Changes in Partners Capital
 Limited
    
    
    Limited
    
    
    General
    
    
    TotalPartners
    
    
    Partners
    
    
    Partners
    
    
    PartnersUnits
    
    
    Accounts
    
    
    Account
    
    
    CapitalBalance, January 1, 2004
    
    
    19,633
    
    
    $
    11,453,527
    
    
    $
    15,844
    
    
    $
    11,469,371Distributions  ($73.59per weighted average limited partnership unit)
    
    
    
    
    
    
    (1,444,830
    )
    
    
    
    
    
    
    (1,444,830
    )Net income
    
    
    
    
    
    
    910,582
    
    
    
    9,198
    
    
    
    919,780Balance, December 31, 2004
    
    
    19,633
    
    
    
    10,919,279
    
    
    
    25,042
    
    
    
    10,944,321Distributions  ($644.77per weighted average limited partnership unit)
    
    
    
    
    
    
    (12,658,726
    )
    
    
    
    
    
    
    (12,658,726
    )Net income
    
    
    
    
    
    
    4,511,756
    
    
    
    5,219
    
    
    
    4,516,975Balance, December 31, 2005
    
    
    19,633
    
    
    $
    2,772,309
    
    
    $
    30,261
    
    
    $
    2,802,570




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Captec Franchise Capital Partners L.P. III
Statements of Cash Flows
 2005
    
    
    2004Cash flows from operating activities:Net Income
    
    $
    4,516,975
    
    
    $
    919,780Adjustments to net income:Depreciation
    
    
    22,121
    
    
    
    236,947Amortization of debt issuance costs
    
    
    19,911
    
    
    
    47,791Loss on disposition of equipment financing leases
    
    
    18,096
    
    
    
    3,938Gain on sale of real estate
    
    
    (4,900,241
    )
    
    
    (83,424
    )Increase in unbilled rent
    
    
    (21,570
    )
    
    
    (49,718
    )Decrease in accounts receivable
    
    
    4,228
    
    
    
    13,940(Decrease) increase in accounts payable and accrued expenses
    
    
    (31,532
    )
    
    
    5,488Decrease (increase) in restricted cash
    
    
    664,680
    
    
    
    (210,140
    )Increase in due to related parties
    
    
    108,168
    
    
    
    Decrease in due from related parties
    
    
    
    
    
    
    8,065Net cash provided by operating activities
    
    
    400,836
    
    
    
    892,667Cash flows from investing activities:Net proceeds from sale of real estate
    
    
    16,936,262
    
    
    
    1,453,086Net proceeds from sale of equipment
    
    
    149,098
    
    
    
    149,315Principal payments on financing leases
    
    
    100,235
    
    
    
    124,710Net cash provided by investing activities
    
    
    17,185,595
    
    
    
    1,727,111Cash flows from financing activities:Repayments of notes payable
    
    
    (5,548,515
    )
    
    
    (156,070
    )Distributions to limited partners
    
    
    (12,658,726
    )
    
    
    (1,444,830
    )Net cash used in financing activities
    
    
    (18,207,241
    )
    
    
    (1,600,900
    )Net (decrease) increase in cash and cash equivalents
    
    
    (620,810
    )
    
    
    1,018,878Cash and cash equivalents, beginning of year
    
    
    1,556,320
    
    
    
    537,442Cash and cash equivalents, end of year
    
    $
    935,510
    
    
    $
    1,556,320
  
    Table of Contents   Captec Franchise Capital Partners L.P. III
 Notes to Financial Statements
 1. The Partnership and its Significant Accounting Principles
       Basis of presentation




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Cash and cash equivalents
  Restricted cash
  Rental income from operating leases
   Land and building subject to operating leases




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Net investment in financing leases
  Net income per limited partnership interest
  Distributions per limited partnership Unit
  Income taxes
  Estimates




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2.
    
    DistributionsCash flows of the Partnership are allocated 99% to the Limited Partners and 1% to the General
Partner, except that the General Partners share is subordinated to a 10% preferred return to
the Limited Partners. Per the Partnership agreement, any amounts not paid to the General
Partner due to the Limited Partners not obtaining the 10% preferred return are accrued for and
payable to the General Partner from proceeds from the sale of properties. The amount accrued to
the General Partner as of December 31, 2005 to be deducted from net sale proceeds is $77,172.
Net sale or refinancing proceeds of the Partnership are allocated 90% to the limited partners
and 10% to the General Partner, except that the General Partners share is subordinated to an
11% preferred return plus return of the original contributions to the limited partners.
Distributions of cash flow from operations are paid quarterly in arrears.3.
    
    Related Party Transactions and AgreementsPursuant to the Partnership Agreement, the General Partner receives acquisition fees of 4% of
the aggregate purchase prices of properties and equipment, plus an additional .00624% for each
1% of indebtedness incurred in acquiring properties and equipment (not to exceed a total 5%
acquisition fee). The Partnership did not incur any acquisition fees during 2005 and 2004.
Acquisition fees incurred in earlier years are capitalized as part of the Partnerships
investment in land and buildings subject to operating leases and net investment in financing
leases.The Partnership has entered into an asset management agreement with the General Partner and its
affiliates, whereby the General Partner and the General Partners affiliates provide various
property and equipment management services for the Partnership. A subordinated asset management
fee is charged, in an amount equal to 1% of the gross rental revenues derived from the
properties and equipment. Payment of the asset management fee is subordinated to receipt by the
Limited Partners of annual distributions equal to a cumulative non-compounded return of 10% per
annum on their adjusted invested capital. Management fees of $10,697 and $18,698 were expensed
as incurred during 2005 and 2004, respectively.The Partnership Agreement provides for the General Partner to receive real estate liquidation
fees and equipment liquidation fees limited to the lesser of 3% of the gross sales price or 50%
of the customary real estate commissions in the event of a real estate liquidation. This fee is
payable only after the limited partners have received distributions equal to a cumulative,
noncompounded return of 11% per annum on their adjusted invested capital plus distributions of
sale or refinancing proceeds equal to 100% of their original contributions. The Partnership did
not incur any real estate or equipment liquidation fees during 2005 and 2004.Amounts due to affiliates at December 31, 2005 include $77,172 related to General Partner
distributions to be deducted from net sale proceeds from the sale of assets, $47,900 for accrued
management fees and approximately $20,000 of amounts due to the General Partner for
reimbursements for third party expenses. Amounts due to affiliates at December 31, 2004 of
$37,203 are accrued management fees. Accrued management fees are subordinated to receipt by the
Limited Partners of annual distributions equal to a cumulative non-compounded return of 10% per
annum on their adjusted invested capital.4.
    
    Land and Building Subject to Operating LeasesThe net investment in operating leases, including Assets Held for Sale, as of December 31, 2005
and 2004 is comprised of the following:
 2005
    
    
    2004Land
    
    $
    721,665
    
    
    $
    5,744,529Building and improvements
    
    
    1,580,985
    
    
    
    8,979,9982,302,650
    
    
    
    14,724,527Less accumulated depreciation
    
    
    (354,394
    )
    
    
    (1,737,366
    )Total
    
    $
    1,948,256
    
    
    $
    12,987,161
  2006
    
    $
    132,3002007
    
    
    132,3002008
    
    
    132,3002009
    
    
    132,3002010
    
    
    132,300Thereafter
    
    
    44,100Total
    
    $
    705,600




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5.
    
    Net Investment in Financing LeasesThe net investment in financing leases as of December 31, 2004 was comprised of the following:
 2004Minimum lease payments to be received
    
    $
    319,641Gross investment in financing leases
    
    
    319,641Less unearned income
    
    
    (52,212
    )Net investment in financing leases
    
    $
    267,429
  6.
    
    Notes PayableIn November 1998, the Partnership entered into a $6.2 million term note. The note had a ten-year
term, was collateralized by certain properties subject to operating leases which had a carrying
value of approximately $7.6 million, and bore interest at a rate of 8.37% per annum. In
September 2003, the partnership defeased approximately $1,979,000 of this notes payable with
proceeds from the sale of a property. The partnership incurred approximately $481,000 of yield
maintenance costs and $49,000 of professional fees related to the defeasance. In June 2005, the
Partnership defeased the remaining amounts payable under this note using the proceeds from the
sale of nine properties. The Partnership incurred approximately $539,000 of yield maintenance
costs and $35,000 of professional fees in connection with the June 2005 defeasance of this note.In March 1999, the Partnership entered into an additional $2.0 million term note. The note had a
ten-year term, was collateralized by certain properties subject to operating leases which had a
carrying value of approximately $3.7 million, and bore interest at a rate of 8.5% per annum. In
June 2005, the Partnership defeased the remaining amounts payable under this note using the
proceeds from the sale of nine properties. The Partnership incurred approximately $295,000 of
yield maintenance costs and $36,000 of professional fees in connection with the defeasance of
this noteThe Partnership has no further obligations related to any of its notes payable.Debt issuance costs of $477,909 in aggregate were incurred in connection with the issuance of
the notes and were being amortized to interest expense using the straight-line method over the
ten-year term of the notes. Upon the defeasance and prepayment of the notes payable in June
2005, the remaining unamortized debt issuance costs associated with the debt that was prepaid
were expensed.7.
    
    Income from Discontinued Operations, netIncome from discontinued operations, net for the years ended December 31, 2005 and 2004 consists
of the following:
 2005
    
    
    2004Revenues
    
    $
    805,123
    
    
    $
    1,679,205Interest expense
    
    
    232,123
    
    
    
    520,689Depreciation
    
    
    
    
    
    
    214,826Income from discontinued operations, net
    
    $
    573,000
    
    
    $
    943,690




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8.
    
    Subsequent EventOn January 3, 2006, the Partnership sold the property located in Ewing, New Jersey and the
related lease for net sale proceeds of approximately $1.6 million.




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Exhibit Index
 Exhibit No.
    
    Description2
    
    
    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