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  **U.S. SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****FORM 10-KSB**(Mark One)   þ **ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****For the fiscal year ended December 31, 2006****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**(Name of small business issuer in its charter)   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) 994-5505    Securities registered under Section 12(b) of the Exchange Act: None  Securities registered under Section 12(g) of the Exchange Act: Units of limited partnership interest    (Title of Class)Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of theExchange Act. oCheck whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that the registrant was requiredto file such reports) and (2) has been subject to such filingrequirements for the past 90 days.þ Yes o NoCheck if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form and no disclosure will be contained to the best of registrant’s knowledge,in definitive proxy or information statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. þIndicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act.    o Yes    þ NoState Issuer’s revenues for its most recent fiscal year: $112,088At December 31, 2006, subscriptions for 20,000 Units of limited partnership interest (the “Units”)had been accepted, representing an aggregate amount of $20,000,000. At December 31, 2006, therewere 19,633 Units issued and outstanding. The aggregate sales price does not reflect market valueand reflects only the price at which the Units were offered to the public. Currently, there is nomarket for the Units and no market is expected to develop.DOCUMENTS INCORPORATED BY REFERENCEThe following documents are incorporated by reference in Part III of this Annual Report on Form 10-KSB:(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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PART IItem 1. Description of BusinessItem 2. Description of PropertyItem 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 Plan of OperationItem 7. Financial StatementsItem 8. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresItem 8B. Other InformationPART IIIItem 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance — Compliance with Section 16(a) of the Exchange ActItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Securityholder MattersItem 12. Certain Relationships and Related Transactions, and Director IndependenceItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESPART I — FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCertification Pursuant to Section 302Certification Pursuant to Section 906

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**PART I****Item 1. Description of Business.**     Captec Franchise Capital Partners L.P. III, a Delaware limited partnership, was formed onFebruary 18, 1994 for the purpose of acquiring income-producing commercial real properties andequipment leased on a “triple net” basis, primarily to operators of national and regionalfranchised businesses.     The initial General Partners upon formation of the Partnership were Captec Franchise CapitalCorporation III (the “Corporation”), a wholly-owned subsidiary of Captec Financial Group, Inc.(“Captec”), an affiliate, and Patrick L. Beach, the Chairman of the Board of Directors, Presidentand Chief Executive Officer of the Corporation and Captec. In August 1998, Captec Net Lease Realty,Inc. (“Captec Net Lease Realty”), an affiliate, acquired the General Partnership interests of thePartnership. In December 2001, Captec Net Lease Realty merged with and into Commercial Net LeaseRealty, Inc. (“Commercial Net Lease”). In connection with the merger, Commercial Net Lease agreedto sell and assign its General Partnership interest in the Partnership to GP3 Asset Acquisition,LLC (“GP3 Asset Acquisition”), which is wholly-owned by Mr. Beach and is an affiliate of Captec.Effective January 15, 2002, the limited partners consented to the transfer of the GeneralPartnership interest. On September 11, 2003, the Partnership’s secured lender consent to thetransfer of the general partnership interest to GP3 Asset Acquisition. Upon receipt of the securedlender’s consent, the general partnership interest was immediately transferred to GP3 AssetAcquisition. Therefore, as of September 11, 2003, GP3 Asset Acquisition became the general partnerof the Partnership.     The Partnership commenced a public offering of up to 20,000 Units of limited partnershipinterest, priced at $1,000 per Unit, registered under the Securities Act of 1933, as amended, bymeans of a Registration Statement on Form SB-2 which was declared effective by the Securities andExchange Commission on August 12, 1994. The Partnership accepted subscriptions for the minimumnumber of Units on January 24, 1995 and immediately commenced operations. The Offering reachedfinal funding in August 1996 having received subscriptions for the entire 20,000 Units. Since1997, 367 Units have been repurchased by the Partnership pursuant to the terms of the RepurchasePlan set forth in the Partnership’s August 12, 1994 prospectus with respect to the Offering. AtDecember 31, 2006, the Partnership had 19,633 Units issued and outstanding.     The principal investment objectives of the Partnership are: (i) preservation and protection ofcapital; (ii) distribution of cash flow generated by the Partnership’s leases; (iii) capitalappreciation of the Partnership’s properties; (iv) generation of increased income and protectionagainst inflation through contractual escalation of base rents or participation in gross revenuesof tenants of the Partnership’s properties; and (v) deferred taxation of cash distributions to thelimited partners.     The Properties generally were leased on terms which provide for a base minimum annual rentwith fixed increases on specific dates or indexation of rent to indices such as the Consumer PriceIndex. The Equipment was leased only pursuant to leases under which the present value ofnon-cancellable rental payments payable during the initial term of the lease was at leastsufficient to permit a lessor to recover the purchase price of the equipment.     The Partnership has no employees. The General Partner and its affiliates, however, arepermitted to perform services for the Partnership pursuant to the Partnership Agreement.     Effective November 8, 2004, the limited partners consented to a Plan of Liquidation andDissolution, which involves the dissolution of the Partnership, the liquidation of its assets andthe winding up of its affairs. As a result, the general partner is authorized to liquidate theassets of the Partnership and distribute the net proceeds from such liquidation after the repaymentof all debt, in accordance with the partnership agreement. As of December 31, 2006, thePartnership has liquidated all of its real assets in accordance with the Plan of Liquidation andDissolution. On October 6, 2006, the Partnership entered into a contract to sell the last remainingreal asset of the Partnership. Effective with the execution of the contract, and in accordancewith generally accepted accounting principles, the Partnership adopted the liquidation basis ofaccounting as of the close of business on October 6, 2006. Under the liquidation basis ofaccounting, assets are stated at their estimated net realizable value and liabilities are stated attheir estimated settlement amounts. These estimates are and will be periodically reviewed andadjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes inNet Assets in Liquidation are the principal financial statements presented under the liquidationbasis of accounting. Under the liquidation basis of accounting, the Partnership is required toestimate and accrue the costs associated with implementing and completing the plan of liquidation.These amounts can vary significantly due to, among other things, the timing and amounts associatedwith the discharging known and contingent liabilities and the costs associated with cessation ofthe Partnership’s operations including an estimate of costs subsequent to that date (which wouldinclude reserve contingencies for the appropriate statutory periods). As a result, the Partnershiphas accrued the projected costs, including miscellaneous wind-down
 

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costs, expected to be incurred during the projected period required to complete theliquidation of the Partnership. These projections could change materially and will be adjustedfrom time to time as projections and assumptions change.     Under the liquidation basis of accounting, the carrying amounts of the last remaining realestate asset was adjusted to its estimated net realizable value and liabilities, including theestimated costs associated with implementing the liquidation, were adjusted to estimated settlementamounts. The net realizable value of the remaining asset was based on the contract sales price,less costs associated with the sale and closing of this transaction. Cash balances, accountsreceivable and accounts payable are presented at face value.     The sale of the remaining asset was completed on November 6, 2006. The Partnership made aliquidating distribution on January 9, 2007 of approximately $900,000 which included proceeds ofthis sale. The timing and amount of any future final liquidating distribution, if any, will dependon the extent to which reserves for current or future liabilities are required. Accordingly, therecan be no assurance that there will be any further distributions. It is anticipated that the finaldistribution, if any, of the Partnership will occur by the end of the second quarter of 2007.     Prior to October 6, 2006, the Partnership’s financial statements were presented on the goingconcern basis of accounting. In accordance with Financial Accounting Standards No. 144 “Accountingfor the Impairment or Disposal of Long Lived-Assets” (“FAS 144”), as a result of the approval ofthe Plan of Liquidation and Dissolution, as of December 31, 2004 all assets, excluding cash, wereclassified as Assets Held for Sale. Depreciation of real estate assets ceased at that time. Onereal property owned by the Partnership as of December 31, 2005 which was not disposed of within oneyear from the initial held for sale designation was reclassified to investment in operating leasesas of December 31, 2005 in accordance with FAS 144. A second real property remained classified asheld for sale at December 31, 2005 due to the sale of this property on January 3, 2006. Alloperations for the period from January 1 through October 6, 2006 and for the year ended December31, 2005 have been classified as discontinued operations.*Additional Information*     The Partnership does not make financial reports available on its web site; however copies offilings with the Commission may be obtained at the Commission’s website at www.sec.gov. Inaddition, copies of the foregoing may be mailed, free of charge, upon request to Captec FranchiseCapital Partners L.P. III, Investor Relations, 24 Frank Lloyd Wright Dr, P.O. Box 544, Ann Arbor,Michigan 48106.**Item 2. Description of Property.**As of December 31, 2006, the Partnership has liquidated all of its properties and equipment leases.***Leases***     *Real Estate Leases:*All of the properties were subject to triple net leases pursuant to whichthe tenant was responsible for all expenses related to the cost of operating the Properties,including real estate taxes, insurance, maintenance and repair costs. Certain of the leasesprovided the tenant with one or more options to renew the lease upon expiration of the base term atpredetermined or market rental rates.     On January 3, 2006, the Partnership sold the property located in Ewing, New Jersey and therelated lease for net sale proceeds of approximately $1.6 million, resulting in a gain ofapproximately $429,000. There were no debt retirement costs associated with the disposition of thisproperty.     On November 6, 2006, the Partnership sold the last remaining property in Enid, Oklahoma andthe related lease for a purchase price of approximately $1.0 million. There were no debtretirement costs associated with the disposition of this property. On October 7, 2006, under theliquidation method of accounting, the Partnership increased its investment in this asset byapproximately $169,000, which represented the net gain realized on the sale of this asset.     *Equipment Leases*: All of the equipment leases were on the Partnership’s standard form of leasepursuant to which the lessee was responsible for all expenses related to the equipment, includingtaxes, insurance, maintenance and repair costs. All of the equipment was purchased with cash fromOffering proceeds. As of December 31, 2005, all of the equipment leases were paid in fullaccording to the terms of the lease or were sold.
 

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***Summary of Investment Objectives and Policies***The Partnership was initially formed to acquire income-producing property and equipment to beleased primarily to operators of nationally franchised fast-food, family style and dinner houserestaurants as well as other franchised service-type businesses such as automotive and specialtyretail franchises. Properties were selected for acquisition based on an examination and evaluationby the General Partner or an affiliate of the potential value of the site, the financial conditionand business history of the proposed tenant or lessee, area demographics, prospective purchaseprice and lease terms, geographic and market diversification, and potential operating results.Similar analyses were utilized in selecting equipment for inclusion in lease packages. ThePartnership intended to acquire interests in real property, although other interests (includingacquisitions of buildings subject to a long-term ground lease) could be acquired if deemed to beadvantageous to the Partnership. In no event was property or equipment acquired unless asatisfactory lease commitment was obtained from a suitable tenant or lessee as further describedbelow.     In selecting specific properties, the General Partner generally required the following:     (i) Base annual rent providing for a specified minimum return on the contract purchase priceof the property; and     (ii) An initial lease term between ten and twenty years.     In selecting specific equipment, the General Partner typically required the following:     (i) Leases providing for fixed rents structured to return 100% of the cost of the equipmentplus yield a return equivalent to market interest rates over the lease term; and     (ii) Terms of five to seven years with residual values of equipment at the end of such termsexpected to be minimal.     The determination of whether particular properties or equipment should be sold or otherwisedisposed of was made after consideration of relevant factors, including performance or projectedperformance of the property or equipment and market conditions, with a view toward achieving theprincipal investment objectives of the Partnership.     On or about September 24, 2004, the Partnership filed with the Securities and ExchangeCommission and mailed to its limited partners a consent solicitation statement pursuant to whichthe Partnership began soliciting the consent of its limited partners to (i) dissolve thePartnership, liquidate its assets and wind up its affairs; and (ii) amend the partnership agreementto permit, on a limited basis, the sale of Partnership assets to certain affiliates in connectionwith the dissolution, liquidation and winding up of the Partnership. Effective November 8, 2004,the requisite limited partner consents for each proposal were obtained and the consent solicitationwas closed.**Item 3. Legal Proceedings.**     None.**Item 4**. **Submission of Matters to a Vote of Security Holders.**     None.**PART II****Item 5. Market for Registrant’s Limited Partnership Interests and Related Security Holder Mattersand Small Business Issuer Purchase of Equity Securities.**     There is no public market for the Units and the Partnership does not expect that any marketwill develop. There are restrictions upon the transferability of Units, including the requirementthat the General Partner consent to any transferee becoming a substituted Limited Partner (whichconsent may be granted or withheld at the sole discretion of the General Partner). In addition,restrictions on transfer may be imposed under state securities laws. As of December 31, 2006,Units were held by 1,244 investors of record. In the
 

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last three years, the Partnership has not engaged in the sale of any Units. The Partnershipdeclared cash distributions of approximately $1.88 million and approximately $12.66 million for theyears ended December 31, 2006 and 2005 respectively. The Partnership made no Unit repurchases inthe twelve months ended December 31, 2006.**Item 6. Management’s Discussion and Analysis of Plan of Operation.**     When used in this discussion, the words, “intends,” “anticipates,” “expects,” and similarexpressions are intended to identify forward-looking statements. Forward-looking statements aresubject to certain risks and uncertainties, some of which are beyond the Partnership’s control,which could cause actual results to differ materially from those projected. Such risks anduncertainties include the following: (i) a tenant may default in making rent payments, (ii) a fireor other casualty may interrupt the cash flow stream from a property, (iii) the properties may notbe able to be leased at the assumed rental rates, (iv) unexpected expenses may be incurred in theownership of the properties, and (v) properties may not be able to be sold at the presentlyanticipated prices and times. Any statements contained in this report or any documents incorporatedherein by reference that are not statements of historical fact may be deemed to be forward-lookingstatements. You should not place undue reliance on these forward-looking statements, which speakonly as of the date of this report. The Partnership disclaims, except as may be required by law,any obligation to update or release revisions to these forward-looking statements to reflect eventsor circumstances after the date of this report or to reflect the occurrence of unanticipatedevents.     See discussion above regarding the Partnership’s adoption of the liquidation basis ofaccounting as of October 6, 2006. Prior to that date, the Partnership’s financial statements arepresented on the going concern basis of accounting.**Changes in Net Assets and Results of Operations***Liquidation Basis — Changes in net assets in liquidation from October 7, 2006 to December 31, 2006*     During the period from October 7, 2006 through December 31, 2006, the Partnership realized anoperating income of approximately $20,000 which primarily represents interest income on cashbalances and rents received prior to the closing of Enid, Oklahoma property.     On November 7, 2006 the Partnership sold the last remaining property in Enid, Oklahoma and therelated lease for net sales proceeds of approximately $1.0 million. There was no gain or lossassociated with this disposal as the Partnership had previously adjusted the carrying value of thisproperty to its net realizable value under the liquidation basis of accounting. There were no debtretirement costs associated with the disposition of this property.*Going Concern Basis — Comparison of results of discontinued operations from January 1, 2006 throughOctober 6, 2006 to the year ended December*31, 2005     For the period from January 1, 2006 through October 6, 2006 total operating revenue wasapproximately $101,000 compared to approximately $937,000 for the year ended December 31, 2005.Rental revenue decreased to $101,000 for the period January 1, 2006 through October 6, 2006compared to $929,000 for the year ended December 31, 2005. The decrease in rental revenue is dueto the sale of nine operating leases in June 2005, one operating lease in September 2005, oneoperating lease in January 2006 and one operating lease in November 2006. Finance income duringthe year ended December 31, 2005 was approximately $8,000 due to income earned on two equipmentleases during the year. There was no finance income for the period January 1, 2006 through October6, 2006 due to the disposal of the equipment leases during the year ended December 31, 2005.     Operating expenses from discontinued operations decreased to approximately $199,000 for theperiod January 1, 2006 through October 6, 2006 compared to approximately $1,384,000 for the yearended December 31, 2005. The decrease is due to debt retirement costs of approximately $905,000and interest expense of approximately $232,000 in the year ended December 31, 2005. With the saleof properties in June 2005, the partnership defeased the remaining notes payable, therefore therewere no interest or debt retirement costs incurred in 2006. General and administrative expensesdecreased during the period January 1, 2006 through October 6, 2006 due to higher professional feesduring the year ended December 31, 2005 related to the liquidation of the Partnership and a fullyear’s worth of expenses incurred during the year ended December 31, 2005. The Partnership recordeda provision for losses of approximately $35,000 in the second quarter of 2006 due to lossesexpected on the real property asset that was eventually sold in November 2006. The provision wasbased on a third party appraisal performed during the second quarter of 2006; the net sales pricewas approximately $169,000 higher than this appraisal.
 

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     Other income for 2006 was approximately $469,000 for the period January 1, 2006 throughOctober 6, 2006 compared to approximately $4,964,000 for the year ended December 31, 2005. Loss onsale of equipment was approximately $18,000 for the year ended December 31, 2005 due to dispositionof two equipment leases in 2005 for net cash proceeds of approximately $149,000. Gain on the saleof real estate was approximately $429,000 for the period January 1, 2006 through October 6, 2006due to the sale of one property in January 2006 for net sale proceeds of approximately $1.6million. The gain on sale of real estate was approximately $4.9 million for the year endedDecember 31, 2005. The Partnership sold nine properties in June 2005 for net cash of approximately$15.2 million, and one property in September 2005 for net cash of approximately $1.8 million.Interest and other income decreased to approximately $40,000 for the period January 1, 2006 throughOctober 6, 2006 compared to approximately $82,000 for the year ended December 31, 2005 due tohigher temporary cash balances in 2005 resulting from the sale of nine properties in June 2005.     As a result of the foregoing, the Partnership’s net income decreased to approximately $371,000for the period from January 1, 2006 through October 6, 2006 compared to approximately $4,517,000for the year ended December 31, 2005.     During the period from January 1, 2006 through October 6, 2006 the Partnership madedistributions to Limited Partners totaling approximately $1.88 million compared with approximately$12.66 million for the year ended December 31, 2005.**Liquidity and Capital Resources**     The Partnership commenced the Offering of up to 20,000 Units, priced at $1,000 per Unit, onAugust 12, 1994. The Partnership accepted subscriptions for the minimum number of Units on January24, 1995, and immediately commenced operations. The Offering was fully subscribed on August 12,1996. Net proceeds after Offering expenses were $17.4 million.     In November 1998, the Partnership entered into a $6.2 million term note. The note had aten-year term, was collateralized by certain properties subject to operating leases which had acarrying value of approximately $7.6 million, and bore interest at a rate of 8.37% per annum. InSeptember 2003, the Partnership defeased approximately $1,979,000 of this note with proceeds fromthe sale of a property. The Partnership incurred approximately $481,000 of yield maintenance costsand $49,000 of professional fees related to the defeasance. In June 2005, the Partnership defeasedthe 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 ofprofessional 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 hada ten-year term, was collateralized by certain properties subject to operating leases which had acarrying value of approximately $3.7 million, and bore interest at a rate of 8.5% per annum. InJune 2005, the Partnership defeased the remaining amounts payable under this note using theproceeds from the sale of nine properties. The Partnership incurred approximately $295,000 ofyield maintenance costs and $36,000 of professional fees in connection with the defeasance of thisnote     The Partnership has no further obligations related to any of its notes payable.     Debt issuance costs of $477,909 in the aggregate were incurred in connection with the issuanceof the notes and were being amortized to interest expense using the straight-line method over theten-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 wereexpensed.     The Partnership annually considers written requests to repurchase Units pursuant to the termsof the repurchase plan set forth in the Partnership’s prospectus with respect to the Offering.Since 1997, a total of 367 Units have been repurchased by the Partnership. The Partnership is notobligated to accept Unit repurchase requests if the General Partner determines that such purchaseswould impair the capital or operation of the Partnership and the Partnership may suspend or cancelthe Repurchase Plan at any time in its sole discretion. In connection with the announcement of thePartnership’s liquidation plans, the General Partner has indefinitely suspended the RepurchasePlan.     Effective November 8, 2004 the limited partners consented to the Plan of Liquidation andDissolution, which involves the dissolution of the Partnership, the liquidation of its assets andthe winding up of its affairs. As a result, the general partner is authorized to liquidate theassets of the Partnership and distribute the net proceeds from such liquidation after the repaymentof all debt in accordance with the partnership agreement. The sale of the remaining asset wascompleted on November 6, 2006. The Partnership made a liquidating distribution on January 9, 2007of approximately $900,000 which included proceeds of this sale. The timing and amount of anyfuture final liquidating distribution, if any, will depend on the extent to which reserves forcurrent or future
 

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liabilities are required. Accordingly, there can be no assurance that will be any furtherdistributions. It is anticipated that the final distribution, if any, of the Partnership willoccur by the end of the second quarter of 2007.**Critical Accounting Policies**Going Concern Basis of Accounting     The financial statements are prepared in accordance with United States generally acceptedaccounting principles, which require the Partnership to make certain estimates and assumptions. Asummary of the Partnership’s significant accounting policies is provided in note 1 to the financialstatements. The following section is a summary of certain aspects of those accounting policies thatrequire management estimates and judgment.     When real estate properties are acquired, acquisition costs are allocated to components of theproperty using relative fair values based on historical experience and the Partnership’s currentjudgment. These assumptions and estimates impact the amount of costs allocated between land andbuilding, depreciation expense, and gains or losses recorded on sales of properties. The cost ofthe properties acquired is allocated among land, buildings and equipment and recognized intangiblesbased upon estimated fair values in accordance with the provisions of SFAS No 141, “BusinessCombinations”. Recognized intangibles include the value of acquired lease contracts. In computingthe value of acquired lease contracts, consideration is given to (a) whether the lease is at marketrates (b) origination fees typically incurred to negotiate a contract and (c) recovery costs toreplace the tenant.     Receivables are reported net of allowance for doubtful accounts and may be uncollectible inthe future. The Partnership reviews its receivables regularly for potential collection problems incomputing the allowance recorded against its receivables. This review process requires thePartnership to make certain judgments regarding collections that are inherently difficult topredict.     Certain of the Partnership’s operating leases had scheduled rent increases which occurred atvarious dates throughout the lease terms. Increases to rental income on leases that provided forrental increases based on changes in the Consumer Price Index commence being recognized when theincrease is known. The Partnership recognized the total rent, as stipulated by the leaseagreement, as income on a straight-line basis over the term of each lease for those leases withfixed percentage increases subject to reasonably assured collectibility. To the extent rentalincome on the straight-line basis exceeded rents billable per the lease agreement, an amount wasrecorded as unbilled rent.     The Partnership periodically reviewed its real estate portfolio for impairment whenever eventsor changes in circumstances indicated that the carrying amount of the property might not berecoverable. If an impairment loss was indicated using undiscounted cash flows, the loss wasmeasured as the amount by which carrying amount of the asset exceeded the estimated fair or presentvalue of the asset on a discounted cash flow basis.Liquidation Basis of Accounting     Effective November 8, 2004, the limited partners consented to a Plan of Liquidation andDissolution, which involves the dissolution of the Partnership, the liquidation of its assets andthe winding up of its affairs. As a result, the general partner is authorized to liquidate theassets of the Partnership and distribute the net proceeds from such liquidation after the repaymentof all debt, in accordance with the partnership agreement. The Partnership has liquidated all ofits real assets in accordance with the Plan of Liquidation and Dissolution. On October 6, 2006,the Partnership entered into a contract to sell the remaining asset of the Partnership. Effectivewith the execution of the contract, and in accordance with generally accepted accountingprinciples, the Partnership adopted the liquidation basis of accounting as of the close of businesson October 6, 2006. Under the liquidation basis of accounting, assets are stated at theirestimated net realizable value and liabilities are stated at their estimated settlement amounts.These estimates are and will be periodically reviewed and adjusted as appropriate. A Statement ofNet Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principalfinancial statements presented under the liquidation basis of accounting. Under the liquidationbasis of accounting, the Partnership is required to estimate and accrue the costs associated withimplementing and completing the plan of liquidation. These amounts can vary significantly due to,among other things, the timing and amounts associated with the discharging known and contingentliabilities and the costs associated with cessation of the Partnership’s operations including anestimate of costs subsequent to that date (which would include reserve contingencies for theappropriate statutory periods). As a result, the Partnership has accrued the projected costs,including miscellaneous wind-down costs, expected to be incurred during the projected periodrequired to complete the liquidation of the Partnership. These projections could change materiallyand will be adjusted from time to time as projections and assumptions change.
 

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     Under the liquidation basis of accounting, the carrying amount of the last remaining asset wasadjusted to its estimated net realizable value and liabilities including the estimated costsassociated with implementing the liquidation were adjusted to estimated settlement amounts. Thenet realizable value of the remaining asset was based on the contract sales price, less costsassociated with the sale and closing of this transaction. Cash balances are presented at facevalue, as are accounts receivable and accounts payable.**Item 7. Financial Statements.**     See Index to Financial Statements on Page F-I of this Form 10-KSB for Financial Statements.**Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.**None**Item 8A. Controls and Procedures.**     Mr. Beach acting in his capacity as the principal executive officer of GP3 Asset Acquisitionis ultimately responsible for the disclosure controls and procedures of the Partnership.Disclosure controls and procedures are established and maintained by the Partnership to ensure theinformation required to be disclosed by the Partnership in the reports that it files or submitspursuant to the Securities Exchange Act of 1934, as amended (the “Act”), is recorded, processed,summarized and reported within the time periods specified in the Commission’s rules and forms. Mr.Beach has evaluated the effectiveness of the Partnership’s disclosure controls and procedures andhas determined that, as of the end of the fiscal period covered by this report, these controls andprocedures effectively communicate the information required to be disclosed by the Partnership inthe report it files or submits under the Act in a manner that allows timely decisions regardingsuch disclosures.     There have been no significant changes in the Partnership’s internal control over financialreporting identified in connection with the foregoing evaluation that has materially affected, oris reasonably likely to materially affect, the Partnership’s internal control over financialreporting.**Item 8B. Other Information.**None.**PARTIII****Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance —Compliance with Section 16(a) of the Exchange Act.**     The Partnership does not have directors, officers or employees and, to the best knowledge ofthe Partnership, as of December 31, 2006, no person beneficially owned more than 5.0% of theoutstanding Units.     Patrick L. Beach is the sole member of CRC Asset Acquisition LLC, the sole member of GP3 AssetAcquisition, and the President of GP3 Asset Acquisition, the Partnership’s General Partner.     Mr. Beach attended the University of Michigan and graduated from its School of BusinessAdministration in 1977 with a Bachelor of Business Administration degree. From 1997 until 2001, Mr.Beach served as the Chairman, President and Chief Executive Officer of Captec Net Lease Realty.Since 1981, he has served as Chairman and Chief Executive Officer of Captec Financial Group, Inc.,an affiliate of the Partnership, that is involved in the acquisition and development of singletenant restaurant properties, shopping centers, and multi-family residential properties.     Since the Partnership has no directors, officers or employees, it has not adopted a code ofethics nor does it maintain an audit committee.**Item 10. Executive Compensation.**
 

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     The Partnership has no officers or other employees. All amounts paid by the Partnership formanagement and administrative services are pursuant to agreements described under Item 12, CertainRelationships and Related Transactions, and Director Independence.**Item 11. Security Ownership of Certain Beneficial Owners and Management and Related SecurityholderMatters.**     The Partnership has no directors or officers and, to the best knowledge of the Partnership, asof December 31, 2006, no person beneficially owned more than 5.0% of the outstanding Units.**Item 12. Certain Relationships and Related Transactions, and Director Independence.**     Pursuant to the Partnership Agreement, the General Partner receives acquisition fees of 4% ofthe 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 2006 and 2005.Acquisition fees incurred in earlier years were capitalized as part of the Partnership’s investmentin land and buildings subject to operating leases and net investment in financing leases.     The Partnership has also entered into an asset management agreement with the General Partnerand its affiliates, pursuant to which the General Partner and the General Partner’s affiliatesprovide various property and equipment management services for the Partnership. An asset managementfee in an amount equal to 1% of the gross rental revenues derived from the properties andequipment, is charged to the Partnership in exchange for these services. Payment of the assetmanagement fee is subordinated to receipt by the limited partners of annual distributions equal toa cumulative non-compounded return of 10% per annum on their adjusted invested capital. Managementfees of $1,126 and $10,697 were incurred during 2006 and 2005, respectively.     The Partnership Agreement provides for the General Partner to receive real estate liquidationfees and equipment liquidation fees limited to the lesser of 3% of the gross sales price or 50% ofthe customary real estate commissions in the event of a real estate liquidation. This fee ispayable 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 saleor refinancing proceeds equal to 100% of their original contributions. The Partnership did notincur any real estate or equipment liquidation fees during 2006 and 2005.     The agreements and arrangements, including those relating to compensation, between thePartnership and the General Partner or any of its affiliates have not been and will not be theresult of arm’s-length negotiations, although the General Partner believes that such agreements andarrangements will approximate those which would be arrived at through arm’s-length negotiations.While the Partnership will make no loans to the General Partner or its affiliates, the Partnershipmay borrow money from the General Partner or its affiliates but only on such terms as to interestrate, security, fees and other charges at least as favorable to the Partnership as are charged byunaffiliated lending institutions in the same locality on comparable loans for the same purpose.The General Partner and its affiliates are not prohibited from providing services to, and otherwisedealing or doing business with, persons (for example, franchisees), who may deal with thePartnership. However, the Partnership Agreement prohibits receipt of rebates or “give-ups” orparticipation in any reciprocal business arrangements which would have the effect of circumventingany of the provisions of the Partnership Agreement.**Item 13. Exhibits.**     The following exhibits are included herein or incorporated by reference:   Number Exhibit2 Plan of Liquidation and Dissolution (Incorporated by reference to theRegistrant’s Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004)   4 Amended Agreement of Limited Partnership of Registrant. (Incorporated byreference to the Registrant’s Definitive Proxy Statement on Schedule 14A, filed onSeptember 21, 2004 and the corresponding exhibit in the Registrant’s Form 10-KSB for theyear ended December 31, 1998)
 

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   Number Exhibit10.1 Promissory Note dated November 28, 1998 between Registrant and National RealtyFunding L.C. (Incorporated by reference to the corresponding exhibit in theRegistrant’s Form 10-KSB for the year ended December 31, 1998)   10.2 Promissory Note dated March 31, 1999 between Registrant and National RealtyFunding L.C. (Incorporated by reference to the corresponding exhibit in theRegistrant’s Form 10-QSB for the quarter ended March 31, 1999)   31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002
 

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**Item 14. Principal Accountant Fees and Services.**     *Audit Fees*     The aggregate fees billed to the Partnership for professional services rendered by thePartnership’s principal accountant for the audit of the Partnership’s annual financial statementsand review of the financial statements included in the Partnership’s quarterly reports on Form10-QSB or for services normally provided by the Partnership’s accountant in connection withstatutory or regulatory filings were $57,500 and $51,000 for the years ended December 31, 2006 and2005, respectively.     *Audit-Related Fees*     The aggregate fees billed to the Partnership for assurance and related services by thePartnership’s principal accountant that were reasonably related to the performance of the audit orreview of the Partnership’s financial statements were $0 for each of the years ended December 31,2006 and 2005.     *Tax Fees*     The aggregate fees billed to the Partnership for professional services rendered by thePartnership’s principal accountant for tax compliance, tax advice and tax planning were $0 for eachof the years ended December 31, 2006 and 2005.     *All Other Fees*     The aggregate fees billed to the Partnership for products and services provided by thePartnership’s principal accountant were $0 for each of the years ended December 31, 2006 and 2005.     The Partnership has no directors, nor does it maintain an audit Committee.
 

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SIGNATURES     In accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrantcaused this report to be signed on its behalf by the undersigned, thereunto duly authorized.CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III