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U.S. SECURITIES AND EXCHANGE COMMISSION  FORM 10-KSB (Mark One) [X]
    
    ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 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 33-77510C 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)
 Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [  ] No Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained 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 Form 10-KSB or any
amendment to this Form 10-KSB. [X] State Issuers revenues for its most recent fiscal year: $1,876,500 At December 31, 2003, 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, 2003, there were 19,633 Units issued and
outstanding. The aggregate sales price does not reflect market value and
reflects only the price at which the Units were offered to the public.
Currently, there is no market for the Units and no market is expected to
develop. DOCUMENTS INCORPORATED BY REFERENCE The 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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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 8. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 8A. Controls and ProceduresPART IIIItem 9. Directors and Executive Officers of the Registrant.Item 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Securityholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. Exhibits and Reports on Form 8-KItem 14. Principal Accountant Fees and ServicesSIGNATURESEXHIBIT INDEXCertification Pursuant to Section 302Certification Pursuant to U.S.C. Section 1350    Table of Contents  
 PART I 
 Item 1. Description of Business Captec Franchise Capital Partners L.P. III (the Partnership), a Delaware
limited partnership, was formed on February 18, 1994 for the purpose of
acquiring income-producing commercial real properties and equipment leased on a
triple net basis, primarily to operators of national and regional franchised
businesses. The initial General Partners upon formation of the Partnership were Captec
Franchise Capital Corporation III (the Corporation), a wholly-owned
subsidiary of Captec Financial Group, Inc. (Captec), an affiliate, and
Patrick L. Beach, the Chairman of the Board of Directors, President and Chief
Executive Officer of the Corporation and Captec. In August 1998, Captec Net
Lease Realty, Inc. (Captec Net Lease Realty), an affiliate, acquired the
General Partnership interests of the Partnership. In December 2001, Captec Net
Lease Realty merged with and into Commercial Net Lease Realty, Inc.
(Commercial Net Lease). In connection with the merger, Commercial Net Lease
agreed to sell and assign its General Partnership interest in the Partnership
to GP3 Asset Acquisition, LLC (GP3 Asset Acquisition), which is wholly-owned
by Mr. Beach and is an affiliate of Captec. Effective January 15, 2002, the
limited partners consented to the transfer of the General Partnership interest.
On September 11, 2003, the Partnerships secured lender consented to the
transfer of the general partnership interest to GP3 Asset Acquisition. Upon
receipt of the secured lenders consent, the general partnership interest was
immediately transferred to GP3 Asset Acquisition. Therefore, as of September
11, 2003, GP3 Asset Acquisition became the general partner of the Partnership. The Partnership commenced a public offering (the Offering) of up to
20,000 Units of limited partnership interests, priced at $1,000 per Unit,
registered under the Securities Act of 1933, as amended, by means of a
Registration Statement on Form SB-2 which was declared effective by the
Securities and Exchange Commission on August 12, 1994. The Partnership
accepted subscriptions for the minimum number of Units on March 24, 1995 and
immediately commenced operations. The Offering reached final funding in August
1996 having received subscriptions for the entire 20,000 Units. Since 1997,
367 Units have been repurchased by the Partnership pursuant to the terms of the
Repurchase Plan set forth in the Partnerships August 12, 1994 prospectus with
respect to the Offering. At December 31, 2003, the Partnership had 19,633
Units issued and outstanding. The principal investment objectives of the Partnership are: (i)
preservation and protection of capital; (ii) distribution of cash flow
generated by the Partnerships leases; (iii) capital appreciation of the
Partnerships properties; (iv) generation of increased income and protection
against inflation through contractual escalation of base rents or participation
in gross revenues of tenants of the Partnerships properties; and (v) deferred
taxation of cash distributions to the limited partners. The Properties generally are leased on terms which provide for a base
minimum annual rent with fixed increases on specific dates or indexation of
rent to indices such as the Consumer Price Index. The Equipment is leased only
pursuant to leases under which the present value of non-cancellable rental
payments payable during the initial term of the lease is at least sufficient to
permit a lessor to recover the purchase price of the equipment. The Partnership has no employees. The General Partner and its affiliates,
however, are permitted to perform services for the Partnership pursuant to the
Partnership Agreement. 
 Item 2. Description of Properties As of December 31, 2003, the Partnership had a portfolio of 13 properties
located in 10 states, with a cost basis of $16.1 million, 5 performing
equipment leases with an original investment of $1.3 million and one
repossessed equipment package related to a defaulted equipment contract. The
Properties are leased to 11 operators of restaurant concepts and one retail
operator, Hollywood Video. As of December 31, 2003, leases to Foodmaker, Inc.,
Gourmet Systems, Inc. and ADL Investments, LLC represented 12.01%, 11.77%, and
9.70%, respectively, of the annualized rent from the total portfolio. Any
performance failure under these leases could materially adversely affect the
Partnerships income and financial position. As of December 31, 2003, all of the properties owned by the Partnership
are occupied, and the related leases are performing, and all of its investments
in equipment subject to financing leases are performing. The Partnership has one equipment lease outstanding for which rental
payments are delinquent by more than 90 days, and income accrual has been
suspended by the Partnership. The lessee, an Arbys restaurant franchisee,
experienced sales declines in prior years that resulted in reduced operating
cash flows and subsequently, past due lease payments. During 2003, the lessee
reversed these 2




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negative trends and as a result of the improving sales and cash flow
trends, the lessee made payments throughout 2003 that reflected an earlier
contemplated restructure. It is anticipated the Partnership will formally
execute the restructure in 2004. The restructure is not expected to result in
a loss on this equipment lease, and no reserve has been recorded against this
asset. The Partnership has repossessed equipment previously leased to a former
Boston Market licensee, that has gone out of business. The Partnership
recovered the equipment package from the lessees premises and expects to sell
the equipment package. At December 31, 2003, the Partnership had a remaining
investment in this asset of approximately $13,000, net of an allowance of
approximately $169,000 recorded in prior years to reflect the loss expected to
be realized from the sale of the equipment. The following is a summary description of the leased Property and
Equipment as of December 31, 2003. OriginalAsset CostIncluding
    
    Asset
    
    
    
    
    
    Date of
    
    AnnualConcept
    
    Date of
    
    Date of
    
    Acquisition
    
    State
    
    Monthly
    
    Next Rent
    
    Rate ofTenant/Lessee Name
    
    Name
    
    Commence
    
    Expiration
    
    Fees
    
    Location
    
    Rent
    
    Increase
    
    Increase(4)
    
    Sq. Ft.PROPERTIESAmericas Favorite Chicken Co.
    
    Churchs
    
    
    11/1/95
    
    
    
    11/1/15
    
    
    $
    661,500
    
    
    TX
    
    $
    6,353
    
    
    
    11/1/05
    
    
    
    1.92
    %
    
    
    1,850Gourmet Systems, Inc.
    
    Applebees
    
    
    8/1/95
    
    
    
    9/1/14
    
    
    
    1,724,583
    
    
    IL
    
    
    19,044
    
    
    
    8/1/04
    
    
    
    3.00
    %
    
    
    5,580Dennys Inc.
    
    Dennys
    
    
    10/1/96
    
    
    
    9/1/15
    
    
    
    1,032,927
    
    
    VA
    
    
    9,740
    
    
    
    9/1/05
    
    
    
    1.92
    %
    
    
    3,012Golden Restaurant Operations, Inc.
    
    Boston Market
    
    
    7/1/96
    
    
    
    11/1/11
    
    
    
    1,200,150
    
    
    NJ
    
    
    11,001
    
    
    
    5/25/04
    
    
    
    1.70
    %
    
    
    3,333Foodmaker, Inc.
    
    Jack in Box
    
    
    10/1/96
    
    
    
    10/1/14
    
    
    
    987,000
    
    
    TX
    
    
    9,223
    
    
    
    10/1/06
    (1)
    
    
    
    
    
    
    2,860Hollywood Entertainment Corp.
    
    Hollywood Video
    
    
    9/1/96
    
    
    
    5/1/11
    
    
    
    1,102,500
    
    
    OK
    
    
    11,025
    
    
    
    9/1/06
    (2)
    
    
    
    
    
    
    7,500ADL Investments, LLC
    
    Golden Corral
    
    
    6/1/97
    
    
    
    6/1/12
    
    
    
    1,680,000
    
    
    FL
    
    
    15,696
    
    
    
    6/1/12
    
    
    
    1.55
    %
    
    
    8,825Dynamic Management
    
    Black Eyed Pea
    
    
    10/1/96
    
    
    
    10/1/16
    
    
    
    1,561,106
    
    
    TX
    
    
    14,480
    
    
    
    10/1/06
    (3)
    
    
    
    
    
    
    5,445Foodmaker, Inc.
    
    Jack in Box
    
    
    1/1/99
    
    
    
    1/1/17
    
    
    
    1,286,250
    
    
    WA
    
    
    11,025
    
    
    
    1/1/09
    
    
    
    1.55
    %
    
    
    2,669Tec-Foods, Inc.
    
    Taco Bell
    
    
    1/1/99
    
    
    
    1/1/19
    
    
    
    840,000
    
    
    MI
    
    
    6,970
    
    
    
    1/1/05
    
    
    
    0.66
    %
    
    
    2,356Romacorp, Inc.
    
    Tony Romas
    
    
    1/1/99
    
    
    
    1/1/17
    
    
    
    1,942,500
    
    
    FL
    
    
    12,518
    
    
    
    10/01/04
    
    
    
    2.5
    %
    
    
    6,297RTM, Inc.
    
    Arbys
    
    
    8/1/99
    
    
    
    8/1/19
    
    
    
    706,011
    
    
    NC
    
    
    5,627
    
    
    
    9/1/05
    
    
    
    1.49
    %
    
    
    2,554Border Foods, Inc.
    
    Taco Bell
    
    
    4/1/99
    
    
    
    4/1/19
    
    
    
    1,338,750
    
    
    MN
    
    
    10,351
    
    
    
    4/1/04
    
    
    
    2.00
    %
    
    
    2,68716,063,277
    
    
    
    
    
    143,053
    
    
    
    
    
    
    
    
    
    
    
    54,968EQUIPMENTJ.M.C. Limited Partnership
    
    Applebees
    
    
    4/1/99
    
    
    
    4/1/06
    
    
    
    391,112
    
    
    UT
    
    
    6,136Morgans Foods of Ohio, Inc.
    
    KFC
    
    
    6/1/99
    
    
    
    6/1/06
    
    
    
    196,469
    
    
    OH
    
    
    3,019Chi-Co, Inc.
    
    Arbys
    
    
    6/1/99
    
    
    
    6/1/06
    
    
    
    105,000
    
    
    IL
    
    
    1,671American Hospitality Corp.
    
    Taco Bell
    
    
    10/01/01
    
    
    
    5/01/14
    
    
    
    195,430
    
    
    NC
    
    
    662Roma Texarcoma
    
    Carinos
    
    
    4/01/99
    
    
    
    04/01/06
    
    
    
    446,250
    
    
    TX
    
    
    7,2411,334,261
    
    
    
    
    
    18,729REPOSSESSED EQUIPMENTN/A
    
    Boston Market
    
    
    8/15/95
    
    
    
    8/15/02
    
    
    
    261,646
    
    
    INTotal
    
    
    
    
    
    
    
    
    
    
    
    $
    17,659,185
    
    
    
    
    $
    161,782
  (1)
    
    Rent Increase equals the greater of CPI or 10.0%.(2)
    
    Rent Increase equals the lesser of CPI or 12.0%.(3)
    
    Rent Increase equals the lesser of CPI or 10.0%.(4)
    
    Rate of increase was calculated on a compounded annual basis. 3




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Leases Real Estate Leases:All of the properties are subject to triple net leases
pursuant to which the tenant is responsible for all expenses related to the
cost of operating the Properties including real estate taxes, insurance,
maintenance and repair costs. As of December 31, 2003, original base terms of
the property leases ranged from 14 to 20 years, and the weighted average
remaining base term of the property lease portfolio was 12.2 years. Certain of
the leases provide the tenant with one or more options to renew the lease upon
expiration of the base term at predetermined or market rental rates. All of
the leases provide for increases in the monthly rents during the base term of
the lease, with most of these determined based upon fixed, contractual rates of
increases. Two of the leases provide for rental increases based upon the
lesser of a fixed percentage or changes in the Consumer Price Index and one of
the leases provides for rental increases based upon the greater of a fixed
percentage or changes in the Consumer Price Index. The timing of rental
increases is specified in the leases, but generally occurs no more often than
annually and no less often than once every five years. Equipment Leases: All of the equipment leases are on the Partnerships
standard form of lease pursuant to which the lessee is responsible for all
expenses related to the equipment, including taxes, insurance, maintenance and
repair costs. All of the equipment was purchased with cash from Offering
proceeds. As of December 31, 2003, original base terms of the equipment leases
ranged from 7 to 12 years, and the weighted average remaining base term of the
equipment lease portfolio was 37 months. All of the leases provide for fixed
monthly rents during the entire term of the lease. All of the equipment leases
provide the lessee with the option to purchase the equipment for a nominal
purchase price ($1) upon expiration of the base lease term. Summary of Investment Objectives and Policies The Partnership acquires income-producing property and equipment which is
leased primarily to operators of nationally franchised fast-food, family style
and dinner house restaurants as well as other franchised service-type
businesses such as automotive and specialty retail franchises. Properties are
selected for acquisition based on an examination and evaluation by the General
Partner or an affiliate of the potential value of the site, the financial
condition and business history of the proposed tenant or lessee, area
demographics, prospective purchase price and lease terms, geographic and market
diversification, and potential operating results. Similar analyses are utilized
in selecting equipment for inclusion in lease packages. The Partnership
anticipates that fee interests in real property will be acquired, although
other interests (including acquisitions of buildings subject to a long-term
ground lease) may be acquired if it is deemed to be advantageous to the
Partnership. In no event is property or equipment acquired unless a
satisfactory lease commitment has been obtained from a suitable tenant or
lessee as further described below. In selecting specific properties, the General Partner generally requires
the following: (i) Base annual rent that provides a specified minimum return on the
contract purchase price of the property; and (ii) An initial lease term between ten and twenty years. In selecting specific equipment, the General Partner typically requires
the following: (i) Leases providing for fixed rents structured to return 100% of the cost
of the equipment plus 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 terms expected to be minimal. The determination of whether particular properties or equipment should be
sold or otherwise disposed of is made after consideration of relevant factors,
including performance or projected performance of the property or equipment and
market conditions, with a view toward achieving the principal investment
objectives of the Partnership. 
 Item 3. Legal Proceedings The Partnership is not a party to any material legal proceeding nor, to
the best of its knowledge, are any such proceedings either pending or
threatened. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 4




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PART II 
 Item 5. Market for Registrants Limited Partnership Interests and Related Security Holder Matters and Small Business Issuer Purchase of Equity Securities There is no public market for the Units and the Partnership does not
currently expect that any market will develop. There are restrictions upon the
transferability of Units, including the requirement that the General Partner
consent to any transferee becoming a substituted Limited Partner (which consent
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, 2003, Units were held by 1,335 investors of record. In the
last three years, the Partnership has not engaged in the sale of any Units. The Internal Revenue Code of 1986, as amended, contains provisions that
may have an adverse impact on investors in certain publicly traded
partnerships. If the Partnership were to be classified as a publicly traded
partnership, income attributable to the Units would be characterized as
portfolio income and the gross income attributable to Units acquired by
tax-exempt entities would be unrelated business income, with the result that
the Units could be less marketable. The General Partner will, if necessary,
take appropriate steps to ensure that the Partnership will not be deemed a
publicly traded partnership. 
 Item 6. 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. Any statements contained in this report or any
documents incorporated herein by reference that are not statements of
historical fact may be deemed to be forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, some of
which are beyond the Partnerships control, and actual results may differ
materially depending on a variety of important factors, many of which are also
beyond the Partnerships control. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this report. The
Partnership disclaims, except as may be required by law, any obligations to
update or release revisions to these forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events. Results of Operations During the year ended December 31, 2003, total operating revenue decreased
by $58,000 to approximately $1.9 million compared to the year ended December 31, 2002. Rental revenue from operating leases for the
year ended 2003 decreased 1.8% to approximately $1.8 million, compared to $1.9
million for the year ended December 31, 2002. Earned income from financing
leases for the year ended 2003 decreased 32.6% to approximately $49,000
compared to approximately $72,000 for the year ended December 31, 2002, as a
result of the amortization of the principal balances on the financing leases
and the disposition of two equipment leases in 2003. Operating expenses were approximately $906,000 for the year ended December
31, 2003, compared to approximately $914,000 for the year ended December 31,
2002. Thee decrease is primarily due to an additional charge of $36,000 in
2002 related to reserve for defaults on operating leases. Interest expense
decreased due to the amortization of principal balances. General and
administrative expenses increased as a result of increased professional fees. Other income for the year ended December 31, 2003 was approximately
$32,000 compared to approximately $40,000 for the prior year. Other income for
the year ended December 31, 2003 is principally attributable to the sale of two
equipment leases for net cash proceeds of approximately $63,000, resulting in a
gain of approximately $14,000, and miscellaneous income from late charges of
approximately $18,000. Other income for year ended December 31, 2002 is
primarily due to a gain on the disposition of an equipment lease in April 2002. 5




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As a result of the foregoing, the Partnerships net income from continuing
operations decreased 5.4% to approximately $1.0 million for the year ended
December 31, 2003, compared to approximately $1.1 million for the year ended
December 31, 2002. Discontinued Operations reflect the sale of the Red Robin property that
was triggered by the tenants exercise of a purchase option clause in the lease
agreement. The property was sold for net cash proceeds of approximately
$3,428,000 in the third quarter of 2003, resulting in a gain of approximately
$498,000.There were approximately $530,000 debt retirement costs associated
with the disposition of the property. As a result of the foregoing, the Partnerships net income decreased 9 .3%
to approximately $1.0 million for the year ended December 31, 2003, compared to
approximately $1.1 million for the year ended December 31, 2002. During the year ended December 31, 2003, the Partnership made
distributions to Limited Partners totaling approximately $2.1 million as
compared with approximately $1.7 million for the preceding year. Critical Accounting Policies The financial statements are prepared in accordance with Generally
Accepted Accounting Principles, which require the Partnership to make certain
estimates and assumptions. A summary of the Partnerships significant
accounting policies is provided in note 1 to the financial statements. The
following section is a summary of certain aspects of those accounting policies
that require management estimates and judgement. When real estate properties are acquired, acquisition costs are allocated
to components of the property using relative fair values based on historical
experience and the Partnerships current judgement. These assumptions and
estimates impact the amount of costs allocated between land and building,
depreciation expense, and gains or losses recorded on sales of properties. Receivables are reported net of allowance for doubtful accounts and may be
uncollectible in the future. The Partnership reviews its receivables regularly
for potential collection problems in computing the allowance recorded against
its receivables. This review process requires the Partnership to make certain
judgements regarding collections that are inherently difficult to predict. The Partnerships operating leases have scheduled rent increases which occur at various dates throughout the lease terms.
Increases to rental income on leases that provide for rental increases based on changes in the Consumer Price Index commence being recognized when the increase is known.
The Partnership recognizes the total rent, as stipulated by the lease agreement, as income on a straight-line basis over the term of each lease for those leases with fixed
percentage increases subject to reasonably ensured collectibility.  To the extent rental income on the straight-line basis exceeds rents billable per the lease agreement,
an amount is recorded as unbilled rent.  In addition to scheduled rent increases, certain of the Partnerships leases also have percentage and overage rent clauses,
which the Partnership recognizes after the tenants reported sales have exceeded the applicable sales breakpoint. The Partnership periodically reviews its real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount of the property may not be recoverable.  If an impairment loss is indicated using undiscounted cash flows, the loss is measured as the amount by which the carrying amount of the asset exceeds the estimated fair or present value of the asset on a discounted cash flow basis. Liquidity and Capital Resources The Partnership commenced the Offering on August 12, 1994. The Partnership
accepted subscriptions for the minimum number of Units on January 24, 1995, and
immediately commenced operations. The Offering reached final funding on August
12, 1996, having received subscriptions for the entire 20,000 Units and funds
totaling $20,000,000. Net proceeds after Offering expenses were $17.4 million. In November 1998, the Partnership entered into a $6.2 million note. The
Partnership entered into an additional $2.0 million note in March 1999.
Proceeds from the notes were used to acquire additional properties and
equipment. The notes each have a 10-year term, are collateralized by certain
properties subject to operating leases, and bear interest at a at rates of
8.37% and 8.50% per annum, respectively. In September 2003, the Partnership
defeased approximately $1,979,000 of these notes payable with proceeds from the
sale of the Red Robin property. The Partnership incurred approximately
$481,000 of yield maintenance costs and $49,000 of professional fees related to
the defeasance. Debt issuance costs of approximately $478,000 incurred in
connection with the issuance of the notes are being amortized over the life of
the notes to interest expense using the straight-line method, which is not
materially different than the interest rate method. As of December 31, 2003, the Partnership had invested $16.1 million in 13
net leased real estate properties and $1.3 million in 5 performing equipment
leases. The remaining net investment in the Partnerships leased equipment is
$533,000, after cumulative principal collections of $801,000. Inclusive of the
above amount, the Partnership has received approximately $3.2 million of
aggregate principal collections on its financing leases during the life of
those investments. The Partnership also has a net investment of approximately
$13,000 in a repossessed equipment package, net of an allowance for loss of
approximately $169,000. As of December 31, 2003, the Partnership has not made
any commitments to purchase additional properties or equipment, nor does it
intend to make any such commitments. The Partnership annually considers written requests to repurchase Units
pursuant to the terms of the repurchase plan set forth in the Partnerships
prospectus with respect to the Offering. Since 1997, a total of 347 Units have
been repurchased by the Partnership. In 2003, the Partnership repurchased 20
Units for $10,607, or an average of $530 per Unit. The Partnership expects to
fund future Unit 6




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repurchases out of working capital reserves and net sale or refinancing
proceeds, but may also fund such repurchases out of cash flow. The Partnership
is not obligated to accept Unit repurchase requests if the General Partner
determines that such purchases would impair the capital or operation of the
Partnership and the Partnership may suspend or cancel the Repurchase Plan at
any time in its sole discretion. The Partnership expects that only limited amounts of liquid assets will be
required for existing properties since its property and equipment leases
require tenants and lessees to pay all taxes and assessments, maintenance and
repairs and insurance premiums, including casualty insurance thereby minimizing
the Partnerships operating expenses and capital requirements. The General
Partner expects that the cash flow to be generated by the Partnerships
properties and equipment will provide adequate liquidity and capital resources
to pay operating expenses and provide distributions to Limited Partners. 
 Item 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 On September 24, 2003, the Partnership dismissed PricewaterhouseCoopers
LLP (PWC) as the Partnerships certifying accountant. PWCs reports on the
financial statements for the past two years contained no adverse opinion or
disclaimer of opinion, nor were the reports qualified or modified as to
uncertainty, audit scope, or accounting principles. The decision to change
accountants was approved by GP3 Asset Acquisition, LLC, the Partnerships sole
manager. The Partnership does not have a board of directors or audit
committee. During the last two fiscal years and through the subsequent interim
period, there were no disagreements with PWC on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. Moreover, during the last two fiscal years and during the
subsequent interim period PWC did not advise the Partnership that (a) the
internal controls necessary for the Partnership to develop reliable financial
statements did not exist, (b) the Partnership needed to expand significantly
the scope of its audit, or (c) PWC was aware of information that on its face,
or if further investigated, (i) made, or would have made, PWC unable to rely on
managements representations, (ii) made, or would have made, PWC unwilling to
be associated with the financial statements prepared by management, or (iii)
materially impacted, or would have materially impacted, the fairness or
reliability of a previously issued audit report or the underlying financial
statements, or the financial statements issued or to be issued covering the
fiscal period(s) subsequent to the date of the most recent financial statements
covered by an audit report, including information that could have prevented PWC
from rendering an unqualified report on those financial statements. The Partnership engaged Ernst & Young LLP (Ernst & Young) as the
Partnerships certifying accountant as of October 7, 2003. During 2002 and
2001 and in the subsequent interim period from January 1, 2003 through October
7, 2003, the Partnership did not consult with Ernst & Young on items that
concerned the application of accounting principles generally, or to a specific
transaction or group of either completed or proposed transactions, or the type
of audit opinion that might be rendered on the Partnerships financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K. 
 Item 8A. Controls and Procedures Mr. Beach acting in his capacity as the principal executive officer of GP3
Asset Acquisition is ultimately responsible for the disclosure and procedures
of the Partnership. Disclosure controls and procedures are established and
maintained by the Partnership to ensure the information required to be
disclosed by the Partnership in the reports that it files or submits pursuant
to the Securities Exchange Act of 1934, as amended (the Act), is recorded,
processed, summarized and reported within the time periods specified in the
Commissions rules and forms. Mr. Beach has evaluated the effectiveness of the
Partnerships disclosure controls and procedures effectively communicate the
information required to be disclosed by the Partnership in the report it files
or submits under the Act in a manner that allows timely decisions regarding
such disclosures. There have been no significant changes in the Partnerships internal
controls or in other factors that could significantly affect these controls
subsequent to the evaluation date, including, but not limited to, any
corrective actions with regard to significant deficiencies and material
weaknesses. 7




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PART III 
 Item 9. Directors and Executive Officers of the Registrant. The Partnership does not have directors, officers or employees and, to the
best knowledge of the Partnership, as of December 31, 2003, no person
beneficially owned more than 5.0% of the outstanding Units. Patrick L. Beach is the Sole Member of CRC Asset Acquisition LLC, the sole
member of GP3 Asset Acquisition 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 Business Administration 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. Since 1981, he has
served as Chairman and Chief Executive Officer of Captec Financial Group, Inc.,
affiliate of the Partnership, that is involved in the acquisition and
development of single tenant restaurant properties, shopping centers, and
multi-family residential properties. Since the Partnership has no directors, officers or employees, it has not
adopted a code of ethics. 
 Item 10. Executive Compensation The Partnership has no officers or other employees. All amounts paid by
the Partnership for management and administrative services are pursuant to
agreements described under Item 12, Certain Relationships and Related
Transactions. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Securityholder Matters The Partnership has no directors or officers and, to the best knowledge of
the Partnership, as of December 31, 2003, no person beneficially owned more
than 5.0% of the outstanding Units. 
 Item 12. Certain Relationships and Related Transactions Pursuant to the Partnership Agreement, the General Partner receives
acquisition fees of 4%, plus an additional .00624% for each 1% of indebtedness
incurred in acquiring properties and equipment, of the aggregate purchase
prices of properties and equipment (not to exceed a total 5% acquisition fee).
The Partnership did not incur any acquisition fees during 2003 and 2002.
Acquisition fees incurred in earlier years were 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, pursuant to which 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 $22,438 and $24,807 were incurred during 2003 and
2002, respectively. The Partnership Agreement provides for the General Partner to receive real
estate 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 liquidation fees during 2003 and 2002. The Partnership Agreement provides for the General Partner to receive
equipment liquidation fees in the amount of 3% of the contract sales price. The
Partnership did not incur any equipment liquidation fees during 2003 and 2002. In December 2001, Captec Net Lease merged with and into Commercial Net
Lease. In connection with the merger, Commercial Net Lease agreed to sell and
assign its General Partnership interest in the Partnership to GP3 Asset
Acquisition, a wholly-owned subsidiary of CRC Asset Acquisition LLC, a Michigan
limited liability company of which Patrick L. Beach is the sole member.
Patrick L. Beach is the former Chairman of the Board of Directors and President
and Chief Executive Officer of Captec Net Lease and 8




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##### Table of Contents



an original General Partner of the Partnership. Effective January 15,
2002, the limited partners consented to the transfer of the General Partnership
interest. On September 11, 2003, the Partnerships secured lender consented to
the transfer of the general partnership interest to GP3 Asset Acquisition.
Upon receipt of the secured lenders consent, the general partnership interest
was immediately transferred to GP3 Asset Acquisition. Therefore, as of
September 11, 2003, GP3 Asset Acquisition became the general partner of the
Partnership. The agreements and arrangements, including those relating to compensation,
between the Partnership and the General Partner or any of its affiliates have
not been and will not be the result of arms-length negotiations, although the
General Partner believes that such agreements and arrangements 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
Partnership may borrow money from the General Partner or its affiliates but
only on such terms as to interest rate, security, fees and other charges at
least as favorable to the Partnership as are charged by unaffiliated 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 otherwise dealing or doing business with, persons (for example,
franchisees), who may deal with the Partnership. However, the Partnership
Agreement prohibits receipt of rebates or give-ups or participation in any
reciprocal business arrangements which would have the effect of circumventing
any of the provisions of the Partnership Agreement. 
 Item 13. Exhibits and Reports on Form 8-K (a) The following exhibits are included herein or incorporated by
reference: Number
    
    Exhibit4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated
by reference to the corresponding exhibit in the Registrants Form
10-KSB for the fiscal 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 fiscal
year ended December 31, 1998)10.2
    
    Promissory Note dated March 31, 1999 between Registrant and National
Realty Funding L.C. (Incorporated by reference to the corresponding
exhibit in the Registrants Form 10-QSB for the quarter ended March
31, 1999)31
    
    Certification Pursuant to section 302 of the Sarbanes-Oxley act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley act of 2002
 (b) Reports on Form 8-K: On October 1, 2003, the Partnership filed a Current Report on Form 8-K,
dated October 1, 2003, to report the dismissal of PricewaterhouseCoopers LLP as
the Partnerships certifying accountant and to disclose that the Partnerships
lender had consented to the proposed transfer of the Partnerships general
partnership interest. This Form 8-K was amended on October 14, 2003 to report
the engagement of Ernst & Young LLP as the Partnerships new certifying
accountant. 9




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##### Table of Contents



Item 14. Principal Accountant Fees and Services Audit Fees The aggregate fees billed to the Partnership for professional services
rendered by the Partnerships principal accountant for the audit of the
Partnerships annual financial statements and review of the financial
statements included in the Partnerships quarterly reports on Form 10-QSB or
for services normally provided by the Partnerships accountant in connection
with statutory or regulatory filings were $56,000 and $21,000 for the years
ended December 31, 2003 and 2002, respectively. Audit-Related Fees The aggregate fees billed to the Partnership for assurance and related
services by the Partnerships principal accountant that were reasonably related
to the performance of the audit or review of the Partnerships financial
statements were $0 for the years ended December 31, 2003 and 2002,
respectively. Tax Fees The aggregate fees billed to the Partnership for professional services
rendered by the Partnerships principal accountant for tax compliance, tax
advice and tax planning were $0 for the years ended December 31, 2003 and 2002,
respectively. All Other Fees The aggregate fees billed to the Partnership for products and services provided
by the Partnerships principal accountant were $0 for the years ended December
31, 2003 and 2002, respectively 10




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SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
By: GP3 Asset Acquisition, LLC.
Its ManagerBy:
    
    /s/ Patrick. L. BeachPatrick L. BeachPresidentDate:
    
    March 28, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. By:
    
    /s/ Patrick L. Beach

Patrick L. BeachPresidentof GP3 Asset Acquisition, LLC.Date:
    
    March 28, 2004
 11




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Captec Franchise Capital Partners L.P. III
Index to Financial Statements Page(s)Reports of Independent Auditors
    
    
    F - 1Financial StatementsBalance Sheets
    
    
    F - 3Statements of Operations
    
    
    F - 4Statements of Changes in Partners Capital
    
    
    F - 5Statements of Cash Flows
    
    
    F - 6Notes to Financial Statements
    
    
    F - 7




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##### Table of Contents



Report of Independent Auditors To the partners of Captec Franchise Capital Partners L.P. III We have audited the accompanying balance sheet of Captec Franchise Capital
Partners L.P. III as of December 31, 2003 and the related statements of
operations, cash flows and changes in partners capital for the year then
ended. These financial statements are the responsibility of the Partnerships
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the 2003 financial statements referred to above present
fairly, in all material respects, the financial position of Captec Franchise
Capital Partners L.P. III at December 31, 2003, and the results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Toledo, Ohio
February 28, 2004 F - 1




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Report of Independent Auditors To the partners of Captec Franchise Capital Partners L.P. III: In our opinion, the accompanying balance sheet as of December 31, 2002 and the related
statements of operations, of changes in partners capital and of cash flows
for the period ended December 31, 2002 present fairly,
in all material respects, the financial position, results of operations and
cash flows of Captec Franchise Capital Partners L.P. III at December 31, 2002
and for the year then ended, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provide a reasonable basis for our opinion. As discussed in Note 8 to the financial statements, on January 1, 2002, the
Company adopted the provisions of Statement of Financial Accounting Standards
No.144, Accounting for the Impairment on Disposal of Long-Lived Assets. PricewaterhouseCoopers LLP Detroit, Michigan
February 28, 2003 except for Note 8 as to
which the date is March 23, 2004 F - 2




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Captec Franchise Capital Partners L.P. III
Balance Sheets
December 31, 2003 and 2002 2003
    
    2002AssetsCash and cash equivalents
    
    $
    537,442
    
    
    $
    286,511Restricted cash
    
    
    454,540
    
    
    
    499,863Investment in leases:Operating leases, net
    
    
    14,485,860
    
    
    
    17,285,384Financing leases, net
    
    
    532,700
    
    
    
    807,542Impaired financing leases, net
    
    
    12,693
    
    
    
    12,693Accounts receivable
    
    
    18,168
    
    
    
    47,762Unbilled rent, net
    
    
    1,013,362
    
    
    
    1,299,690Due from related parties
    
    
    8,216
    
    
    
    5,733Deferred financing costs, net
    
    
    238,954
    
    
    
    286,745Total assets
    
    $
    17,301,935
    
    
    $
    20,531,923Liabilities and Partners CapitalLiabilities:Notes payable
    
    $
    5,704,585
    
    
    $
    7,864,328Accounts payable and accrued expenses
    
    
    120,873
    
    
    
    110,819Security deposits held on leases
    
    
    7,106
    
    
    
    31,960Total liabilities
    
    
    5,832,564
    
    
    
    8,007,107Partners capital:Limited partners capital accounts
    
    
    11,453,527
    
    
    
    12,519,242General partners capital account
    
    
    15,844
    
    
    
    5,574Total partners capital
    
    
    11,469,371
    
    
    
    12,524,816Total liabilities and partners capital
    
    $
    17,301,935
    
    
    $
    20,531,923
 The accompanying notes are an integral part of the financial statements. F - 3




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Captec Franchise Capital Partners L.P. III
Statements of Operations
For the Years Ended December 31, 2003 and 2002 2003
    
    2002Operating revenue:Rental income
    
    $
    1,827,789
    
    
    $
    1,862,139Finance income
    
    
    48,711
    
    
    
    72,240Total operating revenue
    
    
    1,876,500
    
    
    
    1,934,379Operating costs and expenses:Interest expense
    
    
    483,201
    
    
    
    488,817Depreciation
    
    
    234,555
    
    
    
    238,079General and administrative
    
    
    188,044
    
    
    
    151,302Provision for impaired financing leases
    
    
    
    
    
    
    36,000Total operating costs and expenses
    
    
    905,800
    
    
    
    914,198Income from operations
    
    
    970,700
    
    
    
    1,020,181Other income :Gain on sale of equipment
    
    
    13,976
    
    
    
    29,227Interest and other income
    
    
    18,108
    
    
    
    11,156Total other income
    
    
    32,084
    
    
    
    40,383Income from continued operations
    
    
    1,002,784
    
    
    
    1,060,564Discontinued Operations:Net gain on sale of properties
    
    
    498,240
    
    
    
    Income from discontinued operation, net
    
    
    55,993
    
    
    
    71,353Debt Retirement Costs
    
    
    (530,035
    )
    
    
    Income from discontinued operations
    
    
    24,198
    
    
    
    71,353Net Income
    
    $
    1,026,982
    
    
    $
    1,131,917Net income allocable to general partner
    
    $
    10,270
    
    
    $
    11,319Net income allocable to limited partners
    
    $
    1,016,712
    
    
    $
    1,120,598Net income per limited partnership unit
from continuing operations
    
    
    50.52
    
    
    
    53.12Net income per limited partnership unit
from discontinued operations
    
    
    1.22
    
    
    
    3.57Net income per limited partnership unit
    
    $
    51.74
    
    
    $
    56.70Weighted average number of limited partnership
units outstanding
    
    
    19,651
    
    
    
    19,765
 The accompanying notes are an integral part of the financial statements. F - 4




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Captec Franchise Capital Partners L.P. III
Statements of Changes in Partners Capital
For the Years Ended December 31, 2003 and 2002 Limited
    
    Limited
    
    General
    
    TotalPartners
    
    Partners
    
    Partners
    
    PartnersUnits
    
    Accounts
    
    Account
    
    CapitalBalance, January 1, 2002
    
    
    19,776
    
    
    $
    13,188,344
    
    
    $
    32,286
    
    
    $
    13,220,630Repurchase of limited partnership units
    
    
    (123
    )
    
    
    (74,789
    )
    
    
    
    
    
    
    (74,789
    )Distributions - ($86.77 per weighted average limited partnership unit)
    
    
    
    
    
    
    (1,714,911
    )
    
    
    (38,031
    )
    
    
    (1,752,942
    )Net income
    
    
    
    
    
    
    1,120,598
    
    
    
    11,319
    
    
    
    1,131,917Balance, December 31, 2002
    
    
    19,653
    
    
    
    12,519,242
    
    
    
    5,574
    
    
    
    12,524,816Repurchase of limited partnership units
    
    
    (20
    )
    
    
    (10,607
    )
    
    
    
    
    
    
    (10,607
    )Distributions - ($105.43 per weighted average limited partnership unit)
    
    
    
    
    
    
    (2,071,820
    )
    
    
    
    
    
    
    (2,071,820
    )Net income
    
    
    
    
    
    
    1,016,712
    
    
    
    10,270
    
    
    
    1,026,982Balance, December 31, 2003
    
    
    19,633
    
    
    $
    11,453,527
    
    
    $
    15,844
    
    
    $
    11,469,371
 The accompanying notes are an integral part of the financial statements. F - 5




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Captec Franchise Capital Partners L.P. III
Statements of Cash Flows
For the Years Ended December 31, 2003 and 2002 2003
    
    2002Cash flows from operating activities:Net Income
    
    $
    1,026,982
    
    
    $
    1,131,917Adjustments to net income:Depreciation
    
    
    266,279
    
    
    
    280,378Amortization of debt issuance costs
    
    
    47,791
    
    
    
    47,791Gain on sale of equipment
    
    
    (13,976
    )
    
    
    (29,227
    )Gain on sale of real estate
    
    
    (498,240
    )
    
    
    Provision for impaired financing leases
    
    
    
    
    
    
    36,000Increase in unbilled rent
    
    
    (110,659
    )
    
    
    (109,106
    )(Increase) decrease in accounts receivable
    
    
    29,594
    
    
    
    12,639Decrease in security deposits
    
    
    (24,854
    )
    
    
    (13,647
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    
    
    
    
    (51,116
    )Decrease (increase) in restricted cash
    
    
    45,323
    
    
    
    (112,561
    )Increase in due from related parties
    
    
    (2,483
    )
    
    
    (209
    )Decrease in due to related parties
    
    
    
    
    
    
    (15,025
    )Net cash provided by operating activities
    
    
    775,811
    
    
    
    1,177,834Cash flows from investing activities:Net proceeds from disposition of properties subject to operating leases
    
    
    3,428,472
    
    
    
    Net proceeds from sale of equipment
    
    
    62,711
    
    
    
    71,896Principal payments on financing leases
    
    
    226,107
    
    
    
    261,096Net cash provided by investing activities
    
    
    3,717,290
    
    
    
    332,992Cash flows from financing activities:Repayments of notes payable
    
    
    (2,159,743
    )
    
    
    (178,242
    )Repurchase of limited partnership units
    
    
    (10,607
    )
    
    
    (74,789
    )Distributions to limited partners
    
    
    (2,071,820
    )
    
    
    (1,714,911
    )Distributions to general partner
    
    
    
    
    
    
    (38,031
    )Net cash used in financing activities
    
    
    (4,242,170
    )
    
    
    (2,005,973
    )Net increase (decrease) in cash and cash equivalents
    
    
    250,931
    
    
    
    (495,147
    )Cash and cash equivalents, beginning of year
    
    
    286,511
    
    
    
    781,658Cash and cash equivalents, end of year
    
    $
    537,442
    
    
    $
    286,511Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    612,343
    
    
    $
    668,962
 The accompanying notes are an integral part of the financial statements. F - 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 basis, primarily to operators of national and regional
franchised businesses. The initial General Partners upon formation of the Partnership were Captec
Franchise Capital Corporation III (the Corporation), a wholly-owned
subsidiary of Captec Financial Group, Inc. (Captec), an affiliate, and
Patrick L. Beach, the Chairman of the Board of Directors, President and Chief
Executive Officer of the Corporation and Captec. In August 1998, Captec Net
Lease Realty, Inc. (Captec Net Lease Realty), an affiliate, acquired the
General Partnership interests of the Partnership. In December 2001, Captec
Net Lease Realty merged with and into Commercial Net Lease Realty, Inc.
(Commercial Net Lease). In connection with the merger, Commercial Net Lease
agreed to sell and assign its General Partnership interest in the Partnership
to GP3 Asset Acquisition, LLC (GP3 Asset Acquisition), which is
wholly-owned by Mr. Beach and is an affiliate of Captec. Effective January
15, 2002, the limited partners consented to the transfer of the General
Partnership interest. On September 11, 2003, the Partnerships secured
lender consented to the transfer of the general partnership interest to GP3
Asset Acquisition. Upon receipt of the secured lenders consent, the general
partnership interest was immediately transferred to GP3 Asset Acquisition.
Therefore, as of September 11, 2003, GP3 Asset Acquisition became the general
partner of the Partnership. The Partnership commenced a public offering (the Offering) of up to 20,000
units (the Units) of limited partnership interests, priced at $1,000 per
Unit, by means of a Registration Statement on Form SB-2, under the Securities
Act of 1933, as amended, which was declared effective by the Securities and
Exchange Commission on August 12, 1994. The Partnership accepted
subscriptions for the minimum number of Units on January 24, 1995 and
immediately commenced operations. The Offering was fully subscribed in August
1996. Since 1997, 347 Units have been repurchased by the Partnership pursuant
to the terms of the Repurchase Plan set forth in the Partnerships August 12,
1994 prospectus with respect to the Offering. At December 31, 2003, the
Partnership had 19,633 Units issued and outstanding. The principal investment objectives of the Partnership are: (i) preservation
and protection of capital; (ii) distribution of cash flow generated by the
Partnerships leases; (iii) capital appreciation of the Partnerships
properties; (iv) generation of increased income and protection against
inflation through contractual escalation of base rents or participation in
gross revenues of tenants of the Partnerships properties; and (v) deferred
taxation of cash distributions to the Limited Partners. Allocation of profits, losses and cash distributions from operations and cash
distributions from sale or refinancing are made pursuant to the terms of the
Partnership Agreement. Profits and losses from operations are allocated
among the limited partners based upon the number of Units owned. Following is a summary of the Partnerships significant accounting policies: Cash and cash equivalents The Partnership considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Restricted cash The Partnership is required to maintain a cash balance in an escrow account
until specific post closing requirements have been satisfied related to a
note payable. Rental income from operating leases The Partnerships operating leases have scheduled rent increases, which occur
at various dates throughout the lease terms. Increases to rental income on
leases that provide for rental increases based on changes in the Consumer
Price Index commence being recognized when the increase is known. The
Partnership recognizes the total rent, as stipulated by the lease agreement,
as F - 7




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##### Table of Contents



income on a straight-line basis over the term of each lease for those leases
with fixed percentage increases subject to reasonably assured collectibility.
To the extent rental income on the straight-line basis exceeds rents billable
per the lease agreement, an amount is recorded as unbilled rent. In addition
to scheduled rent increases, certain of the Partnerships leases also have
percentage and overage rent clauses, which the Partnership recognizes after
the tenants reported sales have exceeded the applicable sales breakpoint.
Straight line rental income accruals are suspended by the Partnership on leases that are delinquent by more than 90 days. As of December 31, 2003, leases to Foodmaker, Inc., Gourmet Systems,
Inc. and ADL Investments, LLC represented 12.01%, 11.77%, and 9.70%,
respectively, of the annualized rent from the total portfolio. Any
performance failure under these leases could materially adversely affect the
Partnerships income and financial position. Land and building subject to operating leasesLand and buildings subject to
operating leases are stated at cost less accumulated depreciation. Buildings
are depreciated on the straight-line method over their estimated useful lives
(40 years). The Partnership periodically reviews its real estate portfolio
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the property may not be recoverable. If an impairment loss
is indicated using undiscounted cash flows, the loss is measured as the
amount by which the carrying amount of the asset exceeds the estimated fair
or present value of the asset on a discounted cash flow basis. Gains or
losses on sale of property are recognized upon closing of the transaction. The cost of the properties acquired is allocated among tangible land, buildings and equipment and recognized intangibles based upon estimated fair values in accordance with the provisions of SFAS No 141,
Business Combinations. Recognized intangibles include the value of acquired lease contracts.  In computing the value
of acquired lease contracts, consideration is given to (a) whether the lease is at market rates, (b) origination fees typically incurred to negotiate a contract, and (c) recovery costs to replace the tenant. All of the properties are subject to triple net leases pursuant to which
the tenant is responsible for all expenses related to the cost of operating
the Properties including real estate taxes, insurance, maintenance and repair
costs. As of December 31, 2003, original base terms of the property leases
ranged from 14 to 20 years, and the weighted average remaining base term of
the property lease portfolio was 12.2 years. Certain of the leases provide
the tenant with one or more options to renew the lease upon expiration of the
base term at predetermined or market rental rates. All of the leases provide
for increases in the monthly rents during the base term of the lease, with
most of these determined based upon fixed, contractual rates of increases. Net investment in financing leasesNet investment in financing leases
primarily represents equipment used in restaurant operations, which are
leased on a triple-net basis. Leases classified as financing leases are
stated as the sum of the minimum lease payments plus the unguaranteed
residual value accruing to the benefit of the lessor, less unearned income.
Unearned income is amortized to income over the lease term so as to produce a
constant periodic rate of return on the net investment in the lease. Direct
origination costs are deferred and amortized over the life of the lease as an
adjustment to yield. Income recognition is suspended on financing leases that
become delinquent for 90 or more days. The Partnership periodically reviews
its financing lease portfolio for impairment whenever events or changes in
circumstances indicate that the carrying value of a lease may not be
recoverable. If impairment is indicated, a loss reserve is calculated based
on the estimated amounts recoverable. At December 31, 2003 and 2002, the
Partnership has provided an allowance of $168,636 for uncollectible amounts
associated with its financing leases. Note payableNotes Payable have fair values equal to $6,227,273 based on debt
with similar terms reflecting current interest rates. Net income per limited partnership interestNet income per limited
partnership interest is calculated using the weighted average number of
limited partnership Units outstanding during the period and the limited
partners allocable share of the net income. Distributions per limited partnership UnitDistributions per limited
partnership Unit is calculated using the actual distributions disbursed
during the period to the weighted average number of limited partnership Units
during the period. Actual individual limited partner distributions realized
may vary from this calculation as a result of a variety of factors including:
(i) actual distributions are computed based on quarterly operating results
and outstanding limited partnership units, which are disbursed in the
subsequent quarter; (ii) certain limited partners have elected to receive
monthly distributions versus quarterly distributions which creates timing
differences between comparative calculations, and (iii) the calculation
ignores the timing of repurchases. F - 8




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Income taxesNo provision for income taxes is included in the accompanying financial
statements, as the Partnerships results of operations are passed through to
the partners for inclusion in their respective income tax returns.EstimatesThe preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.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. 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%, plus an additional .00624% for each 1% of
indebtedness incurred in acquiring properties and equipment, of the aggregate
purchase prices of properties and equipment (not to exceed a total 5%
acquisition fee). The Partnership did not incur any acquisition fees during
2003 and 2002. 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 $22,438 and $24,807 were expensed as
incurred during 2003 and 2002, respectively.The Partnership Agreement provides for the General Partner to receive real
estate 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 liquidation fees during 2003 and
2002. The Partnership Agreement provides for the General Partner to receive
equipment liquidation fees in the amount of 3% of the contract sales price.
The Partnership did not incur any equipment liquidation fees during 2003 and
2002.An affiliate of the Partnership, a Small Business Investment Corporation
(SBIC), has invested in certain entities that have leases with the
Partnership. As a result of the investments made through the SBIC, Mr. Beach
or his associates in the SBCI, may have board representation in these
companies. The Partnership and its General Partner believe that the leases
are at market rates for such properties and equipment. F - 9




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4.
    
    Land and Building Subject to Operating LeasesThe net investment in operating leases as of December 31, 2003 and 2002 is
comprised of the following: 2003
    
    2002Land
    
    $
    6,540,429
    
    
    $
    7,695,896Building and improvements
    
    
    9,522,848
    
    
    
    11,214,34416,063,277
    
    
    
    18,910,240Less accumulated depreciation
    
    
    (1,577,417
    )
    
    
    (1,624,856
    )Total
    
    $
    14,485,860
    
    
    $
    17,285,384
  The following is a schedule of future minimum lease payments to be received
on the operating leases as of December 31, 2003. 2004
    
    $
    1,729,9842005
    
    
    1,752,8662006
    
    
    1,786,3372007
    
    
    1,820,1672008
    
    
    1,843,213Thereafter
    
    
    12,571,433Total
    
    $
    21,504,000
  5.
    
    Net Investment in Financing Leases The net investment in financing leases as of December 31, 2003 and 2002 is
comprised of the following: 2003
    
    2002Minimum lease payments to be received
    
    $
    622,509
    
    
    $
    897,429Estimated residual value
    
    
    
    
    
    
    48,736Gross investment in financing leases
    
    
    622,509
    
    
    
    946,165Less unearned income
    
    
    (89,809
    )
    
    
    (121,994
    )Less direct origination costs
    
    
    
    
    
    
    (16,629
    )Net investment in financing leases
    
    $
    532,700
    
    
    $
    807,542
  The following is a schedule of future minimum lease payments to be received
on the financing leases as of December 31, 2003: 2004
    
    $
    255,5892005
    
    
    224,7492006
    
    
    83,2332007
    
    
    7,9472008
    
    
    7,947Thereafter
    
    
    43,044Total
    
    $
    622,509
  During 2003, the Partnership recognized a net gain of $13,976 primarily due
to a gain on the disposition of two equipment leases. During 2002, the
Partnership recognized a net gain of $29,227 primarily due to a gain on the
disposition of an equipment lease.6.
    
    Impaired Financing LeasesAt December 31, 2003, the Partnerships investment in impaired financing
leases was comprised of a lease with a recorded investment of $12,693, net of
a related allowance of $168,636. This was an equipment lease to a lessee that
has gone out of business. The Partnership recovered the equipment from the
lessees premises and expects to sell the equipment. The net investment in
the impaired lease represents the estimated net proceeds that the Partnership
expects to receive from a sale of the equipment. F - 10




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7. Notes Payable In November 1998, the Partnership entered into a $6.2 million term note. The
note has a ten-year term, is collateralized by certain properties subject to
operating leases which has a carrying value of approximately $7.7 million,
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 has a ten-year term, is collateralized by certain properties
subject to operating leases which has a carrying value of approximately $3.8
million, and bears an interest rate of 8.5% per annum. In September 2003 the
partnership defeased approximately $1,979,000 of this notes payable with
proceeds from the sale of the Red Robin property. The partnership incurred
approximately $481,000 of yield maintenance costs and $49,000 of professional
fees related to the defeasance. At December 31, 2003, annual maturities on
the notes in aggregate are as follows: 2004
    
    $
    156,0702005
    
    
    169,7162006
    
    
    184,5552007
    
    
    200,6922008
    
    
    218,239Thereafter
    
    
    4,775,313Total
    
    $
    5,704,585
 Debt issuance costs of $477,909 in aggregate were incurred in connection with
the issuance of the notes, and are being amortized to interest expense using
the straight-line method over the ten-year term of the notes. 8. Earnings from Discontinued Operations In accordance with SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets, the Company has classified the operations of the
property sold during 2003 as discontinued operations. Accordingly, the
results of operations related to the property have been reclassified to
earnings from discontinued operations. Expenses include an allocation of
interest expense based on the prorated share of the outstanding debt. The
following is a summary of earnings from discontinued operations as of
December 31, 2003 and 2002: 2003
    
    2002Revenues:Operating lease rents
    
    $
    252,102
    
    
    $
    343,779Expenses:Interest expense
    
    
    161,864
    
    
    
    226,689Provision for depreciation
    
    
    31,724
    
    
    
    42,299Management Fees
    
    
    2,521
    
    
    
    3,438Income from discontinued operation, net
    
    $
    55,993
    
    
    $
    71,353
 9. Subsequent Event Based upon the results of operations for the three-month period ended
December 31, 2003, the Partnership declared distributions of $483,821 to its
limited partners on January 15, 2004. F - 11




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EXHIBIT INDEX Number
    
    Exhibit4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated
by reference to the corresponding exhibit in the Registrants Form
10-KSB for the fiscal 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 fiscal
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