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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, 2004 OR  o
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ______________ to ________________ Commission file number 33-77510C CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III 
  Delaware
    
    38-3160141(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, P.O. Box 544, Ann Arbor, Michigan 48106-0544(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number: (734) 994-5505Securities registered under Section 12(b) of the Exchange Act:
    
    NoneSecurities registered under Section 12(g) of the Exchange Act:
    
    Units of limited partnership interest(Title of Class)
 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.
þ Yes o 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. þ State Issuers revenues for its most recent fiscal year: $1,811,505 At December 31, 2004, 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, 2004, 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 ProceduresItem 8B. Other InformationPART IIIItem 9. Directors and Executive Officers of the RegistrantItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and Management and Related Securityholder MattersItem 12. Certain Relationships and Related TransactionsItem 13. ExhibitsItem 14. Principal Accountant Fees and ServicesSIGNATURESSection 302 Certification of Chief Executive & Chief Financial OfficersSection 906 Certification of Chief Executive & Chief Financial Officers    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 interest, 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 January 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, 2004, the Partnership had 19,633 Units issued and outstanding. The principal investment objectives of the Partnership are: (i) preservation and protection of
capital; (ii) distribution of cash flow generated by the Partnerships leases; (iii) capital
appreciation of the Partnerships properties; (iv) generation of increased income and protection
against inflation through contractual escalation of base rents or participation in gross revenues
of tenants of the Partnerships properties; and (v) deferred taxation of cash distributions to the
limited partners. 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. Effective November 8, 2004 the limited partners consented to a plan of liquidation and
dissolution (Plan of Liquidation and Dissolution), which involves the dissolution of the
Partnership, the liquidation of its assets and the winding up of its affairs. As a result, the
general partner is authorized to liquidate the assets of the Partnership and distribute the net
proceeds from such liquidation after the repayment of all debt, in accordance with the partnership
agreement. The Partnership is undertaking steps to liquidate and dispose of its assets in
accordance with the Plan of Liquidation and Dissolution and has entered into an exclusive listing
agreement with a third party that will oversee the marketing and sale of the Partnerships assets. 
 Item 2. Description of Properties. As of December 31, 2004, the Partnership had a portfolio of 12 properties located in 9 states,
with a cost basis of $14.7 million, and 4 performing equipment leases with an original investment
of $943,000. The Properties are leased to 10 operators of restaurant concepts and one retail
operator, Hollywood Video. As of December 31, 2004, leases to
Jack in the Box, Inc., Gourmet Systems,
Inc. and ADL Investments, LLC represented 13.80%, 13.37%, and 10.70%, 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.




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As of December 31, 2004, 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. During 2004, it
was anticipated that the Partnership would execute a lease restructure with the lessee. The
restructure was not expected to result in a loss on this equipment lease, and therefore no reserve
was recorded against this asset. However, due to additional cash flow declines, the lessee was not
able to make the payments that would have been required under the restructure. As a result, the
contemplated restructure never closed. The lessee, an Arbys franchisee, has found a lender
willing to refinance its entire debt, and as a result, the partnership expects to receive a
lump-sum payoff of this lease. An analysis on this asset showed that
no impairment is expected. The following is a summary description of the leased Property and Equipment as of December 31,
2004. OriginalAsset Cost
    
    
    Asset
    
    
    
    
    
    Date of
    
    
    AnnualConcept
    
    Date of
    
    
    Date of
    
    
    Including
    
    
    State
    
    Monthly
    
    
    Next Rent
    
    
    Rate ofTenant/Lessee Name
    
    Name
    
    Commence
    
    
    Expiration
    
    
    Acquisition Fees
    
    
    Location
    
    Rent
    
    
    Increase
    
    
    Increase(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
    
    
    19,615
    
    
    
    8/1/05
    
    
    
    3.00
    %
    
    
    5,564Denny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
    
    
    11,551
    
    
    
    7/1/06
    
    
    
    1.70
    %
    
    
    3,294Jack in the Box, 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
    
    
    
    6/1/07
    
    
    
    1.55
    %
    
    
    8,825Restaurants Acquisition I, LLC
    
    Black Eyed Pea
    
    
    10/1/96
    
    
    
    10/1/16
    
    
    
    1,561,106
    
    
    TX
    
    
    14,480
    
    
    
    10/1/06
    
    
    
    (3)
    
    
    
    5,445Jack in the Box, Inc.
    
    Jack in the 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
    
    
    12,831
    
    
    
    10/01/05
    
    
    
    2.5
    %
    
    
    6,456RTM, Inc.
    
    Arbys
    
    
    8/1/99
    
    
    
    8/1/19
    
    
    
    706,011
    
    
    NC
    
    
    5,627
    
    
    
    9/1/05
    
    
    
    1.49
    %
    
    
    2,55414,724,527
    
    
    
    
    
    134,136
    
    
    
    
    
    
    
    
    
    
    
    52,385EQUIPMENT
    
    
    
    
    
    
    
    
    
    
    
    CurrentNet InvestmentMorgans Foods of Ohio, Inc.
    
    KFC
    
    
    6/1/99
    
    
    
    6/1/06
    
    
    
    48,766
    
    
    OH
    
    
    3,019Chi-Co, Inc.
    
    Arbys
    
    
    6/1/99
    
    
    
    6/1/06
    
    
    
    60,015
    
    
    IL
    
    
    1,671American Hospitality Corp.
    
    Taco Bell
    
    
    10/01/01
    
    
    
    5/01/14
    
    
    
    50,944
    
    
    NC
    
    
    662Roma Texarcoma
    
    Carinos
    
    
    4/01/99
    
    
    
    4/01/06
    
    
    
    107,704
    
    
    TX
    
    
    7,241267,429
    
    
    
    
    
    12,593Total
    
    
    
    
    
    
    
    
    
    
    
    $
    14,991,956
    
    
    
    
    $
    146,729
   (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.




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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, 2004,
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 10.9 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 increase. 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, 2004, 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 34
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. None.




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Item 4. Submission of Matters to a Vote of Security Holders. On or about September 24, 2004, the Partnership filed with the Securities and Exchange
Commission and mailed to its limited partners a consent solicitation statement pursuant to which
the Partnership began soliciting the consent of its limited partners to (i) dissolve the
Partnership, liquidate its assets and wind up its affairs; and (ii) amend the partnership agreement
to permit, on a limited basis, the sale of Partnership assets to certain affiliates in connection
with the dissolution, liquidation and winding up of the Partnership. Effective November 8, 2004,
The requisite limited partner consents for each proposal were
obtained and the consent solicitation was closed. Limited partners
holding 10,758 Units and 10,137
Units consented to the liquidation proposal and the amendment to the limited partnership agreement,
respectively. Limited partners holding 152 Units and 658 Units did not consent to the liquidation
proposal and the amendment to the limited partnership agreement, respectively. Limited partners
holding 122 Units and 237 Units abstained from consenting to the liquidation proposal and the
amendment to the limited partnership agreement, respectively. In
summary, 97.5% of the Units voted
approved the liquidation proposal and 91.9% of the Units voted approved the amendment to the
limited partnership agreement. 
 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, 2004, Units were held by 1,308 investors of record. In the last three years, the Partnership
has not engaged in the sale of any Units. The Partnership declared cash distributions of
approximately $1.2 million and approximately $2.2 million for the years ended December 31, 2004 and
2003 respectively. The Partnership made no Unit repurchases in the three months ended December 31,
2004. 
 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. Forward-looking statements are
subject to certain risks and uncertainties, some of which are beyond the Partnerships control,
which could cause actual results to differ materially from those projected. Such risks and
uncertainties include the following: (i) a tenant may default in making rent payments, (ii) a fire
or other casualty may interrupt the cash flow stream from a property, (iii) the properties may not
be able to be leased at the assumed rental rates, (iv) unexpected expenses may be incurred in the
ownership of the properties, and (v) properties may not be able to be sold at the presently
anticipated prices and times. Any statements contained in this report or any documents incorporated
herein by reference that are not statements of historical fact may be deemed to be forward-looking
statements. You should not place undue reliance on these forward-looking statements, which speak
only as of the date of this report. The Partnership disclaims, except as may be required by law,
any obligation to update or release revisions to these forward-looking statements to reflect events
or circumstances after the date of this report or to reflect the occurrence of unanticipated
events. As a result of the approval of the Plan of Liquidation and Dissolution, all of the
Partnerships assets except cash are classified as Assets Held for Sale, all liabilities are
classified as Liabilities Held for Sale and the operations of the Partnership have been classified
as discontinued operations for all periods presented. Therefore, the following discussion and
analysis of the results of operations is entirely in regards to discontinued operations, and the
discussion and analysis of financial condition is principally regarding Assets and Liabilities Held
for Sale. Results of Operations During the year ended December 31, 2004, total operating revenue decreased by $317,000
compared to the year ended December 31, 2003. Rental revenue from operating leases for the year
ended December 31, 2004 decreased 14.1% to approximately $1.8 million, compared to $2.1 million for
the year ended December 31, 2003, due to the sale of the Red Robin property in the third quarter of
2003 and the sale of a Taco Bell property in December 2004. Earned income from financing leases
for the year ended December 31, 2004




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decreased 49.2% to approximately $25,000, compared to approximately $49,000 for the year ended
December 31, 2003, as a result of the amortization of the principal balances on the financing
leases and the disposition of two equipment leases. Operating expenses were approximately $979,000 for the year ended December 31, 2004, a
decrease of 40.0% compared to approximately $1.6 million for the year ended December 31, 2003.
Interest expense decreased in 2004 due to the repayment of notes payable and depreciation expense
decreased in 2004 due to the sale of the Red Robin property in the third quarter of 2003 and the
sale of a Taco Bell property in December 2004. General and administrative expenses increased as a
result of increased professional fees. In 2003, the Partnership incurred approximately $530,000 in
debt retirement costs associated with the sale of the Red Robin property. Other income for the year ended December 31, 2004 was approximately $87,000, compared to
approximately $530,000 for the prior year. Other income for the year ended December 31, 2004 is
principally attributable to the sale of a Taco Bell property in December 2004, sale of an equipment
lease for net cash proceeds of approximately $142,000, resulting in a gain of approximately $2,000,
partially offset by an expense of approximately $6,000 relating to the final settlement on a
repossessed equipment package which yielded net proceeds of approximately $6,000. Miscellaneous
income from late charges was approximately $8,000. Other income from discontinued operations for
2003 was primarily due to the sale of the Red Robin property. The property was sold for net cash
proceeds of approximately $3.4 million in 2003, resulting in a gain of approximately $498,000. In
addition, there was a gain of approximately $14,000 from the sale of two equipment leases for net
cash proceeds of approximately $63,000. Miscellaneous income from late charges was approximately
$18,000. As a result of the foregoing, the Partnerships net income decreased 10.4% to approximately
$920,000 for the year ended December 31, 2004, compared to approximately $1.0 million for the year
ended December 31, 2003. During the year ended December 31, 2004, the Partnership made distributions to Limited
Partners totaling approximately $1.4 million compared with approximately $2.1 million for the
preceding year. Liquidity and Capital Resources The Partnership commenced the Offering of up to 20,000 Units, priced at $1,000 per Unit, on
August 12, 1994. The Partnership accepted subscriptions for the minimum number of Units on January
24, 1995, and immediately commenced operations. The Offering was fully subscribed on August 12,
1996. Net proceeds after Offering expenses were $17.4 million. In November 1998, the Partnership entered into a $6.2 million term note. The Partnership
entered into an additional $2.0 million term note in March 1999. Proceeds from the notes were used
to acquire additional properties and equipment. The notes have a 10-year term, are collateralized
by certain properties subject to operating leases, and bear interest at rates of 8.37% and 8.50%
per annum, respectively. In September 2003, the partnership defeased approximately $1,979,000 of
these notes payable with proceeds from the sale of the Red Robin property. The partnership
incurred approximately $481,000 of yield maintenance costs and $49,000 of professional fees related
to the defeasance. Debt issuance costs of approximately $478,000 incurred in connection with the
issuance of the notes are being amortized over the life of the notes to interest expense using the
straight-line method, which is not materially different than the interest rate method. As of December 31, 2004, the Partnership had invested $14.7 million in 12 net leased real
estate properties and $943,000 in 4 performing equipment leases. The remaining net investment in
the Partnerships leased equipment is $267,000, after cumulative principal collections of $676,000.
Inclusive of the above amount, the Partnership has received approximately $3.3 million of
aggregate principal collections on its financing leases during the life of those investments. As of
December 31, 2004, the Partnership has not made any commitments to purchase additional properties
or equipment, nor does it intend to make any such commitments. The Partnership annually considers written requests to repurchase Units pursuant to the terms
of the repurchase plan set forth in the Partnerships prospectus with respect to the Offering.
Since 1997, a total of 367 Units have been repurchased by the Partnership. The Partnership is not
obligated to accept Unit repurchase requests if the General Partner determines that such purchases
would impair the capital or operation of the Partnership and the Partnership may suspend or cancel
the Repurchase Plan at any time in its sole discretion. In connection with the announcement of the
Partnerships liquidation plans, the General Partner has indefinitely suspended the Repurchase
Plan. 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




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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 the Limited Partners. Effective November 8, 2004 the limited partners consented to the Plan of Liquidation and
Dissolution, which involves the dissolution of the Partnership, the liquidation of its assets and
the winding up of its affairs. As a result, the general partner is authorized to liquidate the
assets of the Partnership and distribute the net proceeds from such liquidation after the repayment
of all debt in accordance with the partnership agreement. The Partnership is undertaking steps to
liquidate and dispose of its assets in accordance with the Plan of Liquidation and Dissolution and
has entered into an exclusive listing agreement with a third party that will oversee the marketing
and sale of the Partnerships assets. Management believes the proceeds on sale will be adequate to
pay off all liabilities and make a distribution. Critical Accounting Policies The financial statements are prepared in accordance with United States 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 judgment. 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
judgment. 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. The cost of
the properties acquired is allocated among 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. 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 judgments 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 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. 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 carrying amount of the asset exceeds the estimated fair or present
value of the asset on a discounted cash flow basis. 
 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 Acquisition
is ultimately responsible for the disclosure controls and procedures of the Partnership.
Disclosure controls and procedures are established and maintained by the




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Partnership to ensure the information required to be disclosed by the Partnership in the
reports that it files or submits pursuant to the Securities Exchange Act of 1934, as amended (the
Act), is recorded, processed, summarized and reported within the time periods specified in the
Commissions rules and forms. Mr. Beach has evaluated the effectiveness of the Partnerships
disclosure controls and procedures and has determined that, as of the end of the fiscal period
covered by this report, these controls and procedures effectively communicate the information
required to be disclosed by the Partnership in the report it files or submits under the Act in a
manner that allows timely decisions regarding such disclosures. There have been no 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 actions with regard to significant deficiencies and material
weaknesses. 
 Item 8B. Other Information. None. 
 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, 2004, 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 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 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, 2004, 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% of
the aggregate purchase prices of properties and equipment, plus an additional .00624% for each 1%
of indebtedness incurred in acquiring properties and equipment, (not to exceed a total 5%
acquisition fee). The Partnership did not incur any acquisition fees during 2004 and 2003.
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 also 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




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distributions equal to a cumulative non-compounded return of 10% per annum on their adjusted
invested capital. Management fees of $18,698 and $22,438 were incurred during 2004 and 2003,
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 2004 and 2003. 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 2004 and 2003. 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. The following exhibits are included herein or incorporated by reference: Number
    
    Exhibit2
    
    Plan of Liquidation and Dissolution (Incorporated by reference to the
Registrants Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004)4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated by
reference to the Registrants Definitive Proxy Statement on Schedule 14A, filed on
September 21, 2004 and the corresponding exhibit in the Registrants Form 10-KSB for the
year ended December 31, 1998)10.1
    
    Promissory Note dated November 28, 1998 between Registrant and National Realty
Funding L.C. (Incorporated by reference to the corresponding exhibit in the
Registrants Form 10-KSB for the year ended December 31, 1998)10.2
    
    Promissory Note dated March 31, 1999 between Registrant and National Realty
Funding L.C. (Incorporated by reference to the corresponding exhibit in the
Registrants Form 10-QSB for the quarter ended March 31, 1999)31
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002




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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 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 $51,000 and $56,000 for the years ended December 31, 2004 and
2003, 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 each of the years ended December 31,
2004 and 2003. 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 each
of the years ended December 31, 2004 and 2003. All Other Fees The aggregate fees billed to the Partnership for products and services provided by the
Partnerships principal accountant were $0 for each of the years ended December 31, 2004 and 2003.




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SIGNATURES In accordance with 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. IIIBy:
    GP3 Asset Acquisition, LLC.Its Manager By:
    /s/ Patrick. L. BeachPatrick L. BeachPresidentDate:
    March 31, 2005 In accordance with 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. BeachPatrick L. BeachPresidentof GP3 Asset Acquisition, LLC.
 Date: March 31, 2005




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




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the partners of Captec Franchise Capital Partners L.P. III We have audited the accompanying balance sheets of Captec Franchise Capital Partners L.P. III
as of December 31, 2004 and 2003 and the related statements of discontinued operations, cash flows
and changes in partners capital for the years 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly we express no such opinion. An audit also 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 audits provide a reasonable basis for our
opinion. In our opinion, the 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, 2004
and 2003, and the results of its operations and its cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Toledo, Ohio
February 18, 2005




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Captec Franchise Capital Partners L.P. III
Balance Sheets
December 31, 2004 and 2003 2004
    
    
    2003Cash and cash equivalents
    
    $
    1,556,320
    
    
    $
    537,442Restricted cash
    
    
    664,680
    
    
    
    454,540Assets Held for Sale:Operating leases, net
    
    
    12,987,161
    
    
    
    14,485,860Financing leases, net
    
    
    267,429
    
    
    
    532,700Impaired financing leases, net
    
    
    
    
    
    
    12,693Unbilled rent, net
    
    
    955,171
    
    
    
    1,013,362Deferred financing costs, net
    
    
    191,163
    
    
    
    238,954Accounts receivable
    
    
    4,228
    
    
    
    18,168Due from related parties
    
    
    151
    
    
    
    8,216Total assets
    
    $
    16,626,303
    
    
    $
    17,301,935Liabilities and Partners CapitalLiabilities Held for Sale:Notes payable
    
    $
    5,548,515
    
    
    $
    5,704,585Accounts payable and accrued expenses
    
    
    126,361
    
    
    
    120,873Security deposits held on leases
    
    
    7,106
    
    
    
    7,106Total liabilities
    
    
    5,681,982
    
    
    
    5,832,564Partners capital:Limited partners capital accounts
    
    
    10,919,279
    
    
    
    11,453,527General partners capital account
    
    
    25,042
    
    
    
    15,844Total partners capital
    
    
    10,944,321
    
    
    
    11,469,371Total liabilities and partners capital
    
    $
    16,626,303
    
    
    $
    17,301,935
 The accompanying notes are an integral part of the financial statements.




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Captec Franchise Capital Partners L.P. III
Statements of Discontinued Operations
For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Operating revenue:Rental income
    
    $
    1,786,740
    
    
    $
    2,079,891Finance income
    
    
    24,765
    
    
    
    48,711Total operating revenue
    
    
    1,811,505
    
    
    
    2,128,602Operating costs and expenses:Interest expense
    
    
    520,689
    
    
    
    645,065Depreciation
    
    
    236,947
    
    
    
    266,279Debt retirement costs
    
    
    
    
    
    
    530,035General and administrative
    
    
    221,168
    
    
    
    190,565Total operating costs and expenses
    
    
    978,804
    
    
    
    1,631,944Income from discontinued
operations before other income
    
    
    832,701
    
    
    
    496,658Other income :(Loss) gain on sale of equipment
    
    
    (3,938
    )
    
    
    13,976Gain on sale of real estate
    
    
    83,424
    
    
    
    498,240Interest and other income
    
    
    7,593
    
    
    
    18,108Total other income
    
    
    87,079
    
    
    
    530,324Net income from discontinued operations
    
    $
    919,780
    
    
    $
    1,026,982Net income from discontinued operations allocable to general partner
    
    $
    9,198
    
    
    $
    10,270Net income from discontinued operations allocable to limited partners
    
    $
    910,582
    
    
    $
    1,016,712Net income from discontinued operations per limited partnership unit
    
    $
    46.38
    
    
    $
    51.74Weighted average number of limited partnership
units outstanding
    
    
    19,633
    
    
    
    19,651
 The accompanying notes are an integral part of the financial statements.




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##### Table of Contents



Captec Franchise Capital Partners L.P. III
Statements of Changes in Partners Capital
For the Years Ended December 31, 2004 and 2003 Limited
    
    
    Limited
    
    
    General
    
    
    TotalPartners
    
    
    Partners
    
    
    Partners
    
    
    PartnersUnits
    
    
    Accounts
    
    
    Account
    
    
    CapitalBalance, January 1, 2003
    
    
    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 from discontinued operations
    
    
    
    
    
    
    1,016,712
    
    
    
    10,270
    
    
    
    1,026,982Balance, December 31, 2003
    
    
    19,633
    
    
    
    11,453,527
    
    
    
    15,844
    
    
    
    11,469,371Distributions  ($73.59 per weighted average limited partnership unit)
    
    
    
    
    
    
    (1,444,830
    )
    
    
    
    
    
    
    (1,444,830
    )Net income from discontinued operations
    
    
    
    
    
    
    910,582
    
    
    
    9,198
    
    
    
    919,780Balance, December 31, 2004
    
    
    19,633
    
    
    $
    10,919,279
    
    
    $
    25,042
    
    
    $
    10,944,321
 The accompanying notes are an integral part of the financial statements.




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Captec Franchise Capital Partners L.P. III
Statements of Cash Flows
For the Years Ended December 31, 2004 and 2003 2004
    
    
    2003Cash flows from operating activities:Net Income
from discontinued operations
    
    $
    919,780
    
    
    $
    1,026,982Adjustments to net income:Depreciation
    
    
    236,947
    
    
    
    266,279Amortization of debt issuance costs
    
    
    47,791
    
    
    
    47,791Loss (gain) on sale of equipment
    
    
    3,938
    
    
    
    (13,976
    )Gain on sale of real estate
    
    
    (83,424
    )
    
    
    (498,240
    )Increase in unbilled rent
    
    
    (49,718
    )
    
    
    (110,659
    )Decrease in accounts receivable
    
    
    13,940
    
    
    
    29,594Increase in accounts payable and accrued expenses
    
    
    5,488
    
    
    
    10,054(Increase) decrease in restricted cash
    
    
    (210,140
    )
    
    
    45,323Decrease (increase) in due from related parties
    
    
    8,065
    
    
    
    (2,483
    )Decrease in security deposits
    
    
    
    
    
    
    (24,854
    )Net cash provided by operating activities
    
    
    892,667
    
    
    
    775,811Cash flows from investing activities:Net proceeds from sale of equipment
    
    
    149,315
    
    
    
    62,711Net proceeds from sale of real estate
    
    
    1,453,086
    
    
    
    3,428,472Principal payments on financing leases
    
    
    124,710
    
    
    
    226,107Net cash provided by investing activities
    
    
    1,727,111
    
    
    
    3,717,290Cash flows from financing activities:Repayments of notes payable
    
    
    (156,070
    )
    
    
    (2,159,743
    )Repurchase of limited partnership units
    
    
    
    
    
    
    (10,607
    )Distributions to limited partners
    
    
    (1,444,830
    )
    
    
    (2,071,820
    )Net cash used in financing activities
    
    
    (1,600,900
    )
    
    
    (4,242,170
    )Net increase in cash and cash equivalents
    
    
    1,018,878
    
    
    
    250,931Cash and cash equivalents, beginning of year
    
    
    537,442
    
    
    
    286,511Cash and cash equivalents, end of year
    
    $
    1,556,320
    
    
    $
    537,442
 The accompanying notes are an integral part of the financial statements.




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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 of the Partnership were Captec Franchise Capital Corporation III
(the Corporation), a wholly-owned subsidiary of Captec Financial Group, Inc. (Captec), an
affiliate, and Patrick L. Beach, the Chairman of the Board of Directors, President and Chief
Executive Officer of the Corporation and Captec. In August 1998, Captec Net Lease Realty, Inc.
(Captec Net Lease Realty), an affiliate, acquired the General Partnership interests of the
Partnership. In December 2001, Captec Net Lease Realty merged with and into Commercial Net Lease
Realty, Inc. (Commercial Net Lease). In connection with the merger, Commercial Net Lease
agreed to sell and assign its General Partnership interest in the Partnership to GP3 Asset
Acquisition, LLC (GP3 Asset Acquisition), which is wholly-owned by Mr. Beach and is an
affiliate of Captec. Effective January 15, 2002, the limited partners consented to the transfer
of the General Partnership interest. On September 11, 2003, the Partnerships secured lender
consented to the transfer of the general partnership interest to GP3 Asset Acquisition. Upon
receipt of the secured lenders consent, the general partnership interest was immediately
transferred to GP3 Asset Acquisition. Therefore, as of September 11, 2003, GP3 Asset
Acquisition became the general partner of the Partnership. The Partnership commenced a public offering (the Offering) of up to 20,000 units (the Units)
of limited partnership interests, priced at $1,000 per Unit, by means of a Registration
Statement on Form SB-2, under the Securities Act of 1933, as amended, which was declared
effective by the Securities and Exchange Commission on August 12, 1994. The Partnership accepted
subscriptions for the minimum number of Units on January 24, 1995 and immediately commenced
operations. The Offering was fully subscribed in August 1996. Since 1997, 367 Units have been
repurchased by the Partnership pursuant to the terms of the Repurchase Plan set forth in the
Partnerships August 12, 1994 prospectus with respect to the Offering. At December 31, 2004,
the Partnership had 19,633 Units issued and outstanding. The principal investment objectives of the Partnership are: (i) preservation and protection of
capital; (ii) distribution of cash flow generated by the Partnerships leases; (iii) capital
appreciation of the Partnerships properties; (iv) generation of increased income and protection
against inflation through contractual escalation of base rents or participation in gross
revenues of tenants of the Partnerships properties; and (v) deferred taxation of cash
distributions to the limited partners. Allocation of profits, losses and cash distributions from operations and cash distributions from
sale or refinancing 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: Basis of presentation In November 2004, the limited partners approved a plan to liquidate the Partnership and dispose
of all the assets of the Partnership. With this approval, the Partnership commenced activities
to liquidate and dispose of the assets of the Partnership, which include entering into an
exclusive listing agreement with a third party, who will oversee the marketing and offering for
sale of all the real estate assets and equipment leases and loans on behalf of the Partnership.
In accordance with Financial Accounting Standards No. 144 Accounting for the Impairment or
Disposal of Long Lived-Assets (FAS 144), as a result of the approval of this plan, all assets
except cash are classified as Assets Held for Sale, all liabilities are classified as
Liabilities Held for Sale and the results of the operations in their entirety are classified as
discontinued operations for all years presented, since the operations are directly related to
the assets or liabilities held for sale. The assets of the Partnership will be sold and the
cash will be used to distribute the net proceeds from such liquidation after the repayment of
all debt in accordance with the partnership agreement.




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##### Table of Contents



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
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 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. As of December 31, 2004,
leases to Jack in the Box, Inc., Gourmet Systems, Inc. and ADL Investments,
LLC represented 13.80%, 13.37%, and 10.70%, 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 leases Land 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 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. For year ended December 31, 2004, the Partnership sold a Taco Bell 2004 property for net cash
proceeds of approximately $1.5 million, resulting in a gain of approximately $83,000. In 2003,
the Partnership sold a Red Robin property that was triggered by the tenants exercise of
purchase option clauses in the lease agreement. The property was sold for net cash proceeds of
approximately $3.4 million, resulting in a gain of approximately $498,000. There were
approximately $530,000 in debt retirement costs associated with the disposition of the Red Robin
property. All of the properties are subject to triple net leases pursuant to which 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, 2004, 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 10.9 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 increase. In accordance with the provisions of FAS 144, all assets held for sale are recorded at the lower
of carrying value or fair market value less costs to sell. Additionally, depreciation has been
ceased on these assets effective December 31, 2004.




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##### Table of Contents



Net investment in financing leases Net 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, 2004 and 2003, the Partnership has provided an allowance of
$0 and $168,636 respectively for uncollectible amounts associated with its financing leases. Note payable Notes payable have fair values equal to $5,756,176 based on fair value of debt with similar
terms reflecting current interest rates. Net income per limited partnership interest Net income per limited partnership interest is calculated using the weighted average number of
limited partnership Units outstanding during the period and the limited partners allocable
share of the net income. Distributions per limited partnership Unit Distributions 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. Income taxes No 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. The principal reasons for the difference between net income
passed through the partners for federal income tax purposes and financial statement purposes are
the recognition of straight-line rent for reporting purposes, different useful lives and
depreciation methods for real property and the provision for losses for reporting purposes
versus bad debt expense for tax purposes. Estimates The preparation of financial statements in conformity with United States generally accepted
accounting principles 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.    Distributions Cash 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.




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3.    Related Party Transactions and Agreements Pursuant to the Partnership Agreement, the General Partner receives acquisition fees of 4% of
the aggregate purchase prices of properties and equipment, plus an additional .00624% for each
1% of indebtedness incurred in acquiring properties and equipment (not to exceed a total 5%
acquisition fee). The Partnership did not incur any acquisition fees during 2004 and 2003.
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 $18,698 and $22,438 were expensed
as incurred during 2004 and 2003, 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 2004 and 2003. 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 2004 and 2003. 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 SBIC, 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. 4.    Land and Building Subject to Operating Leases The net investment in operating leases as of December 31, 2004 and 2003 is comprised of the
following: 2004
    
    
    2003Land
    
    $
    5,744,529
    
    
    $
    6,540,429Building and improvements
    
    
    8,979,998
    
    
    
    9,522,84814,724,527
    
    
    
    16,063,277Less accumulated depreciation
    
    
    (1,737,366
    )
    
    
    (1,577,417
    )Total
    
    $
    12,987,161
    
    
    $
    14,485,860
 The following is a schedule of future minimum lease payments to be received on the operating
leases as of December 31, 2004. 2005
    
    $
    1,621,0512006
    
    
    1,654,5302007
    
    
    1,682,3102008
    
    
    1,703,3402009
    
    
    1,726,622Thereafter
    
    
    9,250,580Total
    
    $
    17,638,433




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5.    Net Investment in Financing Leases The net investment in financing leases as of December 31, 2004 and 2003 is comprised of the
following: 2004
    
    
    2003Minimum lease payments to be received
    
    $
    319,641
    
    
    $
    622,509Gross investment in financing leases
    
    
    319,641
    
    
    
    622,509Less unearned income
    
    
    (52,212
    )
    
    
    (89,809
    )Net investment in financing leases
    
    $
    267,429
    
    
    $
    532,700
 The following is a schedule of future minimum lease payments to be received on the financing
leases as of December 31, 2004: 2004
    
    $
    197,3232005
    
    
    63,3802006
    
    
    7,9472007
    
    
    7,9472008
    
    
    7,947Thereafter
    
    
    35,097Total
    
    $
    319,641
 During 2004, the Partnership recognized a net loss of $3,938 due to a loss on the disposition of
an equipment lease. During 2003, the Partnership recognized a net gain of $13,976 due to a gain
on the disposition of an equipment lease. 6.    Notes Payable In November 1998, the Partnership entered into a $6.2 million term note. The note has a ten-year
term, is collateralized by certain properties subject to operating leases which have a carrying
value of approximately $7.6 million, and bears interest at a rate of 8.37% per annum. In
September 2003, the partnership defeased approximately $1,979,000 of this notes payable with
proceeds from the sale of the Red Robin property. The partnership incurred approximately
$481,000 of yield maintenance costs and $49,000 of professional fees related to the defeasance. 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 have a
carrying value of approximately $3.7 million, and bears an interest rate of 8.5% per annum. At
December 31, 2004, annual maturities on the notes in aggregate are as follows: 2005
    
    $
    169,7162006
    
    
    184,5552007
    
    
    200,6922008
    
    
    218,2392009
    
    
    4,775,313Total
    
    $
    5,548,515
 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. 7.    Subsequent Event Based upon the results of operations for the three-month period ended December 31, 2004, the
Partnership declared distributions of $275,000 to its limited partners on January 18, 2005. On February 15, 2005, the Partnership executed an Agreement of Sale (the Agreement) pursuant
to which the Partnership has agreed to sell ten of the Partnerships properties and certain real
property leases related to such properties for an aggregate purchase price of $17,125,000. Under
the Agreement, the purchase price may be adjusted if, among other things, less than all the
properties set forth in the Agreement are sold due to the exercise by tenants of certain rights
of first refusal contained in the property leases. The closing of the transactions contemplated by the Agreement is contingent upon the
satisfaction of certain customary conditions set forth more fully in the Agreement, including
satisfactory completion of due diligence review. In addition, the closing is further contingent
upon the contemporaneous closing of a separate agreement of sale between the purchaser and
Captec Franchise Capital Partners, L.P. IV (LP IV), an affiliate of the Partnership, governing
the sale of twelve properties owned by LP IV. The parties to the Agreement anticipate that the
closing will occur during the second quarter of 2005.




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Exhibit Index Number
    
    Exhibit2
    
    Plan of Liquidation and Dissolution (Incorporated by reference to the Registrants Definitive Proxy Statement on Schedule 14A, filed on September 21, 2004)4
    
    Amended Agreement of Limited Partnership of Registrant. (Incorporated by reference to the Registrants Definitive Proxy Statement on Schedule 14A, filed on September 21,
2004 and the corresponding exhibit in the Registrants Form 10-KSB for the year ended December 31, 1998)10.1
    
    Promissory Note dated November 28, 1998 between Registrant and National Realty Funding L.C. (Incorporated by reference to the corresponding exhibit in the Registrants
Form 10-KSB for the year ended December 31, 1998)10.2
    
    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