Captec Franchise Capital Partners LP Iii 10QSB 2004 Q3 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended           September 30, 2004

OR

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

For the transition period from                   to                   

Commission file number:      33-77510-C

CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

38-3160141

(IRS Employer Identification Number)

24 Frank Lloyd Wright Drive, Lobby L, 4^th Floor
P.O. Box 544, Ann Arbor, Michigan 48106-0544

(Address of principal executive offices, including zip code)

(734) 994-5505

(Issuer’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last year)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes [X] No [  ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court: Not applicable

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Not applicable

Transitional Small Business Disclosure Format (check one) Yes [  ] No [X]

CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

Index to Form 10-QSB

Item No.	Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets, September 30, 2004 and December 31, 2003		3
Statements of Operations for the three and nine months ended September 30, 2004 and 2003		4
Statement of Changes in Partners’ Capital for the nine months ended September 30, 2004		5
Statement of Cash Flows for the nine months ended September 30, 2004 and 2003		6
Notes to Financial Statements		7-9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9-12
Item 3. Controls and Procedures		12
PART II OTHER INFORMATION
Other Information		12-14
SIGNATURES		15
EX- 31 and 32 Certifications Pursuant to Section 302(a) and 906 of the Sarbanes-Oxley Act of 2002		16-18
Certification Pursuant to Section 302
Certification Pursuant to Section 906

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CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Captec Franchise Capital Partners L.P. III

Balance Sheets

	September 30,
	2004		December 31,
	(Unaudited)		2003
Cash and cash equivalents	$	240,434	$	537,442
Restricted cash		579,829		454,540
Investment in leases:
Operating leases, net		14,307,301		14,485,860
Financing leases, net		295,410		532,700
Impaired financing leases, net		—		12,693
Accounts receivable		—		18,168
Unbilled rent, net		1,074,270		1,013,362
Due from related parties		5,016		8,216
Deferred financing costs, net		203,111		238,954
Total assets	$	16,705,371	$	17,301,935
Liabilities and Partners’ Capital
Liabilities:
Notes payable	$	5,588,768	$	5,704,585
Accounts payable and accrued expenses		144,849		120,873
Security deposits held on leases		7,106		7,106
Total liabilities		5,740,723		5,832,564
Partners’ capital:
Limited partners’ capital accounts		10,942,139		11,453,527
General partner’s capital account		22,509		15,844
Total partners’ capital		10,964,648		11,469,371
Total liabilities and partners’ capital	$	16,705,371	$	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

Statement of Operations
(Unaudited)

	Three months ended					Nine months ended
	September 30,					September 30,
	2004		2003			2004			2003
Operating revenue:
Rental income	$	448,780	$	450,614		$	1,346,326		$	1,363,101
Finance income		5,393		11,456			19,979			38,272
Total operating revenue		454,173		462,070			1,366,305			1,401,373
Operating costs and expenses:
Interest expense		129,769		132,521			391,760			401,889
Depreciation		59,520		59,520			178,559			178,559
General and administrative		42,565		38,413			132,974			111,407
Total operating costs and expenses		231,854		230,454			703,293			691,855
Income from operations		222,319		231,616			663,012			709,518
Otherincome :
(Loss) Gain on sale of equipment		—		—			(3,938	)		6,177
Interest and other income		171		267			7,406			9,745
Total other income		171		267			3,468			15,922
Income from continuing operations		222,490		231,883			666,480			725,440
Discontinued Operations:
Net gain on sale of properties		—		498,240			—			498,240
Income from discontinued operations, net		—		40,242			—			125,070
Debt Retirement Costs		—		(530,035	)		—			(530,035	)
Income from discontinued operations		—		8,447			—			93,275
Net income	$	222,490	$	240,330		$	666,480		$	818,715
Net income allocable to general partner	$	2,225	$	2,403		$	6,665		$	8,187
Net income allocable to limited partners	$	220,265	$	237,927		$	659,815		$	810,528
Net income per limited partnership unit from continuing operations		11.22		11.68			33.61			36.54
Net income per limited partnership unit from discontinued operations		—		0.43			—			4.70
Net income per limited partnership unit	$	11.22	$	12.11		$	33.61		$	41.24
Weighted average number of limited partnership units outstanding		19,633		19,653			19,633			19,653

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

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Captec Franchise Capital Partners L.P. III

Statements of Changes in Partners’ Capital
for the nine months ended September 30, 2004
(Unaudited)

	Limited		Limited			General		Total
	Partners’		Partners’			Partner’s		Partners’
	Units		Accounts			Account		Capital
Balance, January 1, 2004		19,633	$	11,453,527		$	15,844	$	11,469,371
Repurchase of limited partnership units		—		—			—		—
Distributions — ($59.65 per weighted average limited partnership unit)				(1,171,203	)		—		(1,171,203	)
Net income		—		659,815			6,665		666,480
Balance, September 30, 2004		19,633	$	10,942,139		$	22,509	$	10,964,648

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 nine months ended September 30, 2004 and 2003
(Unaudited)

	2004			2003
Cash flows from operating activities:
Net Income	$	666,480		$	818,715
Adjustments to net income:
Depreciation		178,559			206,759
Amortization of debt issuance costs		35,843			35,843
Loss (gain) on sale of equipment		3,938			(6,177	)
Gain on sale of real estate					(498,240	)
Increase in unbilled rent		(60,908	)		(74,037	)
Decrease (increase) in accounts receivable		18,168			(15,329	)
Increase (decrease) in accounts payable and accrued expenses		23,976			(22,495	)
Increase in restricted cash		(125,289	)		(141,442	)
Decrease in due from related parties		3,200			868
Decrease in security deposits		—			(24,854	)
Net cash provided by operating activities		743,967			279,611
Cash flows from investing activities:
Net proceeds from sale of equipment		149,315			24,075
Net proceeds from sale of real estate		—			3,428,472
Principal payments on financing leases		96,730			181,731
Net cash provided by investing activities		246,045			3,634,278
Cash flows from financing activities:
Repayments of notes payable		(115,817	)		(2,122,726	)
Distributions to limited partners		(1,171,203	)		(1,027,819	)
Net cash used in financing activities		(1,287,020	)		(3,150,545	)
Net (decrease) increase in cash and cash equivalents		(297,008	)		763,344
Cash and cash equivalents, beginning of year		537,442			286,511
Cash and cash equivalents, end of period	$	240,434		$	1,049,855

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 September 30, 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 activities 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.

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 are 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 may vary from this calculation as a result of a

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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.

The balance sheet of the Partnership as of September 30, 2004, the statements of operations and cash flows for the periods ending September 30, 2004 and September 30, 2003 and the statement of changes in partners’ capital for the period ending September 30, 2004 have not been audited. In the opinion of management, these unaudited financial statements contain all adjustments necessary to present fairly the financial position and results of operations and cash flows of the Partnership for the periods then ended. Results of operations for the interim periods are not necessarily indicative of results for the full year. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership’s annual report on Form 10-KSB for the year ended December 31, 2003 filed with the United States Securities and Exchange Commission on March 28, 2004.

2. LAND AND BUILDING SUBJECT TO OPERATING LEASES:

The net investment in operating leases as of September 30, 2004 is comprised of the following:

Land	$	6,540,429
Building and improvements		9,522,848
		16,063,277
Less accumulated depreciation		(1,755,976	)
Total	$	14,307,301

3. NET INVESTMENT IN FINANCING LEASES:

The net investment in financing leases as of September 30, 2004 is comprised of the following:

Minimum lease payments to be received	$	352,408
Less unearned income		(56,998	)
Net investment in financing leases	$	295,410

4. 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 an interest rate of 8.37% per annum.

In March 1999, the Partnership entered into a $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 interest at a rate of 8.5% per annum.

In September 2003, the Partnership defeased approximately $1,979,000 of these notes payable with proceeds from the sale of a 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 $477,909 were incurred in connection with the issuance of the notes, and 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 method.

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5. 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 outstanding debt required to be repaid. In 2004, the Company corrected the previous reporting of discontinued operations relating to the disposal in 2003. This reclassification has no impact on the reported net income for the three and nine months ended September 30, 2003. The following is a summary of earnings from discontinued operations:

	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Revenues:
Operating lease rents	$	—	$	76,189	$	—	$	266,661
Expenses:
Interest expense		—		28,135		—		110,725
Provision for depreciation		—		7,050		—		28,199
Management Fees		—		762		—		2,667
Income from discontinued operation, net	$	—	$	40,242	$	—	$	125,070

6. LIQUIDATION PLAN:

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. On November 8, 2004, the requisite limited partner consents for each proposal were obtained, the consent solicitation was closed and the plan of liquidation and the amendment to the partnership agreement became effective. As a result, the general partner is authorized to liquidate the assets of the Partnership and distribute the net proceeds from such liquidation in accordance with the partnership agreement, without any further action by the limited partners. The Partnership is undertaking steps to commence the liquidation in accordance with the adopted Plan of Liquidation and Dissolution.

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

When used in this discussion, the words, “intends”, “anticipates”, “expects”, and similar expressions are intended to identify forward-looking statements. 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

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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.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2004.

During the three months ended September 30, 2004, total operating revenue was approximately $454,000, compared to $462,000 for the three months ended September 30, 2003. Rental revenue from operating leases for the three months ended September 30, 2004 remained nearly unchanged. Earned income from financing leases for the three months ended September 30, 2004 decreased 52.9% to approximately $5,000 compared to approximately $11,000 for the three months ended September 30, 2003 as a result of the amortization of the principal balances on the financing leases and the disposition of two equipment leases, one in the fourth quarter of 2003 and the other in the first quarter of 2004.

Operating expenses for the three months ended September 30, 2004, remained nearly unchanged at approximately $231,000. Interest expense decreased by approximately $3,000 for the three months ended September 30, 2004. General and administrative expenses increased by approximately $4,000 as a result of increased professional fees.

As a result of the foregoing, the Partnership’s net income from continuing operations decreased 4.1% to approximately $222,000 for the three months ended September 30, 2004, compared to approximately $232,000 for the three months ended September 30, 2003.

Discontinued operations in the third quarter of 2003 reflect the sale of the Red Robin property that was sold in the third quarter of 2003. The sale was triggered by the tenant’s exercise of a purchase option clause in the lease agreement.

As a result of the foregoing, the Partnership’s net income decreased 7.4% to approximately $222,000 for the three months ended September 30, 2004, compared to approximately $240,000 for the three months ended September 30, 2003.

Nine Months Ended September 30, 2004

During the nine months ended September 30, 2004 total operating revenue was approximately $1,366,000, compared to $1,401,000 for the nine months ended September 30, 2003. Rental revenue from operating leases for the nine months ended September 30, 2004 decreased 1.2% to approximately $1.3 million, compared to $1.4 million for the nine months ended September 30, 2003. Earned income from financing leases for the nine months ended September 30, 2004 decreased 47.8% to approximately $20,000 compared to approximately $38,000 for the nine months ended September 30, 2003 as result of the amortization of the principal balances on the financing leases and the disposition of two equipment leases.

Operating expenses were approximately $703,000 for the nine months ended September 30, 2004, an increase of 1.7% compared to approximately $692,000 for the nine months ended September 30, 2003. Interest expense decreased by approximately $10,000 for the nine months ended September 30, 2004 due to repayments of notes payable. General and administrative expenses increased by approximately $22,000 primarily due to an increase in reserve for bad debts in the second quarter of 2004 and increased professional fees.

Other income for the nine months ended September 30, 2004 was approximately $3,000 compared to approximately $16,000 for the nine months ended September 30, 2003. Other income for the nine months ended September 30, 2004 is principally attributable to the sale of an equipment lease

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with an investment value of approximately $140,000 for net cash proceeds of approximately $142,000, which resulted in a gain of approximately $2,000 and miscellaneous income from late charges of approximately $7,000. These income amounts are 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. The other income for the nine months ended September 30, 2003 is primarily due to the sale of an equipment lease for net cash proceeds of approximately $24,000, resulting in a gain of approximately $6,000, and miscellaneous income from late charges of approximately $9,000.

Discontinued operations in the third quarter of 2003 reflect the sale of the Red Robin property in the third quarter of 2003. The sale was triggered by the tenant’s exercise of a purchase option clause in the lease agreement

As a result of the foregoing, the Partnership’s net income decreased 18.6.% to approximately $666,000 for the nine months ended September 30, 2004 as compared to approximately $819,000 for the nine months ended September 30, 2003.

The Partnership announced third quarter distributions of $275,000, of which $236,593 was distributed to limited partners on October 15, 2004. The balance of $38,407 was distributed on August 16, 2004 and September 15, 2004 to those partners who elected to receive distributions on a monthly basis.

LIQUIDITY AND CAPITAL COMMITMENTS

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 September 30, 2004, the Partnership had invested $16.1 million in 13 net leased real estate properties and $943,000 in 4 performing equipment leases. The remaining net investment in the Partnership’s leased equipment is $295,000, after cumulative principal collections of $648,000. 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 September 30, 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.

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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 3. 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 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 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 changes in the Partnership’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.None.

ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.None.

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.

The Partnership’s liquidation plans, as stated in the offering materials delivered in connection with the Offering, indicated that the Partnership intended to dispose of its properties and liquidate the Partnership in approximately February 2001 through January 2005, the seventh and tenth years after the Partnership commenced operations. These liquidation plans were partly based upon the then-general partners’ belief that the equipment leases would have expired by the time of liquidation, and that the return of the investment in such assets would have been received through the full payout of rental payments. As of September 30, 2004, substantially all of the Partnership’s

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investments in equipment leases have expired and the related capital returned to the limited partners.

The general partner believes that market conditions for selling retail net leased real estate are presently favorable, due to the limited supply of, and high demand for, such assets, as well as the low interest rate environment. As a result, the general partner believes that net leased real estate assets are presently being sold at high prices relative to their annual income. Although market conditions are presently favorable, the general partner believes that the current expectations for increases in interest rates could result in reduced real estate values over time, due to the effect of increased borrowing costs and increased yield expectations (in comparison to other investments). In light of these trends, the general partner has concluded that it would be preferable to sell the Partnership’s assets as soon as practicable to benefit from the existing favorable environment.

As part of the consent solicitation, the Partnership also solicited the consent of the limited partners to an amendment to the Partnership’s partnership agreement, which would permit the general partner and/or its affiliates to purchase Partnership assets under certain limited circumstances. The general partner believes that there is a chance that the general partner will be unable to sell all of the Partnership’s assets to third parties in connection with the liquidation. Since the partnership agreement prohibits distributions in kind, the Partnership cannot be liquidated until all of the Partnership’s assets are sold. Failure to sell all of the Partnership’s assets in a timely manner will result in a delay in the liquidating distribution to the partners and result in continued administrative costs to the Partnership. The general partner believes that if it is permitted to purchase these unsold assets, if any, the partners will materially benefit because they will receive their liquidating distributions sooner and less of the Partnership’s financial resources will be devoted to administrative costs incurred in connection with the continuation 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.

The Partnership has undertaken steps to commence the liquidation of the Partnership. The Partnership has entered into an exclusive listing agreement with CB Richard Ellis. CB Richard Ellis’s Net Leased Property Group will oversee the brokerage activity on behalf of the Partnership. Partnership assets will be marketed on a local, regional and national basis and to a limited number of international investors. The general partner believes this will provide for very broad exposure of the assets to potential purchasers.

ITEM 5. OTHER INFORMATION.None

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

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

Number	Exhibit
2	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 2002
32	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:

There were no reports filed on Form 8-K for the quarter ended September 30, 2004.

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SIGNATURES

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

By:	Captec Franchise Capital Partners L.P. III
	GP3 Asset Acquisition, LLC
	Its Manager
By:	/s/ Patrick L. Beach
	Patrick L. Beach
	President
Date:	November 12, 2004

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Exhibit Index

Number	Exhibit
2	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)
10.3	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 2002
32	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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