Captec Franchise Capital Partners LP Iii 10QSB 2005 Q1 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

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

For the quarterly period endedMarch 31, 2005

OR

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

For the transition period from _____ to _____

Commission file number:33-77510-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. Yesþ Noo

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) Yeso Noþ

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, March 31, 2005 and December 31, 2004		3
	Statement of Discontinued Operations for the three months ended March 31, 2005 and 2004		4
	Statement of Changes in Partners’ Capital for the three months ended March 31, 2005		5
	Statement of Cash Flows for the three months ended March 31, 2005 and 2004		6
	Notes to Financial Statements		7–9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9-11
Item 3.	Controls and Procedures		11
PART II	OTHER INFORMATION
	Other Information		12
SIGNATURES			13
CERTIFICATION Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002			14-15
Certification Pursuant to Section 302
Certification Pursuant to 18 U.S.C. Section 1350

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Captec Franchise Capital Partners L.P. III

Balance Sheets

	March 31,		December 31,
	2005		2004
	(Unaudited)
Assets
Cash and cash equivalents	$	1,432,133	$	1,556,320
Restricted cash		709,641		664,680
Assets Held for Sale:
Operating leases, net		12,987,161		12,987,161
Financing leases, net		238,825		267,429
Unbilled rent, net		978,580		955,171
Deferred financing costs, net		179,216		191,163
Accounts receivable		—		4,228
Due from related parties		151		151
Total assets	$	16,525,707	$	16,626,303
Liabilities and Partners’ Capital
Liabilities Held for Sale:
Notes payable	$	5,507,410	$	5,548,515
Accounts payable and accrued expenses		104,889		126,361
Security deposits held on leases		7,106		7,106
Total liabilities		5,619,405		5,681,982
Partners’ capital:
Limited partners’ capital accounts		10,878,863		10,919,279
General partner’s capital account		27,439		25,042
Total partners’ capital		10,906,302		10,944,321
Total liabilities and partners’ capital	$	16,525,707	$	16,626,303

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

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Captec Franchise Capital Partners L.P. III

Statement of Discontinued Operations

For the three months ended March 31, 2005 and 2004

(Unaudited)

	2005		2004
Operating revenue:
Rental income	$	413,414	$	448,766
Finance income		4,164		8,597
Total operating revenue		417,578		457,363
Operating costs and expenses:
Interest expense		128,071		131,399
Depreciation		—		59,520
General and administrative		50,002		45,382
Total operating costs and expenses		178,073		236,301
Income from discontinued operations		239,505		221,062
Other income :
Gain on sale of equipment		—		1,914
Interest and other income		222		5,655
Total other income		222		7,569
Net income from discontinued operations	$	239,727	$	228,631
Net income from discontinued operations allocable to general partner	$	2,397	$	2,286
Net income from discontinued operations allocable to limited partners	$	237,330	$	226,345
Net income from discontinued operations per limited partnership unit	$	12.09	$	11.53
Weighted average number of limited partnership units outstanding		19,633		19,633

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 three months ended March 31, 2005

(Unaudited)

	Limited		Limited			General		Total
	Partners’		Partners’			Partner’s		Partners’
	Units		Accounts			Account		Capital
Balance, December 31, 2004		19,633	$	10,919,279		$	25,042	$	10,944,321
Distributions — ($14.15 per weighted average limited partnership unit)		—		(277,746	)		—		(277,746	)
Net income from discontinued operations		—		237,330			2,397		239,727
Balance, March 31, 2005		19,633	$	10,878,863		$	27,439	$	10,906,302

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 three months ended March 31, 2005 and 2004

(Unaudited)

	2005			2004
Cash flows from operating activities:
Net Income from discontinued operations	$	239,727		$	228,631
Adjustments to net income:
Depreciation		—			59,520
Amortization of debt issuance costs		11,947			11,947
Gain on sale of equipment		—			(1,914	)
Increase in unbilled rent		(23,409	)		(28,723	)
Decrease (increase) in accounts receivable		4,228			(3,836	)
Decrease in accounts payable and accrued expenses		(21,472	)		(2,791	)
Increase in restricted cash		(44,961	)		(34,180	)
Decrease in due from related parties		—			3,200
Net cash provided by operating activities		166,060			231,854
Cash flows from investing activities:
Net proceeds from sale of equipment		—			142,475
Principal payments on financing leases		28,604			42,577
Net cash provided by investing activities		28,604			185,052
Cash flows from financing activities:
Repayments of notes payable		(41,105	)		(37,799	)
Distributions to limited partners		(277,746	)		(483,819	)
Net cash used in financing activities		(318,851	)		(521,618	)
Net decrease in cash and cash equivalents		(124,187	)		(104,712	)
Cash and cash equivalents, beginning of period		1,556,320			537,442
Cash and cash equivalents, end of period	$	1,432,133		$	432,730

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 upon formation of the Partnership were Captec Franchise Capital Corporation III (the “Corporation”), a wholly-owned subsidiary of Captec Financial Group, Inc. (“Captec”), an affiliate, and Patrick L. Beach, the Chairman of the Board of Directors, President and Chief Executive Officer of the Corporation and Captec. In August 1998, Captec Net Lease Realty, Inc. (“Captec Net Lease Realty”), an affiliate, acquired the general partnership interests of the Partnership. In December 2001, Captec Net Lease Realty merged with and into Commercial Net Lease Realty, Inc. (“Commercial Net Lease”). In connection with the merger, Commercial Net Lease agreed to sell and assign its general partnership interest in the Partnership to GP3 Asset Acquisition, LLC (“GP3 Asset Acquisition”), which is wholly-owned by Mr. Beach and is an affiliate of Captec. Effective January 15, 2002, the limited partners consented to the transfer of the general partnership interest. On September 11, 2003, the Partnership’s secured lender consented to the transfer of the general partnership interest to GP3 Asset Acquisition. Upon receipt of the secured lender’s consent, the general partnership interest was immediately transferred to GP3 Asset Acquisition. Therefore, as of September 11, 2003, GP3 Asset Acquisition became the general partner of the Partnership.
	The Partnership commenced a public offering (the “Offering”) of up to 20,000 units (the “Units”) of limited partnership interests, priced at $1,000 per Unit, by means of a Registration Statement on Form SB-2, under the Securities Act of 1933, as amended, which was declared effective by the Securities and Exchange Commission on August 12, 1994. The Partnership accepted subscriptions for the minimum number of Units on January 24, 1995 and immediately commenced operations. The Offering was fully subscribed in August 1996. Since 1997, 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 March 31, 2005, 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.
	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 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

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	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.
	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 activities included 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 and depreciation on these assets is discontinued, 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.
	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. On March 14, 2005, the Agreement was amended whereby one of the properties and certain real property leases related to such property were removed from the Agreement, and the Purchase Price was reduced to $15,375,000.
	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.
	The balance sheet of the Partnership as of March 31, 2005, the statements of discontinued operations and cash flows for the periods ending March 31, 2005 and March 31, 2004 and the statement of changes in partners’ capital for the period ending March 31, 2005 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, 2004 filed with the United States Securities and Exchange Commission on March 30, 2005.
2.	LAND AND BUILDING SUBJECT TO OPERATING LEASES:
	The net investment in operating leases as of March 31, 2005 is comprised of the following:

Land	$	5,744,529
Building and improvements		8,979,998
		14,724,527
Less accumulated depreciation		(1,737,366	)
Total	$	12,987,161

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3.	NET INVESTMENT IN FINANCING LEASES:
	The net investment in financing leases as of March 31, 2005 is comprised of the following:

Minimum lease payments to be received	$	286,874
Less unearned income		(48,049	)
Net investment in financing leases	$	238,825

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 interest at a rate of 8.37% per annum. In September 2003, the Partnership defeased approximately $1,979,000 of this note payable with proceeds from the sale of a property. The Partnership incurred approximately $481,000 of yield maintenance costs and $49,000 of professional fees related to the defeasance.
	In 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 interest at a rate of 8.5% per annum.
	Debt issuance costs of $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 rate method.

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 leased at the assumed rental rates, (iv) unexpected expenses may be incurred in the ownership of the properties, and (v) properties may not 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 obligations to update or release revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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.

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RESULTS OF OPERATIONS

Three Months Ended March 31, 2005

During the three months ended March 31, 2005, total operating revenue was approximately $418,000, compared to $457,000 for the three months ended March 31, 2004. Rental revenue from operating leases for the three months ended March 31, 2005 decreased 7.9% to approximately $413,000, compared to approximately $449,000 for the three months ended March 31, 2004, due to the sale of a Taco Bell property in December 2004. Earned income from financing leases for the three months ended March 31, 2005 decreased 51.6% to approximately $4,000, compared to approximately $9,000 for the three months ended March 31, 2004, as a result of the amortization of the principal balances on the financing leases.

Operating expenses were approximately $178,000 for the three months ended March 31, 2005, compared to approximately $236,000 for the three months ended March 31, 2004. No depreciation expense is recognized for the three months ended March 31, 2005. In accordance with FAS 144, all of the Partnership’s assets except cash are classified as Assets Held for Sale and depreciation on these assets is discontinued. Interest expense decreased by approximately $3,000 due to the repayment of notes payable. General and administrative expenses increased by approximately $5,000 due to increased professional fees.

Other income for the quarter ended March 31, 2005 is approximately $200 compared to approximately $8,000 for the prior period. Other income for the quarter ended March 31, 2004 is principally attributable to the sale of an equipment lease for net cash proceeds of approximately $142,000, and miscellaneous income from late charges of approximately $5,000.

As a result of the foregoing, the Partnership’s net income from discontinued operations increased 4.9% to approximately $240,000 for the three months ended March 31, 2005, compared to approximately $229,000 for the three months ended March 31, 2004.

The Partnership announced first quarter distributions of $240,000, of which $200,220 was distributed to its limited partners on April 15, 2005. The balance of $39,780 was distributed to limited partners who elected to receive distributions on a monthly basis on February 15, 2005 and March 15, 2005.

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 a property.

As of March 31, 2005, 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 $239,000, after cumulative principal collections of $704,000. Inclusive of the above amount, the Partnership has received approximately $3.4 million of aggregate principal collections on its financing leases during the life of those investments. As of March 31, 2005, the Partnership has not made any commitments to purchase additional properties or equipment, nor does it intend to make any such commitments.

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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 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 one or more distributions to the partners.

ITEM 3. Controls and Procedures

Mr. Beach, actingin 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, 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.

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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.None.

ITEM 5. OTHER INFORMATION.None

ITEM 6. EXHIBITS

          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 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

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has 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: May 13, 2005

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Exhibit Index

Exhibit Number	Description
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