Captec Franchise Capital Partners LP Iii 10QSB 2007 Q2 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 endedJune 30, 2007

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso       Noo

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:
Statements of Net Assets in Liquidation (liquidation basis) at June 30, 2007 (unaudited) and December 31, 2006		3
Statement of Changes in Net Assets in Liquidation (liquidation basis) (unaudited) for the three and six months ended June 30, 2007		4
Statements of Discontinued Operations (going concern basis) (unaudited) for the three and six months ended June 30, 2006		5
Statements of Cash Flows (unaudited) for the six months ended June 30, 2007 (liquidation basis) and 2006 (going concern basis)		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 Certification Pursuant to Section 302		14-16
Certification Pursuant to Section 906
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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Captec Franchise Capital Partners L.P. III

Statements of Net Assets in Liquidation (Liquidation Basis)

	June 30,		December 31,
	2007		2006
Assets
Cash and cash equivalents	$	268,587	$	1,531,355
Due from related parties		151		151
Total assets		268,738		1,531,506
Liabilities and Net Assets in Liquidation
Liabilities:
Reserve for estimated costs during liquidation period		231,546		315,782
Total liabilities		231,546		315,782
Net assets in liquidation	$	37,192	$	1,215,724

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

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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

Consolidated Statement of Changes in Net Assets in
Liquidation (Liquidation Basis)

For the Three and Six Months Ended June 30, 2007

	Three Months			Six Months
	Ended			Ended
	June 30, 2007			June 30, 2007
Net assets in liquidation – beginning of period	$	313,784		$	1,215,724
Distributions to limited partners		(250,000	)		(1,150,000	)
Net change in net assets in liquidation		(26,592	)		(28,532	)
Net assets in liquidation – June 30, 2007	$	37,192		$	37,192

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

(Going Concern Basis)

	Three months			Six months
	ended			ended
	June 30,			June 30,
	2006			2006
Operating revenue:
Rental income	$	33,075		$	66,150
Operating costs and expenses:
Depreciation		5,530			11,060
Provision for impaired operating lease		34,978			34,978
General and administrative		58,104			113,350
Total operating costs and expenses		98,612			159,388
Other income:
Gain on sale of real estate		—			428,852
Interest and other income		18,835			34,295
Total other income		18,835			463,147
Net (loss) income	$	(46,702	)	$	369,909
Net (loss) allocable to general partner	$	(467	)	$	(589	)
Net (loss) income allocable to limited partners	$	(46,235	)	$	370,498
Net loss from continued operations per limited partnership unit	$	(2.35	)	$	(2.97	)
Net income from discontinued operations per limited partnership unit	$	—		$	21.84
Net (loss) income per limited partnership unit	$	(2.35	)	$	18.87
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 Cash Flows

For the six months ended June 30, 2007 and 2006

	Liquidation			Going Concern
	Basis			Basis
	2007			2006
Cash flows from operating activities:
Change in net assets in liquidation from operating activity	$	(28,532	)	$	—
Change in reserve for estimated costs during liquidation period		43,289			—
Cash payments made against reserve		(127,525	)		—
Net income		—			369,909
Adjustments to net income:
Depreciation		—			11,060
Provision for impaired operating lease					34,978
Gain on sale of real estate		—			(428,852	)
Decrease in unbilled rent		—			770
Decrease in accounts payable and accrued expenses					(507	)
Decrease in due to related parties		—			(142,002	)
Net cash used in operating activities		(112,768	)		(154,644	)
Cash flows from investing activities:
Net proceeds from sale of real estate		—			1,601,950
Net cash provided by investing activities		—			1,601,950
Cash flows from financing activities:
Distributions to limited partners		(1,150,000	)		(1,880,000	)
Net cash used in financing activities		(1,150,000	)		(1,880,000	)
Net (decrease) in cash and cash equivalents		(1,262,768	)		(432,694	)
Cash and cash equivalents, beginning of period		1,531,355			935,510
Cash and cash equivalents, end of period	$	268,587		$	502,816

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 June 30, 2007, 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, (iii) the calculation ignores the timing of repurchases, and (iv) liquidating distributions are determined based on the tax account balances of the partners per the Partnership agreement.

Effective November 8, 2004, the limited partners consented to a 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. As of December 31, 2006, the Partnership has liquidated all of its real assets in accordance with the Plan of Liquidation and Dissolution. On October 6, 2006, the Partnership entered into a contract to sell the last remaining real asset of the Partnership. Effective with the execution of the contract, and in accordance with generally accepted accounting principles, the Partnership adopted the liquidation basis of accounting as of the close of business on October 6, 2006. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts. These estimates are and will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. Under the liquidation basis of accounting, the Partnership is required to estimate and accrue the costs associated with implementing and completing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and amounts associated with the discharging known and contingent liabilities and the costs associated with cessation of the Partnership’s operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Partnership has accrued the projected costs, including miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of the Partnership. These projections could change materially and will be adjusted from time to time as projections and assumptions change.

Under the liquidation basis of accounting, the carrying amounts of the liabilities, including the estimated costs associated with implementing the liquidation, were adjusted to estimated settlement amounts. Cash balances, accounts receivable and accounts payable are presented at face value.

The sale of the remaining asset was completed on November 6, 2006. The Partnership made a liquidating distribution on January 9, 2007 of approximately $900,000, which included proceeds of this sale. The Partnership also made a liquidating distribution on June 22, 2007 of approximately $250,000 after adjusting for estimated future liabilities required for liquidation. The timing and amount of any future final liquidating distribution, if any, will depend on the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that there will be any further distributions. It is anticipated that the final distribution, if any, of the Partnership will occur by the end of the fourth quarter of 2007.

Operations for the three and six months ended June 30, 2006 have been classified as discontinued operations on a going concern basis of accounting.

The statement of net assets in liquidation (liquidation basis) of the Partnership as of June 30, 2007, the statement of changes in net assets in liquidation (liquidation basis) for the three and six months ended June 30, 2007, the statement of discontinued operations for the three and six months ended June 30, 2006 (going concern basis) and the statements of cash flows for the six months ending June 30, 2007 (liquidation basis) and 2006 (going concern basis) 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-

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	KSB for the year ended December 31, 2006 filed with the United States Securities and Exchange Commission on March 29, 2007.
2.	LAND AND BUILDING SUBJECT TO OPERATING LEASES:
	As of June 30, 2007 and December 31, 2006, the Partnership has liquidated all of its land and buildings subject to operating leases.
	Leases
	Real Estate Leases:All of the properties were subject to triple net leases pursuant to which the tenant was responsible for all expenses related to the cost of operating the Properties, including real estate taxes, insurance, maintenance and repair costs. Certain of the leases provided the tenant with one or more options to renew the lease upon expiration of the base term at predetermined or market rental rates.
	On January 3, 2006, the Partnership sold the property located in Ewing, New Jersey and the related lease for net sale proceeds of approximately $1.6 million, resulting in a gain of approximately $429,000. There were no debt retirement costs associated with the disposition of this property.

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: under the liquidation basis of accounting, the Partnership is required to estimate and accrue the costs associated with implementing and completing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and amounts associated with the discharging known and contingent liabilities and the costs associated with cessation of the Partnership’s operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Partnership has accrued the projected costs, including miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of the Partnership. These projections could change materially and will be adjusted from time to time as projections and assumptions change. 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.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2007

During the three months ended June 30, 2007, net assets in liquidation decreased by approximately $277,000. The decrease is due to distributions to limited partners of $250,000 on June 22, 2007 and an increase in estimated costs of approximately $33,300 associated with implementing the liquidation of the Partnership, offset by approximately $6,700 of interest income earned. Also, during the three months ended June 30, 2007, the Partnership made payments of approximately $63,000 which were applied against its reserve for estimated costs during the liquidation period.

Three Months Ended June 30, 2006

During the three months ended June 30, 2006, total operating revenue, consisting of rental revenues from one operating lease was approximately $33,000.

Operating expenses were approximately $99,000 for the three months ended June 30, 2006. Included in operating expenses is a provision for impaired operating lease charge of approximately $35,000. The Partnership recognized $5,530 of depreciation expense in the quarter ended June 30, 2006 for investment in operating leases. General and administrative were approximately $58,000 during the three months ended June 30, 2006, primarily for professional fees.

Other income for the quarter ended June 30, 2006 was approximately $18,800 for the quarter ended June 30, 2006 primarily due to interest income earned on cash proceeds from the sale of assets.

As a result of the foregoing, the Partnership’s net loss was approximately $47,000 for the three months ended June 30, 2006.

Six Months Ended June 30, 2007

During the six months ended June 30, 2007, net assets in liquidation decreased by approximately $1,179,000. The decrease is due to distributions to limited partners of $900,000 and $250,000 on January 9, 2007 and June 22, 2007 and an increase in estimated costs of approximately $43,300 associated with implementing the liquidation of the Partnership, offset by approximately $14,800 of interest income earned. Also, during the six months ended June 30, 2007, the Partnership made payments of approximately $128,000 which were applied against its reserve for estimated costs during the liquidation period.

Six months ended June 30, 2006

During the six months ended June 30, 2006, total operating revenue, consisting of rental revenues from one operating lease was approximately $66,000.

Operating expenses were approximately $159,000 for the six months ended June 30, 2006. Included in operating expenses is approximately $35,000 for a provision for impaired operating lease charge recorded in the quarter ended June 30, 2006. The Partnership recognized approximately $11,000 of depreciation expense for the six months ended June 30, 2006 for investment in operating leases. General and administrative were approximately $113,400 during the three months ended June 30, 2006, primarily for professional fees.

Other income for the six months ended June 30, 2006 was approximately $34,300 primarily due to interest income earned on cash proceeds from the sale of assets.

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On January 3, 2006, the Partnership sold the property located in Ewing, New Jersey and the related lease for net sale proceeds of approximately $1.6 million, resulting in a gain on the sale of real estate of approximately $429,000. There were no debt retirement costs associated with the disposition of this property.

As a result of the foregoing, the Partnership’s net income was approximately $370,000 for the six months ended June 30, 2006.

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.

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 sale of the remaining asset was completed on November 6, 2006. The Partnership made a liquidating distribution on January 9, 2007 of approximately $900,000 which included proceeds of this sale. The Partnership also made a liquidating distribution on June 22, 2007 of approximately $250,000 after adjusting for estimated future liabilities required for liquidation. The timing and amount of any future final liquidating distribution, if any, will depend on the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that will be any further distributions. It is anticipated that the final distribution, if any, of the Partnership will occur by the end of the fourth quarter of 2007.

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, 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:	August 10, 2007

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