<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

(Mark One)

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

                   For the fiscal year ended December 31, 1997

                                       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 333-9371

                    CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
             (Exact name of registrant as specified in its charter)

       Delaware                                                38-3304095
---------------------------------                           -------------------
(State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                           Identification No.)



24 Frank Lloyd Wright Drive, Lobby L, 4th Floor,
 P.O. Box 544, Ann Arbor, Michigan                                  48106-0544
--------------------------------------------------------------------------------
(Address of principal executive offices)                            (Zip Code)

Issuer's telephone number, including area code:  (734) 994-5505

Securities registered under Section 12(b) of the Exchange Act:        None

Securities registered under Section 12(g) of the Exchange Act:        None
                                                                (Title of Class)

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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
         [ X ] Yes    [   ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

At December 31, 1997 subscriptions for 15,391.986 units of limited partnership
interest (the "Units") had been accepted, representing an aggregate amount of
$15,391,986. The aggregate sales price does not reflect market value and it
reflects only the price at which the Units were offered to the public.
Currently, there is no market for the Units and no market is expected to
develop.

                       DOCUMENTS INCORPORATED BY REFERENCE
A portion of the Prospectus of the Registrant dated December 23, 1996, as
supplemented and filed pursuant to Rule 424(b) under the Securities Act of 1933,
as amended, S.E.C. File No. 333-9371, and is incorporated by reference in Parts
I and III of this Annual Report on Form 10-K.

<PAGE>   2


                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----
                                     PART I

Item 1.   Business........................................................... 1
Item 2.   Properties......................................................... 2
Item 3.   Legal Proceedings..................................................12
Item 4.   Submission of Matters to a Vote of Security Holders   .............12

                                    PART II

Item 5.   Market for Registrant's Limited Partnership Interests
          and Related Security Holder Matters................................13
Item 6.   Selected Financial Data ...........................................14
Item 7.   Management's Discussion and Analysis or Plan of Organization.......15
Item 8.   Financial Statements and Supplementary Data   .....................17
Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure................................17

                                   PART III

Item 10.  Directors, Executive Officers Promoters and Control Persons
          of the Registrant..................................................18
Item 11.  Executive Compensation.............................................19
Item 12.  Security Ownership of Certain Beneficial Owners and Management.....19
Item 13.  Certain Relationships and Related Transactions.....................19

                                   PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on
          Form 8-K...........................................................21

SIGNATURES...................................................................22

INDEX TO EXHIBITS.........................................................E - i

INDEX TO FINANCIAL STATEMENTS.............................................F - i




                                       i
<PAGE>   3


                                     PART I


ITEM 1.       BUSINESS.

       Captec Franchise Capital Partners L.P. IV (the "Partnership") is a
Delaware limited partnership formed on July 23, 1996 for the purpose of
acquiring income-producing commercial real properties ("Properties") and
equipment ("Equipment") which will be leased primarily to operators of national
chain and nationally franchised fast-food, family style and dinner house
restaurants as well as other franchised or chain businesses pursuant to leases
requiring the lessee to pay all taxes, assessments, utilities, insurance,
maintenance, and repair costs associated with such Properties (a "Triple Net
Lease") or leases differing from Triple Net Leases only in that the Partnership
is responsible for the maintenance of the exterior walls and roof of the
Property (a "Double Net Lease"). The Partnership also intends to acquire
Properties that may be leased to prominent national and regional retail concerns
("Retail Concerns") pursuant to Triple Net Leases or Double Net Leases. The
general partners of the Partnership are Captec Franchise Capital Corporation IV
(the "Managing General Partner") and Patrick L. Beach, an individual
(collectively, the "General Partners") . The Managing General Partner is a
Michigan corporation which is a wholly-owned subsidiary of Captec Financial
Group, Inc. (the "Captec Group").

       The Partnership commenced a public offering (the "Offering") of up to
30,000 units of limited partnership interest (the "Units") registered under the
Securities Act of 1933, as amended, by means of a Registration Statement on Form
S-11 which was declared effective by the Securities and Exchange Commission on
December 23, 1996. Capitalized terms not defined herein shall have the meaning
ascribed to them in the Partnership's Prospectus dated December 23, 1996.

       Through December 31, 1997, the Partnership had accepted subscriptions for
15,391.986 Units and funds totaling $15,391,986 from 911 investors. 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 Partnership properties; (iv)
generation of increased income and protection against inflation through
escalation of base rents or participation in gross revenues of lessees of
Partnership properties; and (v) deferred taxation of Partnership cash
distributions for Limited Partners.

       The Partnership expects to use not less than 75%, but not more than 90%
of Net Offering Proceeds to acquire Properties and up to 25%, but not less than
10% of Net Offering Proceeds to acquire Equipment. Of the 75% of Net Offering
Proceeds that the Partnership intends to use to acquire Properties, the
Partnership does not intend to use more than 25% of such proceeds to acquire
Properties to be leased to Retail Concerns. The Properties generally will be
leased on terms which provide for a base minimum annual rent with fixed
increases on specific dates or indexation of rent to indices such as the
Consumer Price Index and/or percentage rents. The Equipment will be leased only
pursuant to leases under which the present value of non-cancelable rental
payments payable during the initial term of the lease is at least sufficient to
permit a lessor to recover the purchase price of the equipment ("Full Payout
Leases").



                                       1
<PAGE>   4


       The Partnership competes with many other entities engaged in the purchase
of triple-net leased real estate and the purchase of equipment, some of which
have greater assets than the Partnership. In addition, the number of competing
entities and the amount of funds available for investment in these types of
properties or equipment suitable for investment by the Partnership may increase,
resulting in increased competition for such investments and possible increases
in the prices paid or less favorable lease terms on the Property or Equipment.

       The Partnership also competes with many other entities engaged in real
estate and equipment investment activities in the disposition of Property and
Equipment. The ability to locate purchasers will depend primarily on the success
of the operating properties and the desirability of the location of the
operating properties.

       The Partnership has no employees. The General Partners and their
affiliates, however, are permitted to perform services for the Partnership.


ITEM 2.       DESCRIPTION OF PROPERTIES.

The following is a summary description of the Property and Equipment leases as
of December 31, 1997.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                             LEASE INFORMATION
-------------------------------------------------------------------------------------------------------------
REAL ESTATE
                                            Concept                         Lease       Date of     Date of
             Lessee Name                     Name           Industry        Type       Commence   Expiration
             -----------                     ----           --------        ----       --------   ----------

<S>                                    <C>                 <C>             <C>         <C>        <C>
 Corral South Store #3, Inc. (1)       Golden Corral       Restaurant    Triple-Net     8/1/97     6/1/17
 Finest Foodservice, LLC               Boston Market       Restaurant    Triple-Net     4/1/97     4/1/12
 Hollywood Entertainment Corp.         Hollywood Video     Retail        Triple-Net    11/1/97     7/1/12
 Blockbuster Entertainment Corp.       Blockbuster Video   Retail        Double-Net     9/1/97     8/1/07
 Kona Restaurant Group, Inc.           Carino's            Restaurant    Triple-Net     8/1/97     8/1/14


<CAPTION>
                                       ----------------------------         --------------------------------
                                            ASSET INFORMATION                      RENTAL INFORMATION
                                       ----------------------------         --------------------------------

                                       Total Asset Cost     Asset                        Date of      Annual
                                            Including        State          Monthly     Next Rent    Rate of
             Lessee Name                Acquisition Fees   Location          Rent       Increase   Increase(3)
             -----------                ----------------   --------          ----       --------   -----------

<S>                                    <C>                 <C>             <C>         <C>            <C>
 Corral South Store #3, Inc. (1)       $   572,000             FL          $  4,996        6/1/02     1.55%
 Finest Foodservice, LLC                 1,002,560             CO             8,435        4/1/02     1.93%
 Hollywood Entertainment Corp.           1,441,440             OH            12,702    (2) 7/1/03     1.92%
 Blockbuster Entertainment Corp.         1,158,857             GA             9,831        8/1/02     2.29%
 Kona Restaurant Group, Inc.             1,664,000             TX            14,667        8/1/00     1.64%

                                       $ 5,838,857                         $ 50,631                   1.88%




<CAPTION>

EQUIPMENT
                                            Concept                         Lease       Date of     Date of
             Lessee Name                     Name           Industry        Type       Commence   Expiration
             -----------                     ----           --------        ----       --------   ----------
<S>                                    <C>                 <C>             <C>         <C>        <C>
 J.M.C. Limited Partnership            Applebee's          Restaurant    Triple-Net      3/1/97     3/1/04
 DenAmerica Corp.                      Black Eye Pea       Restaurant    Triple-Net     4/15/97    4/15/04
 Corral South Store #4, Inc.           Golden Corral       Restaurant    Triple-Net     6/15/97    6/15/02
 Girardi-Riva Enterprises, Inc.        Arby's              Restaurant    Triple-Net      7/1/97     7/1/04
 Shells Seafood Restaurants, Inc.      Shells Seafood      Restaurant    Triple-Net      6/1/97     6/1/02
 Shells Seafood Restaurants, Inc.      Shells Seafood      Restaurant    Triple-Net      6/1/97     6/1/02
 Morgan's Restaurants of PA, Inc.      KFC                 Restaurant    Triple-Net    10/15/97   10/15/04
 Virginia QSC, LLC                     Burger King         Restaurant    Triple-Net     11/1/97    11/1/04
 BBI Acquisition Co.                   Breck. Brewery      Restaurant    Triple-Net      8/1/97     8/1/04


<CAPTION>

                                                          Asset      Monthly
             Lessee Name                      Total     Location      Rent
             -----------                      -----     --------      ----
<S>                                       <C>              <C>       <C>
 J.M.C. Limited Partnership              $  418,081        UT       $  6,838
 DenAmerica Corp.                           364,000        TX          5,866
 Corral South Store #4, Inc.                526,446        FL         10,934
 Girardi-Riva Enterprises, Inc.             165,849        WA          2,727
 Shells Seafood Restaurants, Inc.           123,405        FL          2,648
 Shells Seafood Restaurants, Inc.            97,198        FL          2,086
 Morgan's Restaurants of PA, Inc.           240,261        PA          3,766
 Virginia QSC, LLC                          293,620        VA          4,862
 BBI Acquisition Co.                        822,640        CO         13,605

                                         $3,051,501                 $ 53,332

                                         $8,890,359                 $103,963
</TABLE>

(1)  The property is owned jointly between CFCP LPIII and LPIV. LPIV owns
     34.375% of the total assets.
(2)  Rent Increase equals the lesser of CPI or 10%.
(3)  Rate of increase calculated on a compounded annual basis.

                                       2

<PAGE>   5



REAL ESTATE

       Boston Market Restaurant, Rochester, Minnesota (Land and Building): On
March 10, 1997 the Partnership acquired the land and 3,035 square foot building
comprising a Boston Market restaurant located at 1201 S. Broadway, Rochester,
Minnesota (the "Minnesota Property"). The Minnesota Property was constructed for
its present use in November of 1995 and was fully operational at the time of the
purchase. The Minnesota Property was purchased from, and leased back to Finest
Foodservice L.L.C., a Delaware limited liability company ("Finest Foodservice").
Finest Foodservice operates casual dining restaurants under the primary trade
name of Boston Market. The Partnership purchased the Minnesota Property for a
purchase price of $964,000.

       Finest Foodservice and the Partnership have entered into a lease (the
"Finest Foodservice Lease"), which is an absolute net lease, whereby Finest
Foodservice is responsible for all expenses related to the Minnesota Property,
including real estate taxes, insurance, maintenance and repair costs. The Finest
Foodservice Lease term expires on April 1, 2012 with five renewal options of
five years each. Annual rental in the five years is $101,220 and is increased by
ten percent every five years therafter. During the Finest Foodservice Lease
years 31-40, the annual rent will be determined by the fair market value at the
beginning of the 31st and 36th Finest Foodservice Lease years.

       Beginning in the sixth lease year, and in addition to the annual rental
provided above, Finest Foodservice will pay percentage rent on an annual basis
equal to the difference between five percent of "gross sales" (as defined in the
Finest Foodservice Lease) during such lease year less the annual rental payable
for such lease year.

       Boston Chicken, Inc., a Delaware corporation (the "Option Holder"), has
an option to purchase and first right of refusal to purchase the Minnesota
Property. The Option Holder has the right to purchase the Minnesota Property on
the same terms and conditions as set forth in the offer or the Option Holder may
elect an alternate purchase price as follows: (a) during the first and second
lease years, an alternate purchase price equal to the total annual rental
payable for the lease year subsequent to the lease year in which the option is
exercised divided by 9.462%; (b) during the third lease year, an alternate
purchase price equal to the total annual rental for the third lease year divided
by 9.978%; (c) during the fourth lease year, an alternative purchase price equal
to the annual rental for the fourth lease year divided by 9.785%; and (d) during
the fifth lease year, an alternative purchase price equal to the annual rental
for the fifth lease year divided by 9.580%.

       The Option Holder has the option to purchase the Minnesota Property at
the following times and option prices:

<TABLE>
<CAPTION>
        PERIOD                                    OPTION PRICE
<S>                                               <C>
        Lease Years 6-8                           Annual rent payable
                                                  for the Lease Year subsequent
                                                  to the Lease Year in which the
                                                  option is exercised divided by
                                                  ten percent (10%)
        Last  ninety (90) days of the 15th        Annual rent payable for the 16th Lease Year divided by
        Lease Year                                ten percent (10%)
        Last  ninety (90) days of the 30th        The lesser of (i) fair  market value or (ii) the annual
        Lease Year                                rent payable for the 31st Lease  Year
</TABLE>



                                       3
<PAGE>   6


<TABLE>
<S>                                               <C>
                                                  divided by ten percent (10%)
        Last ninety (90) days of the 40th         The lesser of (i) fair market value or  (ii) one hundred
        Lease Year                                ten percent (110%) of the annual rent payable for the
                                                  40th Lease Year divided by ten percent (10%)
</TABLE>

       The current annual rent per square foot for the Minnesota Property is
$33.35 per square foot. The depreciable basis of the Minnesota Property for
federal tax purposes is $614,000 and it will be depreciated using the straight
line method over 39 years, a rate of $15,744 per year. In addition, Finest
Foodservice has paid to the same affiliate a closing fee equal to $4,820 as
provided for in the Partnership Agreement.

       The Finest Foodservice Lease contains a substitution option that provides
in the event that Finest Foodservice determines the Minnesota Property is
inadequate or unprofitable or is rendered unsuitable by condemnation or
casualty, Finest Foodservice, subject to the Partnership's approval, may
substitute another property of equal or greater current value having a Boston
Market restaurant located thereon. All obligations under the Finest Foodservice
Lease, including Annual Rental, percentage rent and taxes attributable to rent
and the Minnesota property, are unconditionally guaranteed by Boston Chicken,
Inc., a Delaware corporation.

       Carino's Italian Kitchen, El Paso, Texas (Land and Building): On July 25,
1997 the Partnership acquired the land and 6,257 square foot building comprising
a Carino's Italian Kitchen restaurant located at 675 Sunland Park Drive, El
Paso, Texas (the "Carino's Property"). The Carino's Property was constructed for
its present use in 1995 and was fully operational at the time of the purchase.
The Carino's Property was purchased from and leased back to Kona Restaurant
Group, Inc., a Delaware corporation ("Kona Group"). Kona Group operates casual
dining restaurants under the primary trade names of Carino's Italian Kitchen and
Kona Ranch Steak House. The Partnership purchased a fee simple interest in the
Carino's Property for a purchase price of $1,600,000.

       Kona Group and the Partnership have entered into a lease (the "Carino's
Lease"), which is an absolute net lease, whereby Kona Group is responsible for
all expenses related to the Carino's Property including real estate taxes,
insurance, maintenance and repair costs. The Carino's Lease term expires on July
31, 2014 with one renewal option of six years and one renewal option of seven
years. The rent in the first three years of the Carino's Lease is $176,000 per
year, or $14,667 per month. The annual rent will increase by five percent (5%)
on the August 1, 2000 and every three years thereafter.

       Kona Group has an option to purchase the Carino's Property during the
sixty-first (61st) full month of the Carino's Lease. In the event that Kona
Group elects to exercise the option to purchase in the sixty-first full month of
the Carino's Lease, the option price is $1,940,400.

       The current annual rent per square foot for the Carino's Property is
$28.13 per square foot. The depreciable basis of the Carino's Property for
federal tax purposes is $500,000 and it will be depreciated using the straight
line method over 39 years, a rate of $12,821 per year.

       Golden Corral Restaurant, Lakeland, Florida (Land and Building): On July
25, 1997, the Partnership acquired an undivided 34.375% interest as a tenant in
common with Captec Franchise Capital Partners L.P. III, a Delaware limited
partnership and affiliate of the Managing General Partner ("Captec III"), in the
land and 8,825 square foot building located at 4532 South Florida Avenue,
Lakeland, Florida (the "Lakeland Property"). The Lakeland Property was
constructed for its present

                                       4

<PAGE>   7



use in May of 1997 and leased to Corral South Store 3, Inc., a Florida
corporation ("Corral South 3"). Corral South 3 operates casual dining
restaurants under the primary trade name of Golden Corral Restaurants. Captec
III purchased the Lakeland Property for a total purchase price of $1,600,000 and
sold the 34.375% interest to the Partnership for $550,000.

       Corral South 3 and Captec III have entered into a lease (the "Corral
South 3 Lease"), which is an absolute net lease, whereby Corral South 3 is
responsible for all expenses related to the Lakeland Property including real
estate taxes, insurance, maintenance and repair costs. The Corral South 3 Lease
term commenced on June 1, 1997 and expires fifteen years thereafter. The Corral
South 3 Lease has two renewal options of five years each. The initial annual
rent is $174,400, or $14,533 per month, and increases by 8% on the five-year
anniversary of the Corral South 3 Lease and every five years thereafter
(including any renewal options). The Partnership's pro-rata share of the initial
annual rent will be $59,950 or $4,996 per month. The total initial annual rent
per square foot on the Lakeland Property is $19.76. The depreciable basis of the
Lakeland Property for federal tax purposes is $1,080,000 and it will be
depreciated using the straight line method over 39 years, a rate of $27,692 per
year. The Partnership's pro-rata share of depreciation will be $9,519 per year.

       The obligations under the Corral South 3 Lease are guaranteed for the
benefit of the Partnership by David C. Brown, an individual. David C. Brown is
the sole stockholder of Corral South 3. Corral South 3 has an option to purchase
the Lakeland Property commencing on the sixty-first month of the Corral South 3
Lease. In the event that Corral South 3 elects to exercise the option to
purchase, the option price shall be $1,833,520.

       Blockbuster Video, Riverdale, Georgia (Land and Building): On August 8,
1997 the Partnership acquired the land and 6,500 square foot building comprising
a Blockbuster Video located at 8529 Georgia Highway 85, Riverdale, Georgia (the
"Blockbuster Property"). The Blockbuster Property was constructed for its
present use in 1995 and was fully operational at the time of the purchase. The
Blockbuster Property was purchased from Atlantis Properties, L.L.C., a Georgia
limited liability company ("Atlantis Properties"), for a purchase price of
$1,114,286.

       The Partnership purchased the Blockbuster Property subject to a lease
dated April 4, 1997 (the "Blockbuster Lease") between Atlantis Properties and
Blockbuster Videos, Inc., a Texas corporation ("Blockbuster"), which is a net
lease, whereby Blockbuster is responsible for most expenses related to the
Blockbuster Property including real estate taxes, insurance, maintenance and
repair costs, except that the Partnership will be responsible for the repair and
maintenance of the structural systems including the roof, load-bearing walls and
floor slabs and exterior masonry walls and foundations. The Blockbuster Lease
term expires on June 30, 2007 with three renewal options of five years each. The
annual rental is payable according to the following schedule:

<TABLE>
<CAPTION>
                  PERIOD                                    ANNUAL RENTAL
<S>               <C>                                       <C>
                  Lease Years 1-5                           $117,975
                  Lease Years 6-10                          $132,145
                  Lease Years 11-15                         $145,360
                  Lease Years 16-20                         $159,900
                  Lease Years 21-25                         $175,890
</TABLE>

Viacom International, Inc., a Delaware corporation, unconditionally and
irrevocably guaranteed the full and complete performance of the Blockbuster
Lease.

                                       5


<PAGE>   8



       The current annual rent per square foot for the Blockbuster Property is
$18.15 per square foot. The depreciable basis of the Blockbuster Property for
federal tax purposes is $754,286 and it will be depreciated using the straight
line method over 39 years, a rate of $19,341 per year.


       Hollywood Video, Hamilton, Ohio (Land and Building): On October 14, 1997,
the Partnership acquired the land and 7,488 square foot building comprising a
Hollywood Video located at 1491 Main Street, Hamilton, Ohio (the "Hollywood
Video Property"). The Hollywood Video Property was constructed for its present
use in 1997 and was fully operational at the time of the purchase. The Hollywood
Video Property was purchased from Blue Freedom Holdings, LLC, a Kentucky limited
liability company, and leased to Hollywood Entertainment Corporation, an Oregon
corporation ("Hollywood Entertainment"). The Partnership purchased a fee simple
interest in the Hollywood Video Property for a purchase price of $1,386,000

       The Partnership purchased the property subject to a lease between Blue
Freedom Holdings, LLC and Hollywood Entertainment which commenced on July 24,
1997 (the "Hollywood Video Lease"). The Hollywood Video Lease is an absolute net
lease, whereby Hollywood Entertainment is responsible for all expenses related
to the Hollywood Video Property including real estate taxes, insurance,
maintenance and repair costs. The Hollywood Video Lease term expires on July 30,
2012 with three renewal options of five years each. The rent in the first
through fifth years of the Hollywood Video Lease is $152,418 per year, or
$12,701.50 per month. The annual rent will be adjusted on the first day of the
sixty-first month and every sixty months thereafter by the lesser of the
Percentage CPI Increase, as defined in the Hollywood Video Lease, or ten percent
(10%).

       The current annual rent per square foot for the Hollywood Video Property
is $20.35 per square foot. The depreciable basis of the Hollywood Video Property
for federal tax purposes is $811,000 and it will be depreciated using the
straight line method over 39 years, a rate of $20,795 per year.


EQUIPMENT

       Applebee's Neighborhood Grill & Bar Equipment, Midvale, Utah: On March
31, 1997, the Partnership acquired, effective as of February 20, 1997,
restaurant equipment (the "Applebee's Equipment") to be used in the operation of
an Applebee's Neighborhood Grill & Bar, located at 7045 South 1300 East,
Midvale, Utah for $402,000.00. The Applebee's Equipment was acquired from Captec
Financial Group, Inc. ("Captec"), an affiliate of the General Partners, which
purchased the Applebee's Equipment from various vendors for a total cost of
$402,000 and leased it to J.M.C. Limited Partnership, a Utah limited
partnership, DBA Applebees ( "JMC"). JMC and Captec entered into the
Partnership's standard form of lease dated March 1, 1997 (the "JMC Lease"). The
Partnership's standard form of equipment lease provides that the tenant is
responsible for all expenses related to such equipment, including taxes,
insurance, maintenance and repair costs. JMC owns and operates the Applebee's
Neighborhood Grill & Bar restaurant under a franchise agreement.

       On March 31, 1997, Captec assigned the JMC Lease to the Partnership,
effective as of February 20, 1997. The lease term is 84 months and the annual
rent is $82,056 payable in monthly installments of $6,838. The annual rent
remains fixed for the entire JMC Lease term. The JMC Lease is guaranteed by John
B. Prince, an individual, and William Tell, Inc., a Utah corporation. At the end
of the JMC Lease term, upon at least 90 days prior irrevocable notice to the
Partnership, JMC may purchase the Equipment for the lesser of fair market value
or $40,200.



                                       6

<PAGE>   9



       Black-Eyed Pea Equipment, Plano, Texas: On April 3, 1997, the Partnership
acquired restaurant equipment (the "Black-Eyed Pea Equipment") to be used in the
operation of a Black-Eyed Pea restaurant located at 1905 Preston Road, Plano,
Texas for $350,000. The Black-Eyed Pea Equipment was acquired from DenAmerica
Corp., which purchased the Black-Eyed Pea Equipment from various vendors for a
total cost of $350,000. The Partnership leased the Black-Eyed Pea Equipment to
DenAmerica Corporation, a Georgia corporation d/b/a Black-Eyed Pea
("DenAmerica"), by entering into a lease dated as of April 15, 1997 (the
"DenAmerica Lease") with DenAmerica on the Partnership's standard form of
equipment lease. DenAmerica operates and franchises restaurants under the
primary trade names of Denny's and Black-Eyed Pea.

       The lease term is 84 months and the minimum annual rent is $70,392
payable in monthly installments of $5,866. The annual rent remains fixed for the
entire DenAmerica Lease term. At the end of the DenAmerica Lease term, upon at
least 90 days prior irrevocable notice to the Partnership, DenAmerica may
purchase the Black-Eyed Equipment for its fair market value at the date of the
exercise of the option. The Partnership consented to a sublease between
DenAmerica and Texas BEP., LP., a Texas limited partnership, on the same terms
and conditions as the DenAmerica Lease. DenAmerica remains the obligor under the
DenAmerica Lease.

       Jacksonville Shells Seafood Equipment, Jacksonville, Florida: On May
27,1997, the Partnership acquired restaurant equipment to be used in the
operation of a Shells Seafood Restaurant, located at 9965 San Jose Blvd.,
Jacksonville, Florida (the "Jacksonville Shells Equipment"). The Jacksonville
Shells Equipment was purchased from various vendors for a total cost of
$118,658.30 and leased to Shells Seafood Restaurants, Inc., a Delaware
corporation ("Shells Seafood"). Shells Seafood owns and operates Shells Seafood
Restaurants.

       The Partnership and Shells Seafood entered into the Partnership's
standard form of equipment lease commencing on June 1, 1997 (the "Jacksonville
Shells Seafood Lease"). The lease term is 60 months and the minimum annual rent
is $31,781 payable in monthly installments of $2,648. The annual rent remains
fixed for the entire Jacksonville Shells Seafood Lease term. At the end of the
Jacksonville Shells Seafood Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, Shells Seafood may purchase the Jacksonville Shells
Equipment for $11,866.

       Shells Seafood Equipment, Winter Haven, Florida: On May 27,1997, the
Partnership acquired restaurant equipment to be used in the operation of a
Shells Seafood Restaurant, located at 1551 3rd Street, SW, Winter Haven, Florida
(the "Winter Haven Shells Equipment"). The Winter Haven Shells Equipment was
purchased from various vendors for a total cost of $93,460 and leased to Shells
Seafood.

       The Partnership and Shells Seafood entered into the Partnership's
standard form of equipment lease commencing on June 1, 1997 (the "Winter Haven
Shells Seafood Lease"). The lease term is 60 months and the minimum annual rent
is $25,032 payable in monthly installments of $2,086 on the 1st day of each
month. The annual rent remains fixed for the entire Winter Haven Shells Lease
term. At the end of the Winter Haven Shells Seafood Lease term, upon at least 90
days prior irrevocable notice to the Partnership, Shells Seafood may purchase
the Winter Haven Shells Equipment for $9,346.

       Golden Corral Equipment, Temple Terrace, Florida: On June 4,1997, the
Partnership acquired restaurant equipment to be used in the operation of a
Golden Corral Restaurant located at 11801 56th Street North, Temple Terrace,
Florida (the "Golden Corral Equipment"). The Golden Corral Equipment was
purchased from various vendors for a total cost of $506,198 and leased to Corral
South Store 4,



                                       7

<PAGE>   10



Inc. a Florida corporation dba Golden Corral Restaurant ("Corral South 4").
Corral South 4 owns and operates the Golden Corral Restaurant under a franchise
agreement.

       The Partnership and Corral South 4 entered into the Partnership's
standard form of equipment lease commencing on June 15, 1997 (the "Corral South
4 Lease"). The lease term is 60 months and the annual rent is $131,207 payable
in monthly installments of $10,934 on the 15th day of each month. The annual
rent remains fixed for the entire Golden Corral Lease term. All obligations
under the Corral South 4 Lease are guaranteed by David C. Brown, an individual.
At the end of the Corral South 4 Lease term, upon at least 90 days prior
irrevocable notice to the Partnership, Corral South 4 may purchase the Golden
Corral Equipment for $1.00

       Arby's Equipment Pasco, Washington: On June 25,1997, the Partnership
acquired restaurant equipment to be used in the operation of an Arby's
restaurant, located at 2411 West Court, Pasco, Washington (the "Arby's
Equipment"). The Arby's Equipment was acquired from various vendors for a total
cost of $159,470.62 and leased to Girardi-Riva Enterprises, Inc., an Arizona
corporation dba Arby's Restaurant ("Girardi-Riva"). Girardi-Riva owns and
operates the Arby's restaurant under a franchise agreement.

       The Partnership and Girardi-Riva entered into the Partnership's standard
form of equipment lease (the "Girardi-Riva Lease") commencing July 1, 1997. The
lease term is 84 months and the minimum annual rent is $32,724 payable in
monthly installments of $2,727. The annual rent remains fixed for the entire
Girardi-Riva Lease term. All obligations under the Girardi-Riva Lease are
jointly and severally guaranteed by Richard Riva, Sharri Riva, Thomas Girardi
and Kathy Girardi. At the end of the Girardi-Riva Lease term, upon at least 90
days prior irrevocable notice to the Partnership, Girardi-Riva may purchase the
Arby's Equipment for $1.00.

       Breckenridge Brewery & Pub Equipment, Breckinridge, Colorado: On July 9,
1997, the Partnership purchased restaurant equipment to be used in the operation
of an Breckenridge Brewery & Pub, located at 600 South Main, Breckenridge,
Colorado (the "Breckenridge Equipment") for $791,000. The Breckenridge Equipment
was acquired from, and leased back to BBI Acquisition Co., a Colorado
corporation dba Breckenridge Brewery & Pub ("BBI").

       The Partnership and BBI entered into the Partnership's standard form of
equipment lease ("BBI Lease") commencing August 1, 1997. The lease term is 84
months and the minimum annual rent is $163,262 payable in monthly installments
of $13,605.20. The annual rent remains fixed for the entire BBI Lease term. All
obligations under the BBI Lease are unconditionally guaranteed by Breckenridge
Holding Company, a Colorado corporation. At the end of the BBI Lease term, upon
at least 90 days prior irrevocable notice to the Partnership, BBI may purchase
the Breckenridge Equipment for $1.00.

       Burger King Equipment, Colonial Heights, Virginia: On July 25,1997, the
Partnership made an initial disbursement of $30,600 for restaurant equipment to
be used in the operation of a Burger King restaurant, located at 401 Southpark
Blvd., Colonial Heights, Virginia ("Burger King Equipment"). The final
disbursement was made on November 1, 1997. The Burger King Equipment was
acquired from various vendors for a total cost of $282,327 and leased to
Virginia QSC, LLC, a Delaware limited liability company dba Burger King
("Virginia QSC"). Virginia QSC owns and operates the Burger King restaurant
under a franchise agreement.

       The Partnership and Virginia QSC entered into a Progress Payment
Agreement dated July 15, 1997, ("Agreement") whereby the Partnership provided
disbursements of down payments and interim payments to pay approved costs
associated with the purchase of the Burger King Equipment. Virginia


                                       8

<PAGE>   11




QSC paid to the Partnership a daily progress rental payment for each day that
any down payment and/or interim payment remained outstanding. The daily progress
payment was equal to .00031944 times the total amount outstanding and was paid
from July 25, 1997 to October 22, 1997. By October 22, 1997, all of the Burger
King Equipment had been delivered, installed, and accepted by Virginia QSC.

       The Partnership and Virginia QSC entered into the Partnership's standard
form of equipment lease (the "Virginia QSC Lease") dated July 15, 1997 and
amended October 22, 1997 and November 1, 1997. The base lease term is 84 months
and commenced on November 1, 1997. Under the terms of the Virginia QSC Lease,
the minimum annual rent is $58,340 and is payable in monthly installments of
$4,862. The annual rent remains fixed for the entire Virginia QSC Lease term.
All obligations under the Virginia QSC Lease are jointly and severally
unconditionally guaranteed by Justin Hathaway, Steven Porath and Alan Buford,
each of whom is a member of Virginia QSC. At the end of the Virginia QSC Lease
term, upon at least 90 days prior irrevocable notice to the Partnership,
Virginia QSC may purchase the Burger King Equipment for $1.00.

       KFC Equipment, Greensburg, Pennsylvania: On October 15,1997, the
Partnership acquired restaurant equipment to be used in the operation of a KFC
restaurant, located at 975 E. Pittsburgh Street, Greensburg, Pennsylvania (the
"KFC Equipment"). The KFC Equipment was acquired from various vendors for a
total cost of $231,021 and leased to Morgan's Restaurants of Pennsylvania, Inc.,
a Pennsylvania corporation dba KFC Restaurant ("Morgan's"). Morgan's owns and
operates the KFC restaurant under a franchise agreement.

       The Partnership and Morgan's entered into the Partnership's standard form
of equipment lease (the "Morgan's Lease") commencing on October 15, 1997. The
lease term is 84 months and the minimum annual rent is $45,188 payable in
monthly installments of $3,766. The annual rent remains fixed for the entire
Morgan's Lease term. All obligations under the Morgan's Lease are
unconditionally guaranteed by Morgan's Foods, Inc., an Ohio corporation and
parent company of Morgan's. At the end of the Morgan's Lease term, upon at least
90 days prior irrevocable notice to the Partnership, Morgan's may purchase the
KFC Equipment for $1.00.

Property and Equipment Acquisitions-General

       With respect to each of the Properties, an affiliate of the Managing
General Partner (i) considered factors such as the potential value of the site,
the financial condition and business and operating history of the tenant, and
demographic data for the area in which the Property is located, (ii) analyzed
demographic, geographic and market diversification data for the area in which
each Property is located and reviewed an independent MAI appraisal of each
Property and the analysis regarding comparable properties contained therein, and
(iii) negotiated the purchase price.

       The Partnership purchased each Property and Equipment package with cash
from Offering proceeds. It is anticipated that each such Property and Equipment
package will be leveraged as provided for in the Prospectus. However, the
Partnership presently does not have a financing commitment. With respect to each
of the Properties and the Equipment packages, the General Partners believe that
the amount of insurance carried by each lessee is adequate. With respect to all
Equipment leases, each provides that the lessee is responsible for all expenses
related to the Equipment including taxes, insurance, maintenance and repair
costs.

       Properties will be selected for acquisition based on an examination and
evaluation by the General Partners or an Affiliate of the potential value of the
site, the financial condition and business

                                       9

<PAGE>   12




history of the proposed lessee, the demographics of the area in which the
Property is located or to be located, the proposed purchase price and lease
terms, geographic and market diversification, and potential operating results.
Similar analysis will be utilized in selecting Equipment. In certain cases, the
Partnership may become a co-venturer or general partner in a joint venture or
general partnership which will own a Property or Equipment. (See discussion
below.) The Partnership may also acquire Property through the acquisition of
substantially all of the interests of an entity which in turn owns a Property.
The Partnership may participate in sale-leaseback transactions, but expects to
do so only with respect to Properties and then only when the Property has an
established track record. The Partnership anticipates that only fee interests in
real property will be acquired, although other interests (including acquisitions
of buildings, with the underlying land being subject to a long-term ground
lease) may be acquired if it is deemed to be advantageous to the Partnership. In
each such case, the Partnership's cost to purchase an interest in such Property
and/or Equipment would decrease and the total number of Properties and/or
Equipment which the Partnership would be able to acquire will increase.

       In making investments, the General Partners will consider relevant
factors, including the condition and proposed use of the Property and/or
Equipment, income-producing capacity, the financial condition of the lessee, and
with respect to Properties, the prospects for long-term appreciation. In no
event will Property or Equipment be acquired unless a satisfactory lease
commitment has been obtained from a suitable lessee as further described below.

       In selecting specific Properties and lessees, the General Partners
generally will require the following:

          (i)      Base annual rent will provide a specified minimum return on
                   the contract purchase price of the Property; the majority of
                   the leases will provide for fixed increases on specific dates
                   or indexation of rents to indices such as the Consumer Price
                   Index. Leases may also provide for percentage rents
                   calculated to provide rents equal to a percentage of the
                   lessee's gross sales if greater than the base rent; and

          (ii)     The initial lease will have a term of between seven and
                   twenty years.

       In selecting specific Equipment, the General Partners typically will
require the following:

          (i)      Full Payout Leases providing for fixed rents structured to
                   return 100% of the cost of the Equipment plus yield a return
                   equivalent to market interest rates over the lease term; and

          (ii)     The leases are expected to have terms of five to seven years
                   with residual values of Equipment at the end of such terms
                   expected to be minimal (approximately 10% of original cost).

       The terms and conditions of any lease entered into by the Partnership
with regard to a tenant may vary substantially from those described herein.
However, all of the leases will be Triple Net, which means that the lessee will
be required to pay all real estate and other taxes and assessments, utilities,
insurance and cost of maintenance and repairs, or Double Net leases, which
differs from a Triple Net Lease only in that the Partnership is responsible for
the maintenance of the exterior walls and roof of the Property.


                                       10


<PAGE>   13



       The Partnership may invest in partnerships or joint venture arrangements
with persons formed by the General Partners or any of their Affiliates if all of
the following conditions are met: (i) the two partnerships or entities have
substantially identical investment objectives; (ii) the Partnership will not
incur any duplicate property management or other fees; (iii) the compensation to
the General Partners and their Affiliates must be substantially identical in
both partnerships or entities; (iv) the Partnership must have a right of first
refusal to buy the interest of the other joint venture partner if said other
partner wishes to sell the property held by such joint venture; and (v) the
investment by each such joint venture partner must be on substantially the same
terms and conditions.

       The Partnership may invest in partnerships or joint venture arrangements
with persons other than Affiliated partnerships only under the following
conditions: (a) there are no duplicate property management or other fees; (b)
the investment of each entity is on substantially the same terms and conditions;
(c) the Partnership obtains a controlling interest in the partnership or joint
venture; and (d) the Partnership must have a right of first refusal to buy if
its joint venture partner wishes to sell the Property or Equipment held in such
joint venture.

       In no event will the Partnership reinvest Net Sale or Refinancing
Proceeds received commencing four years after the date on which the Partnership
terminates its Offering. It is expected that leases of certain Properties may
give the lessee the right to purchase the Property seven to ten years after the
date of the lease at the Property's fair market value as determined by an
independent appraisal at the time of sale. Additionally, certain leases may
grant the lessee an option to purchase a percentage interest in the Property at
a price based on the fair market value as determined by an independent appraisal
at the time the option is exercised. The determination of whether particular
Properties or Equipment should be sold or otherwise disposed of will be made
after consideration of relevant factors, including performance or projected
performance of the Property or Equipment and market conditions, with a view
toward achieving the principal investment objectives of the Partnership.

       The Partnership's general policy will be to sell Properties and/or
Equipment on an all cash basis. However, under certain circumstances a purchase
money obligation secured by a lien on the Property or Equipment may be taken as
part payment and there are no limitations or restrictions on the Partnership
taking such purchase money obligations. The terms of payment to the Partnership
will be affected by custom in the area in which the Property or Equipment is
located and the then prevailing economic conditions. To the extent the
Partnership receives notes and other property in lieu of cash, such proceeds
(other than any interest payable thereon) will be excluded from Net Sale or
Refinancing Proceeds until and to the extent the notes or other property are
actually paid, sold, refinanced or otherwise disposed of and, therefore, the
distribution of the proceeds of a sale to the Limited Partners may be delayed
until such time. In some cases, the Partnership may receive payments (cash and
other property) in the year of sale in an amount less than the selling price,
with subsequent payments being spread over a number of years. It is possible
that such purchase money obligations would be structured to provide for a
"balloon" payment of the entire balance of principal at maturity.

       The Partnership intends to acquire Properties and Equipment using
leverage, on a portfolio basis, of up to 35% of the sum of gross proceeds of the
Offering and the aggregate amount of Partnership indebtedness secured by
Partnership Assets (approximately 40% of the aggregate purchase prices of all
Properties and Equipment). Notwithstanding the foregoing, the Partnership may
incur indebtedness on single Properties or Equipment packages equal to up to 80%
of the purchase price thereof so long as aggregate portfolio indebtedness does
not exceed the above-referenced amount. Borrowings for acquisition or
improvement will cause tax-exempt investors to recognize unrelated business
taxable income, although they will be allowed to offset such income with
deductions related thereto.


                                       11


<PAGE>   14




ITEM 3.     LEGAL PROCEEDINGS.

       The Partnership is not a party to any material legal proceeding nor, to
the best of its knowledge, are any such proceedings either pending or
threatened.


ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

       No matters were submitted to a vote of security holders during the
Partnership's most recent fiscal year covered by this report. However, the
Partnership intends to solicit the approval of the Limited Partners for the sale
of the general partnership interest held by the General Partners to Captec Net
Lease Realty, Inc., an Affiliate of the General Partners. The transfer of such
general partnership interests is subject to the approval of the majority of the
Limited Partners, and the Limited Partners will receive notice of and an
opportunity to approve any transfer of the general partnership interests.



                                       12

<PAGE>   15


                                     PART II


ITEM 5.     MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED
            SECURITY HOLDER MATTERS.

       The Units are not readily transferable. There is no public market for the
Units and it is not currently expected that any will develop. There are
restrictions upon the transferability of Units, including the requirement that
the General Partners consent to any transferee becoming a substituted Limited
Partner (which consent may be granted or withheld at the sole discretion of the
General Partners). In addition, restrictions on transfer may be imposed under
state securities laws.

       The Revenue Act of 1987 contains provisions which may have an adverse
impact on investors in certain "publicly traded partnerships." If the
Partnership were to be classified as a "publicly traded partnership," income
attributable to the Units would be characterized as portfolio income and the
gross income attributable to Units acquired by tax-exempt entities would be
unrelated business income, with the result that the Units could be less
marketable. The General Partners will, if necessary, take appropriate steps to
ensure that the Partnership will not be deemed a "publicly traded partnership."

       At December 31, 1997, the Partnership had 15,391.986 Units issued and
outstanding and 911 limited partners.

                                       13


<PAGE>   16




ITEM 6.     SELECTED FINANCIAL DATA.
                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                Year Ended
                                                               December 31,
                                                                   1997
                                                              -------------
<S>                                                           <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenue:
   Rental income                                              $    295,367
   Finance income                                                  201,314
                                                              ------------
             Total operating revenue                               496,681
                                                              ------------
Operating costs and expenses:
   Depreciation                                                     32,988
   General and administrative                                       31,296
                                                              ------------
             Total operating costs and expenses                     64,284
                                                              ------------
             Income from operations                                432,397
                                                              ------------
Other income:
   Interest income                                                  92,048
   Other                                                             1,598
                                                              ------------
             Total other income                                     93,646
                                                              ------------

Net income                                                         526,043

Net income allocable to general partners                             5,260
                                                              ------------

Net income allocable to limited partners                      $    520,783
                                                              ============

Net income per limited partnership unit                       $      74.10
                                                              ============

Weighted average number of limited partnership
   units outstanding                                                 7,028
                                                              ============

OTHER DATA:
Cash flows from operating activities                          $    579,235
Cash flows from investing activities                          $ (8,677,520)
Cash flows from financing activities                          $ 13,106,479

<CAPTION>

                                                              December 31,
BALANCE SHEET DATA:                                               1997
                                                              ------------
<S>                                                           <C>
Cash and cash equivalents                                     $  5,008,194
Investment in property under leases                           $  8,644,533
Total assets                                                  $ 13,731,578
Total liabilities                                             $    179,058
Total partners' capital                                       $ 13,552,520
</TABLE>


                                       14

<PAGE>   17



ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF ORGANIZATION.

        When used in this discussion, the words, "intends", "anticipates",
"expects", and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. Such risks
and uncertainties include the following: (i) a tenant may default in making rent
payments, (ii) a fire or other casualty may interrupt the cash flow stream from
a property, (iii) the properties may not be able to be leased at the assumed
rental rates, (iv) unexpected expenses may be incurred in the ownership of the
properties, and (v) properties may not be able to be sold at the presently
anticipated prices and times.

        As a result of these and other factors, the Partnership may experience
material fluctuations in future operating results on a quarterly or annual
basis, which could materially and adversely affect its business, financial
condition and operating results. These forward-looking statements speak only as
of the date hereof. The Partnership undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

Liquidity and Capital Resources

         The Partnership commenced the Offering of up to 30,000 Units registered
under the Securities Act of 1933, as amended, by means of a Registration
Statement filed on Form S-11 which was declared effective by the Securities and
Exchange Commission on December 23, 1996. The Partnership accepted subscriptions
for the Minimum Number of Units on March 5, 1997 and immediately commenced
operations.

         As of December 31, 1997, the Partnership had accepted subscriptions for
15,392 Units and funds totaling $15,380,902. After payment of $1,995,825 in
offering expenses, net proceeds available for investment from sale of the units
totaled $13,385,077. The Partnership had purchased five Properties for a total
of $5,838,857 and nine Equipment packages for $3,051,499. At December 31, 1997,
the Partnership had approximately $4.5 million of uninvested capital and
approximately $5 million invested in interest bearing cash accounts.

         As of December 31, 1997, the Partnership's investments were allocated
approximately 66% to Properties and 33% to Equipment. This allocation is
expected to change as additional Properties and Equipment are acquired. The
final asset mix allocation is expected to be at least 75% and not more than 90%
Properties and up to 25% but not less than 10% Equipment.

         As of March 25, 1998, the Partnership had accepted subscriptions for
19,827.488 Units and funds totaling $19,827,488. The Partnership intends to
raise an additional $10,172,512 in capital from the sale of 10,172.512 Units.
The univested capital and the proceeds from the offering received during 1998,
will be utilized to acquire Properties and Equipment.

         Once the proceeds from the offering have been invested, the Partnership
expects to obtain leverage of up to 35% of the sum of gross proceeds and the
aggregate amount of Partnership indebtedness secured by Partnership assets
(approximately 40% of the aggregate purchase prices of Partnership assets). Such
leverage, when incurred, will provide additional funds to be used by the
Partnership to purchase additional Properties and Equipment. Presently, the
Partnership does not have a financing commitment for this leverage.

                                       15


<PAGE>   18

         The Partnership has invested some of its funds in liquid assets until
such time as the funds can be invested in Property and Equipment. Once
substantially all of the Partnership's funds have been invested as intended, the
Partnership expects that only limited amounts of liquid assets will be required
since the form of lease which it intends to use for its Properties and Equipment
will require lessees to pay all taxes and assessments, maintenance and repairs
items (except, with respect to Double Net Properties, costs associated with the
maintenance and repairs of the exterior walls and roof of the Property) and
insurance premiums, including casualty insurance. The General Partners expect
that the cash flow generated by the Properties and Equipment will be adequate to
pay operating expenses and provide distributions to Limited Partners.


Results of Operations.

         The Partnership commenced operation in March of 1997, therefore, there
is no comparative information provided below for the prior year. Furthermore,
the information provided below should be read with the understanding that 1997
does not reflect a full twelve month period. In addition, the Partnership is in
the process of raising funds through the Offering and does not have all the
capital invested.

         For the year ended December 31, 1997, the Partnership earned revenues
totaling approximately $590,000. Revenues for the year ended December 31, 1997,
were comprised of approximately $295,000 of rental income from operating leases,
$201,000 of financing income from financing leases and $94,000 of other income
which includes approximately $92,000 interest earned on the Partnership's bank
accounts.

         For the year ended December 31, 1997, the Partnership incurred expenses
totaling approximately $64,000. Expenses for the year ended December 31, 1997,
were comprised of approximately $32,000 of depreciation on buildings leased
under operating leases and $32,000 of general and administrative expenses.

         For the year ended December 31, 1997, the Partnership earned net income
of approximately $526,000. The Partnership is not subject to income taxation as
all of its income and expenses flow through to the Partners. The Partnership's
net assets and liabilities as reported in its financial statements exceeds tax
basis by $273,000, as of December 31, 1997.

         During the year ended December 31, 1997, the Partnership made
distributions to limited partners totaling $358,900. Approximately $92,000 is
interest from the Partnership's bank accounts and the remaining $266,900 is cash
flow form operations.

         The Partnership anticipates increased income in 1998 as a result of the
anticipated purchase of additional Properties and Equipment. In addition, the
Partnership expects as well, a proportionate increase in expenses due to the
effects of the purchase of additional Properties subject to triple or double net
leases and the resulting additional depreciation expense therefrom, and the
corresponding increase in general and administrative expense related to the
growth of the investment in such assets.


                                       16

<PAGE>   19




ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

       See Index to Financial Statements on Page F-i of this Form 10-K for
Financial Statements and Financial Statement Schedules, where applicable.


ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.

            None.



                                       17

<PAGE>   20


                                    PART III


ITEM 10.    DIRECTORS,  EXECUTIVE OFFICERS,  PROMOTERS AND CONTROL PERSONS:
            COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT.

       The Partnership does not have directors or officers. The General Partners
of the Partnership are Captec Franchise Capital Corporation IV, a Michigan
corporation, as Managing General Partner, and Patrick L. Beach, an individual.
Captec Franchise Capital Corporation IV is a wholly-owned subsidiary of the
Captec Group.

       The following is a list of the executive officers and directors of the
Managing General Partner as of December 31, 1997:

<TABLE>
<CAPTION>
         Name           Age            Position
         ----           ---            --------
<S>                     <C>            <C>
Patrick L. Beach        41             Chairman of the Board of Directors,
                                       President and Chief Executive Officer

W. Ross Martin          37             Director, Senior Vice President,
                                       Treasurer and Chief Financial Officer
</TABLE>

       Patrick L. Beach has served as Chairman of the Board of Directors,
President and Chief Executive Officer of the Managing General Partner since
1996. Mr. Beach is also the Chairman of the Board of Directors, President and
Chief Executive Officer of the Captec Group, Captec Franchise Capital
Corporation II ("Captec II"). and Captec Franchise Capital Corporation III
("Captec III"). Captec II and Captec III are Michigan corporations which serve
as the Managing General Partner of Captec Franchise Capital Partners L.P. II and
Captec Franchise Capital Partners L.P. III, respectively, both of which are
limited partnerships with investment objectives similar to the Partnership. From
1977 until 1980 he was employed by the HydraMatic Division of General Motors
Corp., where he served in various manufacturing related positions. From March
1980 until February 1981 he served as Production Manager for Quick Industries,
Inc. of Jackson, Michigan with responsibility for purchasing and production
management for five plastics manufacturing plants in five states. In February
1981, Mr. Beach resigned from his previous position to found the Captec Group.
He is responsible for the day to day management of the Captec Group and its
Affiliates. From 1986 to 1990, Mr. Beach also served as Chairman of Wendy's of
San Diego, Inc., a 27-unit franchisee of Wendy's International. In 1990, Mr.
Beach sold his interest in Wendy's of San Diego, Inc. and resigned as Chairman
of the Board. Approximately twenty-two months thereafter, Wendy's of San Diego,
Inc. filed for protection under Chapter 11 of the Bankruptcy Code. From 1989 to
1991 Mr. Beach served as Chairman and President of Illiana Printing, Inc., the
master franchisor for American Speedy Printing Centers, Inc. in the states of
Illinois and Indiana.

       W. Ross Martin has served as a Director, Sr. Vice President, Treasurer
and Chief Financial Officer of the Managing General Partner since 1996. Mr.
Martin also serves as Director, Vice President, Treasurer and Chief Financial
Officer of Captec II and Captec III and as Director, Senior Vice

                                       18

<PAGE>   21

President and Chief Financial Officer of the Captec Group. Mr. Martin is also a
Certified Public Accountant. From 1982 until 1985, he was employed by Deloitte
Haskins & Sells, most recently as senior consultant in that firm's Emerging
Business Services practice. Mr. Martin joined the Captec Group in 1985 as
Controller, was promoted to Vice President-Finance in 1986 and to Senior Vice
President and Chief Financial Officer in 1994. He is responsible for the
treasury, corporate finance and strategic planning duties of the Captec Group as
well as overseeing the Accounting and Credit Departments.


ITEM 11.    EXECUTIVE COMPENSATION.

       The Partnership has no officers or directors. Furthermore, the
Partnership is not required to pay the officers and directors of the General
Partners any current nor any proposed compensation in such capacities. However,
the Partnership is required to pay certain fees, make distributions and allocate
a share of the profits or losses of the Partnership to the General Partners as
described under the caption "Compensation Table" on pages 35 through 42 of the
Partnership's Prospectus, which description is incorporated herein by reference.

       See "Item 13. Certain Relationships and Related Transactions."


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

       To the best knowledge of the Partnership, as of December 31, 1997 no
person known by the Partnership, beneficially owned more than 5% of the
outstanding Units.


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.


       During 1997, Captec Financial Group, Inc., the parent of the Managing
General Partner and of which Mr. Patrick Beach is a director, officer and
majority shareholder and affiliates of Captec Financial Group, Inc. (the "Captec
Group") received Acquisition Fees from the Partnership in an amount equal to
$341,936, and expects to receive an additional fee of $102,000 from the
Partnership after leveraging the Partnership's assets as provided for in the
Prospectus, for services rendered in connection with the selection, evaluation
and acquisition of the Property, as provided in the Partnership Agreement. In
addition, the Captec Group also received commitment fees paid by the tenants and
lessees during 1997 totaling $85,000. Commitment fees are paid by third parties
and are generally 1%-2% of the purchase price of the assets. All of the expenses
incident to the closing of the transactions including, without limit, the
Partnership's attorney's fees, title insurance premiums, recording fees and
expenses and transfer taxes are paid from amounts received as Acquisition Fees
or by the lessee.

       The General Partners believe that the Asset Management Agreement entered
into between the Partnership and the Captec Group is on terms no less favorable
to the Partnership than those customary for similar services by independent
firms in the relevant geographic area. The property management agreement
provides for termination by a majority vote of the Limited Partners, without
penalty, upon 60 days prior written notice. During 1997, $6,297 was paid or
incurred by the Partnership in Asset Management Fees.

       In connection with the Offering and throughout all stages of the
Partnership's operations, the General Partners and their affiliates will receive
compensation as described more fully in the "Compensation Table" on pages 35
through 42 of the Partnership's Prospectus. All of the General Partners' fees
with the exception of Acquisition Fees will be subordinated to receipt by the
Limited Partners of preferential distributions. Acquisition Fees will be payable
whether or not funds are

                                       19
<PAGE>   22


available for distribution to the Limited Partners. The General Partners may,
under certain circumstances, benefit from the continued holding of Partnership
Properties and/or Equipment, while investors may be better served by a sale or
other disposition of such Properties and/or Equipment. Furthermore, the receipt
of certain fees and reimbursements is dependent upon the ability of the General
Partners to timely invest net offering proceeds. Therefore, the interest of the
General Partners in receiving such fees may conflict with the interest of the
Limited Partners. The General Partners and their affiliates believe that their
actions and decisions will be made in a manner consistent with their fiduciary
duty to the Partnership.

       The agreements and arrangements, including those relating to
compensation, between the Partnership and the General Partners or any of their
affiliates have not and will not be the result of arm's-length negotiations
although the General Partners believe that such agreements and arrangements will
approximate those which would be arrived at through arm's-length negotiations.
While the Partnership will make no loans to the General Partners or their
affiliates, the Partnership may borrow money from the General Partners or their
affiliates but only on such terms as to interest rate, security, fees and other
charges at least as favorable to the Partnership as are charged by unaffiliated
lending institutions in the same locality on comparable loans for the same
purpose. The General Partners and their affiliate's are not prohibited from
providing services to, and otherwise dealing or doing business with, persons
(for example, franchisees), who may deal with the Partnership, although there
are no present arrangements with respect thereto. However, the Partnership
Agreement prohibits receipt of rebates or participation in any reciprocal
business arrangements which would have the effect of circumventing any of the
provisions of the Partnership Agreement.

       The General Partners may cause the Partnership to acquire an interest in
property and/or equipment through a joint venture or general partnership with an
entity affiliated with the General Partners. In such instance, the General
Partners or their affiliates will have a fiduciary duty to both the Partnership
and the other entity which participates in the joint venture. This may result in
an impasse in decision-making since generally no one of the affiliated joint
venturers would have full control over the joint venture. In addition, there is
a potential risk that while one joint venturer may have the right to purchase
the other joint venturer's interest in the event of a proposed sale, it may not
have the resources to do so. In order to minimize the likelihood of a conflict
between those fiduciary duties, the Partnership Agreement provides guidelines
for investments in such joint ventures in various respects.


                                       20
<PAGE>   23


ITEM 14.    EXHIBITS AND REPORTS ON FORM 8-K.

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

Number                   Exhibit

   4                     Agreement of Limited Partnership of Registrant
                         (Incorporated by reference from Exhibit B of the final
                         Prospectus dated December 23, 1996, as supplemented and
                         filed with the Securities and Exchange Commission,
                         S.E.C. File No. 333-9371)

   27                    Financial Data Schedule

   99.1                  Pages 35-42 of the final Prospectus dated December 23,
                         1997 as supplemented. (Incorporated by reference from
                         the final Prospectus filed with the Securities and
                         Exchange Commission pursuant to Rule 424(b) promulgated
                         under the Securities Act of 1933, as amended. S.E.C.
                         File No. 333-9371.)


       (b) Reports on Form 8-K:

       The Partnership filed one report on Form 8-K during the quarter ended
December 31, 1997. (Incorporated by reference from Registrant's SEC File No.
333-9371, filed October 16, 1997).



SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

       No annual report to security holders covering the Partnership's last
fiscal year and no proxy statement, form of proxy or other proxy soliciting
material with respect to any annual or other meeting of security holders has
been nor will be sent to security holders.




                                       21

<PAGE>   24
                         INDEX TO FINANCIAL STATEMENTS





          CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV              PAGE


          REPORT OF INDEPENDENT ACCOUNTANTS                  F(a) - 1

          FINANCIAL STATEMENTS:

               Balance Sheet                                 F(a) - 2

               Statement of Operations                       F(a) - 3

               Statement of Changes in Partners' Capital     F(a) - 4

               Statement of Cash Flows                       F(a) - 5

               Notes to Financial Statements                 F(a) - 6




          CAPTEC FRANCHISE CAPITAL CORPORATION IV                PAGE


          REPORT OF INDEPENDENT ACCOUNTANTS                  F(b) - 1

          FINANCIAL STATEMENTS:

               Balance Sheet                                 F(b) - 2

               Statement of Operations                       F(b) - 3

               Statement of Changes in Stockholder's Equity  F(b) - 4

               Statement of Cash Flows                       F(b) - 5

               Notes to Financial Statements                 F(b) - 6







                                       i


<PAGE>   25



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Captec Franchise Capital Corporation IV
Managing General Partner of
Captec Franchise Capital Partners L.P. IV:

We have audited the accompanying balance sheet of Captec Franchise Capital
Partners L.P. IV as of December 31, 1997 and 1996 and the related statements of
operations, changes in partners' capital, and cash flows for the years then
ended.  These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting financial statement amounts and disclosures.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Captec Franchise Capital
Partners L.P. IV as of December 31, 1997 and 1996, and the results of its
operations, changes in partners' capital and its cash flows for the years then
ended,  in conformity with generally accepted accounting principles.



/s/ Coopers & Lybrand

Detroit, Michigan
March 14, 1998

                                    F(a) - 1

<PAGE>   26

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                                 BALANCE SHEET
                           December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                                   1997                1996
                                                            ----------------       -----------
<S>                                                         <C>                    <C>
                                   ASSETS

Cash and cash equivalents                                   $      5,008,194       $       -
Investment in property under leases:
   Operating leases, net                                           5,805,870               -
   Financing leases, net                                           2,838,663               -
Prepaid expenses                                                         -                 339
Accounts receivable                                                    3,487               -
Unbilled rent                                                         25,983               -
Due from related parties                                              49,381               -
                                                            ----------------       -----------
    Total assets                                            $     13,731,578       $       339
                                                            ================       ===========


                       LIABILITIES & PARTNERS' CAPITAL

Liabilities:
   Accounts payable                                         $         49,375       $       -
   Due to related parties                                            129,683               -
   Overdraft                                                             -                  39
                                                            ----------------       -----------

    Total liabilities                                                179,058                39
                                                            ----------------       -----------

Partners' Capital:
Limited partners' capital accounts                                       -                 100
General partners' capital accounts                                       -                 200
                                                            ----------------       -----------

    Total partners' capital                                              -                 300
                                                            ----------------       -----------

    Total liabilities & partners' capital                   $        179,058       $       339
                                                            ================       ===========
</TABLE>



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


                                    F(a) - 2

<PAGE>   27

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                            STATEMENT OF OPERATIONS
                 for the years ended December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                                             1997             1996
<S>                                                                    <C>               <C>
Operating revenue:
   Rental income                                                       $    295,367      $       -
   Finance income                                                           201,314              -
                                                                       ------------      ------------

        Total operating revenue                                             496,681              -
                                                                       ------------      ------------

Operating costs and expenses:
   Depreciation                                                              32,988              -
   General and administrative                                                31,296              -
                                                                       ------------      ------------

        Total operating costs and expenses                                   64,284              -
                                                                       ------------      ------------

        Income from operations                                              432,397              -
                                                                       ------------      ------------

Other income:
   Interest income                                                           92,048              -
   Other                                                                      1,598              -
                                                                       ------------      ------------

        Total other income                                                   93,646              -
                                                                       ------------      ------------

Net income                                                                  526,043              -

Net income allocable to general partners                                      5,260              -
                                                                       ------------      ------------

Net income allocable to limited partners                               $    520,783      $       -
                                                                       ============      ============

Net income per limited partnership unit                                $      74.10      $       -
                                                                       ============      ============

Weighted average number of limited partnership
   units outstanding                                                          7,028              -
                                                                       ============      ============
</TABLE>



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


                                    F(a) - 3

<PAGE>   28

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
                 for the years ended December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                       Limited             Limited                General             Total
                                                      Partners'           Partners'              Partners'          Partners'
                                                        Units             Accounts                Accounts           Capital
                                                     -----------       --------------           -----------       --------------
<S>                                                  <C>               <C>                      <C>               <C>
Balance July 30, 1996                                        -         $          100           $       200       $          300

Net income                                                   -                    -                     -                    -
                                                     -----------       --------------           -----------       --------------

Balance, December 31, 1996                                   -                    100                   200                  300

Issuance of 15,392 limited partnership
units, net                                                15,392           13,385,077                                 13,385,077

Distributions - ($23.32 per unit)                            -               (358,900)                  -               (358,900)

Net income                                                   -                520,783                 5,260              526,043
                                                     -----------       --------------           -----------       --------------

Balance, December 31, 1997                                15,392       $   13,547,060           $     5,460       $   13,552,520
                                                     ===========       ==============           ===========       ==============
</TABLE>



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



                                    F(a) - 4

<PAGE>   29

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                            STATEMENT OF CASH FLOWS
                 for the year ended December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                                                  1997                   1996
                                                                            ----------------        ---------------
<S>                                                                         <C>                     <C>
Cash flows from operating activities:
   Net Income                                                               $        526,043        $           -
   Adjustments to net income:
        Depreciation                                                                  32,987                    -
        Decrease (increase) in prepaids                                                  339                   (339)
        Increase in unbilled rent                                                    (25,983)                   -
        Increase in accounts receivable                                               (3,487)                   -
        Increase in  accounts payable                                                 49,336                     39
                                                                            ----------------        ---------------

Net cash provided by operating activities                                            579,235                   (300)
                                                                            ----------------        ---------------

Cash flows from investing activities:
   Purchase of real estate for operating leases                                   (5,838,857)                   -
   Purchase of equipment for financing leases                                     (3,051,499)                   -
   Reduction of net investment in financing leases                                   212,836                    -
                                                                            ----------------        ---------------

Net cash used in investing activities                                             (8,677,520)                   -
                                                                            ----------------        ---------------

Cash flows from financing activities:
   (Increase) in due from related parties                                            (49,381)                   -
   Increase in due to related parties                                                129,683                    -
   Issuance of limited partnership units                                          15,380,902                    -
   Offering costs                                                                 (1,995,825)                   -
   Distributions to limited partners                                                (358,900)                   -
                                                                            ----------------        ---------------

Net cash provided by financing activities                                         13,106,479                    -
                                                                            ----------------        ---------------

Net (decrease) increase in cash and cash equivalents                               5,008,194                   (300)

Cash and cash equivalents, beginning of period                                           -                      300
                                                                            ----------------        ---------------

Cash and cash equivalents, end of period                                    $      5,008,194        $           -
                                                                            ================        ===============
</TABLE>


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



                                    F(a) - 5

<PAGE>   30


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                         NOTES TO FINANCIAL STATEMENTS


1.  THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:

    Captec Franchise Capital Partners L.P. IV (the "Partnership"), a Delaware
    limited partnership, was organized on July 23, 1996 for the purpose of
    acquiring income-producing commercial real properties and equipment leased
    on a "triple net" or "double net" basis, primarily to operators of national
    and regional chain franchised fast food and family style restaurants, as
    well as other national and regional retail chains.

    The general partners of the Partnership are Captec Franchise Capital
    Corporation IV (the "Corporation"), a wholly owned subsidiary of Captec
    Financial Group, Inc. ("Captec"), and Patrick L. Beach, an individual,
    hereinafter collectively referred to as the Sponsor.  Patrick L. Beach is
    also the Chairman of the Board of Directors, President and Chief Executive
    Officer of the Corporation and Captec.  The General Partners have each
    contributed $100 in cash to the Partnership as a capital contribution.

    The Partnership commenced a public offering of limited partnership
    interests ("Units") on December 31, 1996.  A minimum of 2,000 Units and a
    maximum of 30,000 Units, priced at $1,000 per Unit, were offered on a "best
    efforts, part or none" basis.  The Partnership broke impound on March 5,
    1997, at which time funds totaling $2,015,500 were released from escrow and
    the Partnership immediately commenced operations.  At December 31, 1997,
    the Partnership had accepted subscriptions for 15,392 Units, and funds
    totaling $15,380,902.

    The initial Limited Partner of the Partnership was Patrick L. Beach.  As of
    December 31, 1996, Mr. Beach had contributed $100 to the capital of the
    Partnership and had received 0.1 Unit.  During 1997, upon admission to the
    Partnership of other Limited Partners, the initial Limited Partner may
    withdraw from the Partnership, and his 0.1 Unit shall be redeemed for $100.

    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.
    In no event will the General Partners be allocated less than one percent of
    profits and losses in any year.


    Following is a summary of the Partnership's significant accounting
    policies:

    A.   CASH EQUIVALENTS:  The Partnership considers all highly liquid
         investments purchased with an original maturity of three months or
         less to be cash equivalents.


                                    F(a) - 6

<PAGE>   31


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                         NOTES TO FINANCIAL STATEMENTS

1.  THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES, CONTINUED:

    B.   RENTAL INCOME FROM OPERATING LEASES:  The Partnership's operating
         leases have scheduled rent increases which occur at various dates
         throughout the lease terms.  The Partnership recognizes the total
         rent, as stipulated by the lease agreement, as income on a
         straight-line basis over the term of each lease.  To the extent rental
         income on the straight-line basis exceeds rents billable per the lease
         agreement, an amount is recorded as unbilled rent.

    C.   LAND AND BUILDING SUBJECT TO OPERATING LEASES:  Land and
         buildings subject to operating leases are stated at cost less
         accumulated depreciation.  Buildings are depreciated on the
         straight-line method over their estimated useful lives (40 years).

    D.   NET INVESTMENT IN FINANCING LEASES:  Leases classified as
         financing leases are stated as the sum of the minimum lease payments
         plus the unguaranteed residual value accruing to the benefit of the
         lessor, less unearned income.  Unearned income is amortized to income
         over the lease term so as to produce a constant periodic rate of
         return on the net investment in the lease.

    E.   NET INCOME PER LIMITED PARTNERSHIP INTEREST:  Net income per
         limited partnership interest is calculated using the weighted average
         number of limited partnership units outstanding during the period and
         the limited partners' allocable share of the net income.

    F.   INCOME TAXES:  No provision for income taxes is included in the
         accompanying financial statements, as the Partnership's results of
         operations are passed through to the partners for inclusion in their
         respective income tax returns.

    G.   ESTIMATES:  The preparation of financial statements in conformity
         with generally accepted accounting principles requires management to
         make estimates and assumptions that affect the reported amounts of
         assets and liabilities and disclosure of contingent assets and
         liabilities at the date of the financial statements and the reported
         amounts of revenues and expenses during the reporting period.  Actual
         results could differ from those estimates.

2.  DISTRIBUTIONS:

    Cash flows of the Partnership are allocated ninety-nine percent (99%) to the
    limited partners and one percent (1%) to the Sponsor, except that the
    Sponsor's share is subordinated to a ten percent (10%) per annum
    cumulative, non-compounded preferred return to the limited partners.  Net
    sale or refinancing proceeds of the Partnership will be allocated ninety
    percent (90%) to the limited partners and ten percent (10%) to the Sponsor,
    except that the Sponsor's share will be subordinated to a ten and one-half
    percent (10.5%) per annum cumulative, non-compounded return on their
    Adjusted Investment plus return of the original contributions to the limited
    partners.

    Distributions of cash flow from operations are paid quarterly in arrears.


                                    F(a) - 7

<PAGE>   32


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                         NOTES TO FINANCIAL STATEMENTS


3.  RELATED PARTY TRANSACTIONS AND AGREEMENTS:

    Organization and offering expenses, excluding selling commissions, are paid
    initially by the General Partners and/or their affiliates and are
    reimbursed by the Partnership in an amount equal to up to three percent (3%)
    of the gross proceeds of the offering (less any amounts paid directly by the
    Partnership).  In addition, the Sponsor and/or its affiliates are paid a
    non-accountable expense allowance by the Partnership in an amount equal to
    two percent (2%) of the gross proceeds of the offering. The Sponsor and/or
    its affiliates were reimbursed $710,310 during the twelve month period ended
    December 31, 1997.  These costs were treated as capital issuance costs and
    have been netted against the limited partners' capital accounts.

    The Partnership paid to Participating Dealers, including affiliates of the
    general partners, selling commissions in an amount equal to eight percent
    (8%) of the purchase price of all Units placed by them directly. An
    additional one percent (1%) of the purchase price was paid to Participating
    Dealers on all Units placed by them until the minimum number of Units were
    sold (2,015.5).  The additional one percent (1%) was paid out of the
    non-accountable expense allowance.  There were $1,223,946 of selling
    commissions paid or incurred during the twelve month period ended December
    31, 1997.  These costs were treated as capital issuance costs and have been
    netted against the limited partners' capital accounts.  The Sponsor has also
    guaranteed payment of organization and offering expenses which exceed 13%,
    including selling commissions, of the gross proceeds of the offering.

    An acquisition fee is charged, not to exceed the lesser of: (i) four
    percent (4%) of gross proceeds plus an additional .0677% for each 1%
    of indebtedness incurred in acquiring properties and/or equipment but in no
    event will acquisition fees exceed five percent (5%) of the aggregate
    purchase prices of properties and equipment; or (ii) compensation
    customarily charged in arm's length transactions by others rendering similar
    services.  The Partnership paid the Sponsor $341,936 in acquisition fees
    during the twelve month period ended December 31, 1997, and expects to pay
    an additional $68,351 once the Partnership has obtained the maximum
    leverage. Of this amount $117,365 was capitalized into net investment in
    financing leases and $224,571 was capitalized into land and building subject
    to operating leases.

    The Partnership has entered into an asset management agreement with the
    Sponsor and its affiliates, whereby the Sponsor provides various property
    and equipment management services for the Partnership.

    A subordinated asset management fee is charged, in an amount equal to one
    percent (1%) of the gross rental revenues derived from the properties and
    equipment.  Payment of the asset management fee is subordinated to receipt
    by the limited partners of annual distributions equal to a cumulative,
    non-compounded return of ten percent (10%) per annum on their Adjusted
    Investment.  There was $6,297 paid or incurred to the General Partners
    during the twelve month period ended December 31, 1997.

                                    F(a) - 8

<PAGE>   33


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                         NOTES TO FINANCIAL STATEMENTS


3.  RELATED PARTY TRANSACTIONS AND AGREEMENTS, CONTINUED:

    An equipment liquidation fee limited to the lesser of three percent (3%) of
    the sales price or customary fees for similar services will be paid in
    conjunction with asset liquidation services.  There were no equipment
    liquidations during the twelve month period ended December 31, 1997.

    The Partnership Agreement provides for the Sponsor to receive a real estate
    liquidation fee limited to the lesser of three percent (3%) of the gross
    sales price or fifty percent (50%) of the customary real estate commissions
    in the event of a real estate liquidation.  This fee is payable only after
    the limited partners have received distributions equal to a cumulative,
    non-compounded return of ten and one-half percent (10.5%) per annum,
    cumulative non-compounded preferred return on their Adjusted Investment
    capital plus distributions of sale or refinancing proceeds equal to 100% of
    their original contributions.  There were no real estate liquidations during
    the twelve month period ended December 31, 1997.

    The Partnership has agreed to indemnify the Sponsor and their affiliates
    against certain costs paid in settlement of claims which might be sustained
    by them in connection with the Partnership.  Such indemnification is limited
    to the assets of the Partnership and not the limited partners.


4.  LAND AND BUILDING SUBJECT TO OPERATING LEASES:

    The net investment in operating leases as of December 31, 1997 is comprised
    of the following:


<TABLE>
                   <S>                            <C>
                   Land                           $2,676,582
                   Building and improvements       3,162,276
                                                  ----------

                                                   5,838,858
                   Less accumulated depreciation     (32,988)
                                                  ----------

                   Total                          $5,805,870
                                                  ==========
</TABLE>

    The following is a schedule of future minimum lease payments to be received
    on the operating leases as of December 31, 1997.


<TABLE>
                   <S>                             <C>
                   1998                            $  607,570
                   1999                               607,570
                   2000                               611,235
                   2001                               616,366
                   2002                               632,662
                   Thereafter                       6,180,051
                                                   ----------

                   Total                           $9,255,454
                                                   ==========
</TABLE>




                                    F(a) - 9

<PAGE>   34

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
                         NOTES TO FINANCIAL STATEMENTS


5.  NET INVESTMENT IN FINANCING LEASES:

    The net investment in financing leases as of December 31, 1997 is comprised
    of the following:

<TABLE>
            <S>                                         <C>
                 Minimum lease payments to be received  $3,714,592
                 Estimated residual value                   81,372
                                                        ----------

                 Gross investment in financing leases    3,795,964
                 Less unearned income                     (957,301)
                                                        ----------

                 Net investment in financing leases     $2,838,663
                                                        ==========
</TABLE>

    The following is a schedule of future minimum lease payments to be received
    on the financing leases as of December 31, 1997:

<TABLE>
                 <S>                                   <C>
                 1998                                   $  640,331
                 1999                                      639,982
                 2000                                      639,982
                 2001                                      639,982
                 2002                                      514,635
                 Thereafter                                639,680
                                                        ----------

                 Total                                  $3,714,592
                                                        ==========
</TABLE>

6.  SUBSEQUENT EVENT:

    Based upon the results of operations for the three month period ended
    December 31, 1997, the Partnership will distribute $350,000, of which
    $284,706 was distributed to its limited partners on January 15, 1998 and the
    remaining $65,294 will be distributed to those limited partners who elected
    to receive distributions on a monthly basis on February 13, 1998 and March
    13, 1998.


                                   F(a) - 10
<PAGE>   35

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Captec Franchise Capital Corporation IV:


We have audited the accompanying balance sheet of Captec Franchise Capital
Corporation IV as of December 31, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended.  These financial statements are the responsibility of the Corporation's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement.  An audit includes examining, on a test basis,
evidence supporting financial statement amounts and disclosures.  An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Captec Franchise Capital
Corporation IV as of December 31, 1997 and 1996, and the results of its
operations, changes in stockholders' equity and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.




/s/ Coopers & Lybrand

Detroit, Michigan
March 14, 1998






                                    F(b) - 1

<PAGE>   36

                    CAPTEC FRANCHISE CAPITAL CORPORATION IV
                                 BALANCE SHEET
                           December 31, 1997 and 1996




<TABLE>
<CAPTION>
                                                                                1997                1996
                                                                          --------------       ------------
<S>                                                                       <C>                  <C>
                                      ASSETS

Cash                                                                      $        1,748       $      1,407
Investment in partnership                                                          2,730                100
Reimbursable organizational & offering expenses, net                              15,594             29,048
Receivable from affiliate                                                         19,766              1,697
Other assets                                                                      15,005             16,038
                                                                          --------------       ------------

Total assets                                                              $       54,843       $     48,290
                                                                          ==============       ============

                         LIABILITIES & STOCKHOLDERS' EQUITY

Total liabilities:
   Accounts payable                                                       $       51,213       $     37,022
   Payable to affiliates                                                               -             10,268
   Income tax payable                                                                894                -
                                                                          --------------       ------------

Total liabilities                                                                 52,107             47,290
                                                                          --------------       ------------

Stockholders' equity:
Common stock, no par value; 60,000 shares authorized,
   1,000 shares issued and outstanding                                               -                  -
Paid-in capital                                                                    1,000              1,000
Retained earnings                                                                    -                  -
                                                                          --------------       ------------

Total stockholders' equity                                                         1,000              1,000
                                                                          --------------       ------------

Total liabilities & stockholders' equity                                  $       53,107       $     48,290
                                                                          ==============       ============
</TABLE>



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



                                    F(b) - 2

<PAGE>   37

                    CAPTEC FRANCHISE CAPITAL CORPORATION IV
                            STATEMENT OF OPERATIONS
                 for the years ended December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                                1997               1996
                                                            ------------       ------------
<S>                                                         <C>                <C>
Investment income from partnership                          $      2,630       $       -
                                                            ------------       ------------

        Net income before taxes                                    2,630               -

Income tax provision                                                 894               -
                                                            ------------       ------------

        Net income                                          $      1,736       $       -
                                                            ============       ============
</TABLE>



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


                                    F(b) - 3

<PAGE>   38
                    CAPTEC FRANCHISE CAPITAL CORPORATION IV
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                 for the years ended December 31, 1997 and 1996





<TABLE>
<CAPTION>
                                                     COMMON             PAID-IN           RETAINED
                                                     STOCK              CAPITAL           EARNINGS             TOTAL
                                                 -------------       ------------       ------------       ------------
<S>                                              <C>                 <C>                <C>                <C>
Balance, January 1, 1996                         $         -         $      1,000       $        -         $      1,000

Net Income                                                 -                  -                  -                  -
                                                 -------------       ------------       ------------       ------------

Balance, December 31, 1996                                 -                1,000                -                1,000

Net income                                                 -                  -                1,736              1,736
                                                 -------------       ------------       ------------       ------------

Balance, December 31, 1997                       $         -         $      1,000       $      1,736       $      2,736
                                                 =============       ============       ============       ============
</TABLE>





                                    F(b) - 4

<PAGE>   39

                    CAPTEC FRANCHISE CAPITAL CORPORATION IV
                            STATEMENT OF CASH FLOWS
                 for the years ended December 31, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                                     1997              1996
                                                                                                 ------------      ------------
<S>                                                                                              <C>               <C>
Cash flows from operating activities:
   Net income                                                                                    $      1,736      $        -
   Adjustments to net income:
      Undistributed income from partnership                                                            (2,630)             (100)
      Increase in income tax payable                                                                      894               -
      Decrease (increase)  in other assets                                                              1,033           (16,038)
      Increase in accounts payable                                                                     14,191            37,022
                                                                                                 ------------      ------------

Net cash provided by operating activities                                                              15,224            20,884
                                                                                                 ------------      ------------


Cash flows from financing activities:
   Issuance of common stock                                                                               -               1,000
   Decrease in reimbursable offering expense and payable to affiliate, net                            (14,883)          (20,477)
                                                                                                 ------------      ------------


Net cash provided by financing activities                                                             (14,883)          (19,477)
                                                                                                 ------------      ------------

Net increase (decrease) in cash                                                                           341             1,407

Cash, beginning of year                                                                                 1,407               -
                                                                                                 ------------      ------------

Cash, end of period                                                                              $      1,748      $      1,407
                                                                                                 ============      ============
</TABLE>



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


                                    F(b) - 5

<PAGE>   40


                    CAPTEC FRANCHISE CAPITAL CORPORATION IV
                         NOTES TO FINANCIAL STATEMENTS

1.  ORGANIZATION:

    Captec Franchise Capital Corporation IV (the "Corporation") is a Michigan
    corporation organized on July 22, 1996.  The Corporation was formed for the
    purpose of serving as the managing general partner of Captec Franchise
    Capital Partners L.P. IV (the "Partnership"), a Delaware limited
    partnership.

    The Corporation is a wholly owned subsidiary of Captec Financial Group,
    Inc. ("Captec").  Captec has paid $1,000 in cash to the Corporation for the
    purchase of 1,000 shares of common stock of the Corporation.  As a general
    partner of the Partnership, the Corporation has contributed $100 to the
    capital of the Partnership.  Patrick L. Beach is also a general partner of
    the Partnership and is the Chairman of the Board of Directors, President
    and Chief Executive Officer of the Corporation and Captec.  Each general
    partner has a 0.5 percent share in the Partnership's net income or loss.

    The Partnership undertook a public offering of limited partnership
    interests ("Units") in 1997.  A minimum of 2,000 Units and a maximum of
    30,000 Units, priced at $1,000 per Unit, will be offered on a "best
    efforts, part or none" basis.  As of December 31, 1997, the Partnership had
    accepted subscriptions for 15,380.902 Units and funds totaling $15,380,902.

    Affiliates of the Corporation are expected to provide various services to
    the Partnership and will be paid certain fees for such services as
    specified in the Partnership Agreement.

    Following is a summary of the Corporation's significant accounting
    principles:

    A.   INCOME TAXES:   The Corporation reports its income for federal
         income tax purposes in the consolidated tax return of Captec.  Income
         taxes are allocated by Captec to the Corporation on the separate
         return basis.  The Corporation's income tax expense reflected in the
         statement of operations and that computed by applying the statutory
         federal income tax rate are approximately equal.  Deferred income
         taxes, for financial reporting purposes, are not material.

    B.   ESTIMATES:   The preparation of financial statements in
         conformity with generally accepted accounting principles requires
         management to make estimates and assumptions that affect the reported
         amounts of assets and liabilities and disclosure of contingent assets
         and liabilities at the date of the financial statements and the
         reported amounts of revenues and expenses during the reporting period.
         Actual results could differ from those estimates.

    C.   RECLASSIFICATIONS:  Certain 1996 financial statement amounts have
         been reclassified to conform to the 1997 presentation.

                                    F(b) - 6

<PAGE>   41



                    CAPTEC FRANCHISE CAPITAL CORPORATION IV
                         NOTES TO FINANCIAL STATEMENTS


2.  OPERATIONS:

    The Corporation's only source of revenue in 1997 and 1996 was from its
    investment in the Partnership.  See the accompanying financial statements
    of the Partnership.

3.  RELATED PARTY TRANSACTIONS:

    Organization and offering expenses related to the offering of Units are
    prepaid by the Corporation and reimbursed by the Partnership in an amount
    equal to up to three percent (3%) of the gross proceeds of the offering
    (less any amounts paid directly by the Partnership).  The Corporation is
    also reimbursed by the Partnership for a non-accountable expense allowance
    in an amount equal to two percent (2%) of the gross proceeds of the
    offering.  During 1997 the Corporation was reimbursed indirectly through
    payments made in the amount of $500,699 by LP IV to Captec on behalf of the
    Corporation.

    The Corporation receives advances from Captec in order to have sufficient
    funds for the prepayment of organization and offering and non-accountable
    expenses made on behalf of the Partnership.  As the Corporation receives
    reimbursements of such prepaid expenses,  the advances to Captec are
    repaid.



                                    F(b) - 7
<PAGE>   42

                                   SIGNATURES

       In accordance with Section 13 or 15 (d) of the Securities Exchange Act of
1934, as amended, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                              CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV

                              By:   Captec Franchise Capital Corporation IV,
                                    Managing General Partner


                              By:   /s/  Patrick L. Beach
                                   ------------------------------
                                   Patrick L. Beach
                                   Chairman of the Board of Directors,
                                   President and Chief Executive Officer

                              Date:   March 31, 1998


In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.


By:     /s/  Patrick L. Beach
       ------------------------------
       Patrick L. Beach
       Chairman of the Board of Directors,
       President and Chief Executive Officer

Date:  March 31, 1998


By:     /s/  W. Ross Martin
       ------------------------------
       W. Ross Martin
       Director,  Sr. Vice President,
       Treasurer and Chief Financial Officer

Date:  March 31, 1998





                                     22

<PAGE>   43


                                INDEX TO EXHIBITS


Exhibit 27

         Financial Data Schedule

Exhibit 99.1

         Pages 35-42 of the final Prospectus                               E-1









                                      E-i