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


                                  FORM 10-QSB


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

For the quarterly period ended March 31, 1997
                               --------------

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

     For the transition period from                 to
                                    ----------------  ----------------

     Commission file number   33-77510-C
                              ----------


                 CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
--------------------------------------------------------------------------------
      (Exact name of small business issuer as specified in its charter)


              Delaware                           38-3160141
--------------------------------------------------------------------------------
    (State or other jurisdiction                 (IRS Employer
     of incorporation or organization)            Identification Number)


               24 Frank Lloyd Wright Drive, Lobby L, 4th Floor
                P.O. Box 544, Ann Arbor, Michigan  48106-0544
--------------------------------------------------------------------------------
                  (Address of principal executive offices)
                               (313)  994-5505
--------------------------------------------------------------------------------
                         (Issuer's telephone number)

                               Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last year)

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

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

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.  Yes        No      .
                                                 -----     -----

                      APPLICABLE ONLY TO CORPORATE ISSUERS

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

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

<PAGE>   2


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                              INDEX TO FORM 10-QSB



PART I   FINANCIAL INFORMATION                                         Page


Item 1.  Financial Statements                                            1

         Balance Sheet, March 31, 1997                                   2

         Statement of Operations for the three month periods
         ended March 31, 1997 and 1996                                   3

         Statement of Cash Flows for the three month periods
         ended March 31, 1997 and 1996                                   4

         Notes to Financial Statements                                   5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                      10


ART II   OTHER INFORMATION

Item 1.  Legal Proceedings                                              13

Item 2.  Changes in Securities                                          13

Item 3.  Defaults Upon Senior Securities                                13

Item 4.  Submission of Matters to a Vote of Security Holders            13

Item 5.  Other Information                                              13

Item 6.  Exhibits and Reports on Form 8-K                               13


SIGNATURES                                                              14


                                       i



<PAGE>   3


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

     The balance sheet of Captec Franchise Capital Partners L.P. III (the
"Partnership") as of March 31, 1997 and the statements of operations and cash
flows for the periods ending March 31, 1997 and 1996 are unaudited and have not
been examined by independent public accountants.  In the opinion of the
Management, these unaudited financial statements contain all adjustments
necessary to present fairly the financial position and results of operations
and cash flows of the Partnership for the periods then ended.  All such
adjustments are of a normal and recurring nature.

     These financial statements should be read in conjunction with the audited
financial statements and accompanying notes thereto included in the
Partnership's report on Form 10-KSB for the fiscal year ended December 31,
1996.

                                       1



<PAGE>   4
                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                                 BALANCE SHEET
                                 March 31, 1997
                                  (Unaudited)


<TABLE>
<S>                                                                <C>
                                     ASSETS
Cash                                                                $   367,337
Investment in property under leases:
   Operating leases, net                                             14,060,380
   Direct financing leases, net                                       2,801,567
Accounts receivable                                                         198
Unbilled rent                                                           217,840
Due from related parties                                                 10,690
                                                                    -----------

Total assets                                                        $17,458,012
                                                                    ===========

                       LIABILITIES & PARTNERS' CAPITAL

Liabilities:
   Accounts payable                                                 $    17,530
   Due to related parties                                                32,650
   Security deposits held on leases                                      59,329
                                                                    -----------

Total liabilities                                                       109,509
                                                                    -----------

Partners' Capital:
Limited partners' capital accounts                                   17,327,880
General partners' capital accounts                                       20,623
                                                                    -----------

Total partners' capital                                              17,348,503
                                                                    -----------

Total liabilities & partners' capital                               $17,458,012
                                                                    ===========
</TABLE>



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

                                      2
<PAGE>   5


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                            STATEMENT OF OPERATIONS
           for the three month periods ended March 31, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>      
                                                             1997        1996
<S>                                                        <C>         <C>
Operating revenue:
   Rental income                                           $393,115    $118,217
   Finance income                                            84,492      72,933
                                                           --------    --------

          Total operating revenue                           477,607     191,150
                                                           --------    --------

Operating costs and expenses:
   Depreciation                                              48,831      21,594
   General and administrative                                45,509      14,799
                                                           --------    --------

          Total operating costs and expenses                 94,340      36,393
                                                           --------    --------

          Income from operations                            383,267     154,757
                                                           --------    --------

Other income (expense):
   Interest income                                           28,670      19,154
   Other                                                        231         907
                                                           --------    --------

          Total other income, net                            28,901      20,061
                                                           --------    --------

Net income                                                  412,168     174,818

Net income allocable to general partners                      4,122       1,748
                                                           --------    --------

Net income allocable to limited partners                   $408,046    $173,070
                                                           ========    ======== 

Net income per limited partnership unit                    $  20.40    $  18.75
                                                           ========    ======== 

Weighted average number of limited partnership
   units outstanding                                         20,000       9,228
                                                           ========    ======== 
</TABLE>



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

                                      3
<PAGE>   6

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                            STATEMENT OF CASH FLOWS
           for the three month periods ended March 31, 1997 and 1996
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                  1997             1996   
<S>                                                           <C>            <C>      
Cash flows from operating activities:                                                     
   Net Income                                                 $  412,168     $    174,818 
   Adjustments to net income:                                                             
        Depreciation                                              48,831           21,594 
        Increase in unbilled rent                                 (7,167)         (22,783)
        Decrease (increase) in receivables                         1,761           (2,451)
        (Decrease) increase in payables                          (31,238)           8,556 
        Decrease in security deposits held on leases              (6,624)               - 
                                                              ----------     ------------
                                                                                          
Net cash provided by operating activities                        417,731          179,734 
                                                              ----------     ------------
                                                                                          
Cash flows from investing activities:                                                     
   Purchase of real estate for operating leases                        -       (2,819,849)
   Construction loan draws                                      (376,890)                 
   Purchase of equipment for financing leases                          -         (601,793)
   Reduction of net investment in financing leases               104,183           64,022 
                                                              ----------     ------------
                                                                                          
Net cash used in investing activities                           (272,707)      (3,357,620)
                                                              ----------     ------------
                                                                                          
Cash flows from financing activities:                                                     
   Decrease in due from related parties                            9,899            5,800 
   Increase in due to related parties                             24,922          411,440 
   Issuance of limited partnership units                               -        3,513,913 
   Offering costs                                                      -         (450,783)
   Distributions to limited partners                            (502,683)        (214,170)
                                                              ----------     ------------
                                                                                          
Net cash provided by financing activities                       (467,862)       3,266,200 
                                                              ----------     ------------
                                                                                          
Net increase in cash                                            (322,838)          88,314 
                                                                                          
Cash, beginning of period                                        690,175        1,283,655 
                                                              ----------     ------------
                                                                                          
Cash, end of period                                           $  367,337     $  1,371,969 
                                                              ==========     ============
</TABLE>



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


                                      4

<PAGE>   7


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


1.  THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:

    Captec Franchise Capital Partners L.P. III (the "Partnership"), a Delaware
    limited partnership, was formed on February 18, 1994 for the purpose of
    acquiring income-producing commercial real properties and equipment leased
    on a "triple net" basis, primarily to operators of national and regional
    franchised businesses.  The general partners of the Partnership are Captec
    Franchise Capital Corporation III (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 August 12, 1994.  A minimum of 1,150 Units and a
    maximum of 20,000 Units, priced at $1,000 per Unit, were offered on a "best
    efforts, part or none" basis.  The Partnership broke impound on January 24,
    1995, at which time funds totaling $1,155,255 were released from escrow and
    the Partnership immediately commenced operations.  At March 31, 1997, the
    Partnership had accepted subscriptions for the entire 20,000 Units, and
    funds totaling $20,000,000.

    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 Sponsor 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.   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.

    B.   LAND AND BUILDING ON 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).



                                       5



<PAGE>   8


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


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

    C.   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.

    D.   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.

    E.   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.

    F.   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%) 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 eleven percent (11%) preferred return plus return of the
    original contributions to the limited partners.

    The Partnership distributed approximately $503,000 during the three month
    period ended March 31, 1997, representing quarterly distributions of cash
    flow from operations for the quarter ended December 31, 1996 and elective
    monthly distributions for the current quarter.



                                       6



<PAGE>   9


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


3.  RELATED PARTY TRANSACTIONS AND AGREEMENTS:

    Organization and offering expenses, excluding selling commissions, were
    initially paid by the General Partners and/or their Affiliates and were
    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 Sponsors and/or their affiliates
    were  paid a non-accountable expense allowance by the Partnership in an
    amount equal to two percent (2%) of the gross proceeds of the offering.
    There were no organizational and offering costs paid during the three month
    period ended March 31, 1997.

    The Partnership also 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.
    There were no commissions paid or incurred during the three month period
    ended March 31, 1997.  The Sponsor had 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 .0624% 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.  There were no acquisition fees paid by the Partnership
    during the three month period ended March 31, 1997.

    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,
    noncompounded return of ten percent (10%) per annum on their adjusted
    invested capital.  There were $24,433 of subordinated asset management fees
    paid to the Sponsor during the three month period ended March 31, 1997.

                                       7



<PAGE>   10


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         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 three month period ended March 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,
    noncompounded return of eleven percent (11%) per annum on their adjusted
    invested capital plus distributions of sale or refinancing proceeds equal
    to 100% of their original contributions.  There were no real estate
    liquidations during the three month period ended March 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 March 31, 1997 is comprised of
    the following:


<TABLE>
   <S>                                                          <C>
   Land                                                          $ 5,127,875
   Building and improvements                                       7,812,917
   Construction draws on properties (including land of $555,000)   1,316,668
                                                                 -----------
                                                                  14,257,460

   Less accumulated depreciation                                    (197,080)
                                                                 -----------
   Total                                                         $14,060,380
                                                                 ===========
</TABLE>


    As indicated above, at March 31, 1997 the Partnership had made investments
    in properties under construction.  All construction draws are subject to
    the terms of a standard lease agreement with the Partnership which fully
    obligates the tenant to the long-term lease of all amounts advanced under
    construction draws.  At March 31, 1997, the Partnership had approximately
    $339,000 of unfunded commitments on properties under construction.

    The following is a schedule of future minimum lease payments to be received
    on the operating leases as of March 31, 1997.  This schedule excludes
    additional rents due under unfunded commitments on properties under
    construction which are estimated to be equal to an additional $553,000 in
    aggregate.

                                       8



<PAGE>   11


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


4.   LAND AND BUILDING SUBJECT TO OPERATING LEASES, CONTINUED:



<TABLE>
           <S>                                      <C>
           1997                                     $ 1,120,952 
           1998                                       1,520,568 
           1999                                       1,537,124 
           2000                                       1,558,121 
           2001                                       1,595,801 
           Thereafter                                21,619,515 
                                                    ----------- 
                                                                
           Total                                    $28,952,081 
                                                    =========== 

</TABLE>



5.  NET INVESTMENT IN FINANCING LEASES:

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


<TABLE>
           <S>                                     <C>
           Minimum lease payments to be received    $ 3,346,584
           Estimated residual value                     269,811
                                                    -----------

           Gross investment in financing leases       3,616,395
           Less unearned income                        (814,828)
                                                    -----------

           Net investment in financing leases       $ 2,801,567
                                                    ===========

</TABLE>

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

<TABLE>
           <S>                                      <C>
           1997                                     $   660,476
           1998                                         799,737
           1999                                         799,737
           2000                                         602,496
           2001                                         262,247
           Thereafter                                   221,891
                                                    -----------
           
           Total                                    $ 3,346,584
                                                    ===========
</TABLE>



6.  SUBSEQUENT EVENT:

    In April 1997, the Partnership made a distribution to its limited partners
    totaling approximately $472,000, which represented the aggregate quarterly
    distribution of cash flow from operations for the quarter ended March 31,
    1997 in the amount of $540,000 less $68,000 of elective monthly
    distributions previously distributed during that quarter.


                                       9



<PAGE>   12


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                         PART I - FINANCIAL INFORMATION


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

LIQUIDITY AND CAPITAL COMMITMENTS:

     The Partnership commenced the Offering of up to 20,000 limited partnership
units ("Units") registered under the Securities Act of 1933, as amended by
means of a Registration Statement, filed on form SB-2 which was declared
effective by the Securities and Exchange Commission on August 12, 1994.

     The Partnership accepted subscriptions for the Minimum Number of Units on
January 24, 1995 and immediately commenced operations.  The Offering reached
final funding as of August 12, 1996, having accepted subscriptions for the
entire 20,000 Units and funds totaling $20,000,000.

     At  March 31, 1997, the Partnership had invested in eleven net leased real
estate properties and ten equipment packages in amounts totaling approximately
$17,617,000, including capitalized acquisition fees.  The Partnership has
committed additional funds of approximately $339,000 for the final construction
draw on the Golden Corral Restaurant located in Lakeland, Florida.  In April
1997, the Partnership provided funding in the amount of $241,765 for the
re-imaging of the Kettle Restaurant located in Virginia Beach, Virginia to a
Denny's Restaurant ( the "Virginia Beach Property").  The Virginia Beach
Property is currently being operated as a Denny's Restaurant.

     The Partnership had cash totaling $367,337 as of March 31, 1997, none of
which is available for investment.  The Sponsor has agreed to lend moneys to
the Partnership, to the extent necessary for the Partnership to fulfill the
existing investment commitments described above, until such time as the
Partnership obtains the leverage described below.

     During 1997, the Partnership expects to obtain leverage of up to 30% of
the sum of gross proceeds and the aggregate amount of Partnership indebtedness
secured by Partnership assets (approximately 35% of the aggregate purchase
prices of the Partnership's assets).  Such leverage, when incurred, will
provide additional funds to be used by the Partnership to purchase additional
income-producing commercial Properties and Equipment which will be leased on a
"triple net" basis primarily to operators of nationally franchised fast-food,
family style and dinner house restaurants as well as other franchised
service-type businesses.  The Property leases are expected to provide for a
base minimum annual rent, with provisions for fixed increases on specific dates
or indexation of rent to indices such as the Consumer Price Index and/or
percentage rents.  Equipment will be leased only pursuant to Full Payout
Leases.  Presently, the Partnership does not have a financing commitment for
this leverage.

     During the three month period ending March 31, 1997, the Partnership did
not acquire any additional properties.  The number of Properties and/or the
amount of Equipment to be acquired will depend upon the additional debt.


                                       10



<PAGE>   13


     Once substantially all of the Partnership's funds have been applied as
intended, the Partnership expects to require limited amounts of liquid assets
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 and insurance premiums, including casualty insurance.  The general
partners expect that the cash flow to be generated by the Partnership's
Properties and Equipment will be adequate to pay operating expenses and provide
distributions to Limited Partners.

     The General Partners are not aware of any known trends or uncertainties,
other than national economic conditions, which reasonably may be expected to
have a material impact, favorable or unfavorable, on liquidity and capital
resources of the Partnership other than those referred to herein and in the
Partnership's Prospectus.


RESULTS OF OPERATIONS:

     For the three month period ended March 31, 1997 the Partnership earned
revenues totaling approximately $507,000, compared to approximately $211,000
for the corresponding period of the preceding year.  The increase in
year-to-date revenues over the prior year's period (140%) was due to the effect
of the Partnership's additional investment in income producing triple net
leased real estate properties and full payout equipment leases.

     For the three month period ended March 31, 1997, the Partnership incurred
expenses totaling approximately $94,000, compared to $36,000 for the
corresponding period of the preceding year.  The increase in year-to-date
expenses over the prior year's period (159%) was due to the same effects which
produced the increase in revenues.  This growth caused corresponding increases
in depreciation expense (due to the growth in depreciable assets) and general
and administrative expenses.

     For the three month period ended March 31, 1997, the Partnership earned
net income of  approximately $412,000  compared to approximately $175,000 for
the corresponding period of the previous year.  The increase in year-to-date
net income over the prior year's period (136%) was primarily due to the
increase in revenues discussed above.

     Based upon the results of operations for the three month period ended
March 31, 1997, the Partnership distributed to its limited partners a total of
$540,000 representing cash flow from operations for that period.  These amounts
were distributed as follows: $35,805 paid in February 1997 and $32,340 paid in
March 1997 to investors that have elected to receive monthly distributions and
$471,855 paid in April 1997 to all investors.  On a comparative basis, the
Partnership distributed to its limited partners a total of $254,000 for the
corresponding three month period of the preceding year.  The increase in
distributions over the prior year's period (113%) was due to the increase in
net income discussed above and the reduction in net investment in financing
leases (i.e. capital returned on equipment lease investments) resulting from
the growth in the equipment lease portfolio.

TENANT DEFAULT:

     The Partnership has invested in a financing lease, which lease has a net
investment value of $241,765 as of March 31, 1997.  The lessee under this
lease, Kenny Rogers Roasters of Arizona, Inc., has defaulted on the lease
agreement due to non-payment of rents.  As of March 31, 1997, the Partnership
is owed $59,615 of rents past due from February 1, 1996 and

                                       11



<PAGE>   14

forward.  Presently, this default has caused the suspension of cash flows from
rents to the Partnership in an amount equal to $4,258 per month, which amount
represents 2.3% of the Partnership's aggregate current monthly rental income
(excluding additional rent which may be received from any future acquisitions).

     On May 1, 1997, the Partnership executed a lease agreement with
Captec-Roasters, L.L.C., a Michigan limited liability company DBA Kenny Rogers
Roasters ("Captec-Roasters").  The equipment is being used in the operation of
the Kenny Rogers Roasters restaurant  located at 1949 E. Camelback, Suite 160,
Phoenix, Arizona ("Arizona KRR Equipment").  The address of Captec-Roasters is
899 W. Cypress Creek Road. Suite 500, Ft. Lauderdale, Florida 33309.  Captec
Financial Group, Inc., an affiliate of the Managing General Partner of the
Partnership, is a member of Captec-Roasters.  Roasters Corp., a Florida
corporation and the franchisor of Kenny Rogers Roasters Restaurants, is also a
member of Captec-Roasters and is responsible for the operation of the
restaurant.

     The lease dated May 1, 1997 is the Partnership's standard form of
equipment lease (the "KRR Lease").  Under the terms of the KRR Lease,
Captec-Roasters is responsible for all expenses related to the Arizona KRR
Equipment including taxes, insurance, maintenance and repair costs.  The KRR
Lease term is 70 months.  The annual rent for the first 12 months of the KRR
Lease is $6,869 and is $4,849 for the 58 months thereafter.   At the end of the
KRR Lease term, upon at least 90 days prior irrevocable notice of the
Partnership, Captec-Roasters shall have the option to purchase all of the
Arizona KRR Equipment for one dollar $1.00.


                                       12



<PAGE>   15


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                          PART II - OTHER INFORMATION


Item 1.     Legal Proceedings

            None

Item 2.     Changes in Securities

            None

Item 3.     Defaults Upon Senior Securities

            None

Item 4.     Submission of Matters to a Vote of Security Holders

            None

Item 5.     Other Information

            None

Item 6.     Exhibits and Reports on Form 8-K


            (a) Exhibits.

            No.  Exhibit

            4    Agreement of Limited Partnership of Registrant
                 (Incorporated by reference from Exhibit A of the final
                 Prospectus dated August 12, 1994, as supplemented and filed
                 with the Securities and Exchange Commission, S.E.C. File No.
                 33-77510C).

            27   Financial Data Schedule

         (b)  Reports on Form 8-K.  There were no reports on Form 8-K filed
         during the three month period ending March 31, 1997.




                                       13



<PAGE>   16


                                   SIGNATURES



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
                                                           
                          By:   Captec Franchise Capital Corporation III   
                                Managing General Partner of                
                                Captec Franchise Capital Partners L.P. III 
                                                                           
                                                                           
                                                                           
                          By:   /w/ W. Ross Martin                         
                                -------------------------                  
                                W. Ross Martin                             
                                Chief Financial Officer and Vice President,
                                a duly authorized officer                  
                                                                           
                          Date: May 19, 1997                               
                


                                       14

<PAGE>   17
                                EXHIBIT INDEX



<TABLE>
<CAPTION>
Exhibit No.                    Description
-----------                    -----------
<S>                        <C>
Exhibit 27                 Financial Data Schedule
</TABLE>