<PAGE>   1

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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ---------------------

                                  FORM 10-KSB

(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, 1999 OR

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

FOR THE TRANSITION PERIOD FROM                 TO

COMMISSION FILE NUMBER 33-77510C

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                 (Name of small business issuer in its charter)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      38-3160141
       (State or other jurisdiction of                        (I.R.S. Employer
        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)
</TABLE>

                           Issuer's telephone number:
                                 (734) 994-5505

<TABLE>
<S>                                                       <C>
Securities registered under Section 12(b) of the
  Exchange Act:                                           None
Securities registered under Section 12(g) of the
  Exchange Act:                                           Units of limited partnership interest
                                                          ($1,000)
                                                          (Title of Class)
</TABLE>

     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  ___ No _____

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.[X]

     At December 31, 1999 subscriptions for 20,000 units of limited partnership
interest (the "Units") had been accepted, representing an aggregate amount of
$20,000,000. At December 31, 1999, 19,884 Units were issued and outstanding. The
aggregate sales price does not reflect market value and 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 August 12, 1994, as
supplemented and filed pursuant to Rule 424(b) under the Securities Act of 1933,
as amended, S.E.C. File No. 33-77510C, and is incorporated by reference in Part
III of this Annual Report on Form 10-KSB.

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<PAGE>   2

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

     Captec Franchise Capital Partners L.P. III (the "Partnership") is a
Delaware limited partnership formed on February 18, 1994 for the purpose of
acquiring income-producing commercial real properties and 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. The general partners upon formation of the Partnership were
Captec Franchise Capital Corporation III ("Captec") and Patrick L. Beach, an
individual. In August 1998, the general partnership interest in the Partnership
was acquired by Captec Net Lease Realty, Inc. ("Captec Net Lease"), an affiliate
of Captec, for $1,483,000. Captec Net Lease, Captec, and Mr. Beach are
collectively referred to as the "General Partners."

     The Partnership commenced a public offering (the "Offering") of up to
20,000 units of limited partnership interest (the "Units") registered under the
Securities Act of 1933, as amended, by means of a Registration Statement on Form
SB-2 which was declared effective by the Securities and Exchange Commission on
August 12, 1994. Capitalized terms not defined herein shall have the meaning
ascribed to them in the Partnership's Prospectus dated August 12, 1994.

     On January 24, 1995, the Partnership commenced operations. The Offering
reached final funding in August, 1996, with subscriptions for the entire 20,000
Units and funds from 1,392 limited partners totaling $20,000,000. During
December, 1997, the Partnership repurchased a total of 37 Units for $31,450, or
85% of the investor's capital account. An additional 79 Units were repurchased
in December, 1999 for $59,625, or 75% of the investor's capital account. The
repurchase of the Units was completed pursuant to the terms of the Repurchase
Plan set forth in the Partnership's Prospectus. At December 31, 1999, the
Partnership had 19,884 Units issued and outstanding.

     The principal investment objectives of the Partnership are: (i)
preservation and protection of capital; (ii) distribution of cash flow generated
by the Partnership's leases; (iii) capital appreciation of Partnership
properties; (iv) generation of increased income and protection against inflation
through contractual escalation of base rents or participation in gross revenues
of lessees of Partnership properties; and (v) deferred taxation of Partnership
cash distributions of the Partnership for limited partners of the Partnership
(the "Limited Partners").

     The Partnership expects to have not less than 75%, but not more than 90% of
total investments in Properties and up to 25%, but not less than 10% in
Equipment. 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. 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").

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

ITEM 2. DESCRIPTION OF PROPERTIES

     As of December 31, 1999, the Partnership had a portfolio of 15 properties
located in 10 states, with a cost basis of $20.0 million and 12 performing
equipment leases with an original investment of $4.0 million. The Properties are
leased to 12 operators of restaurant concepts such as Red Robin and Denny's and
one retail operator, Hollywood Video. As of December 31, 1999, leases to Red
Robin International, Inc., DenAmerica Corp., and Foodmaker, Inc. represented
11.1%, 9.1%, and 7.6% of the annualized rent from the Properties. Any failure of
these leases could materially affect the Partnership's income.

     In October of 1998, Boston Chicken Inc. and the majority of its
subsidiaries filed for Chapter 11 bankruptcy protection. As a consequence, one
of the Partnership's Boston Chicken leases was rejected and
<PAGE>   3

classified as vacant as of December 31, 1998. Boston Chicken, Inc. and its
affiliates operating in Chapter 11 collectively agreed to assume one lease with
slightly modified terms. The Partnership has one additional lease to a Boston
Chicken affiliate that is not currently operating in bankruptcy. The vacant
Boston Chicken property was sold in April 1999, and the proceeds were reinvested
in properties and equipment.

     The Partnership recorded rental income of approximately $386,000 from all
Boston Market properties during 1998, $101,000 of which represented rental
income from the rejected lease contract. In 1998, the Partnership recorded a
one-time non-cash charge of approximately $22,000 related to unbilled rents on
the rejected lease contract. Minimum monthly rental due under the rejected lease
was approximately $9,000. Annualized rent from the remaining Boston Chicken
leases was $238,000 at December 31, 1998.

     The Partnership has one impaired equipment lease at December 31, 1999, with
a recorded investment of $181,329 net of a related allowance of $153,837. The
net investment in the impaired lease represents the estimated proceeds that the
Partnership expects to receive.

     The following is a summary description of the Property and Equipment leases
as of December 31, 1999.
<TABLE>
<CAPTION>
                                                                          TOTAL ASSET
                                                                             COST                             DATE OF
                                                                           INCLUDING     ASSET                  NEXT
                                                  DATE OF     DATE OF     ACQUISITION    STATE     MONTHLY      RENT
          LESSEE NAME             CONCEPT NAME    COMMENCE   EXPIRATION      FEES       LOCATION     RENT     INCREASE
          -----------             ------------    --------   ----------   -----------   --------   -------    --------
<S>                              <C>              <C>        <C>          <C>           <C>        <C>        <C>
PROPERTIES
Platinum Properties, LLC.......  Boston Market      2/1/95     10/1/09    $ 1,050,000      NC      $ 10,118    2/1/00
America's Favorite Chicken
  Co...........................  Church's          11/1/95     11/1/15        661,500      TX         5,775   11/1/00
Gourmet Systems, Inc...........  Applebee's         8/1/95      8/1/15      1,724,583      IL        16,920    8/1/00
DenAmerica Corp................  Denny's           10/1/96      9/1/15      1,032,927      VA         8,854    9/1/00
Red Robin International,
  Inc..........................  Red Robin          4/1/96      4/1/16      2,846,963      TX        26,766    4/1/00
New Jersey Rose, LLC...........  Boston Market      7/1/96      7/1/11      1,200,150      NJ         8,501    1/1/00
Foodmaker, Inc.................  Jack in Box       10/1/96     10/1/14        987,000      TX         8,225   10/1/01(1)
Hollywood Entertainment
  Corp.........................  Hollywood Video    9/1/96      5/1/11      1,102,500      OK         9,844    9/1/01(2)
Corral South Store #3, Inc.....  Golden Corral      6/1/97      6/1/17      1,680,000      FL        14,534    6/1/02
DenAmerica Corp................  Black Eyed Pea    10/1/96     10/1/16      1,561,106      TX        13,164   10/1/02(3)
Foodmaker, Inc.................  Jack in Box        1/1/99      1/1/17      1,286,250      WA        10,209    1/1/04
Tec-Foods, Inc.................  Taco Bell          1/1/99      1/1/19        840,000      MI         6,833    1/1/02
Romacorp, Inc..................  Tony Roma's        1/1/99      1/1/14      1,942,500      FL        15,417    1/1/02
RTM, Inc.......................  Arby's             8/1/99      8/1/19        706,011      NC         5,304    9/1/01
Border Foods...................  Taco Bell          4/1/99      4/1/19      1,338,750      MN         9,563    4/1/01
                                                                          -----------              --------
                                                                           19,960,240               170,027
EQUIPMENT
J.M.C. Limited Partnership.....  Applebee's         4/1/99      4/1/06        391,112      UT         6,136
KG Restaurants, Inc............  Burger King        4/1/99      4/1/06        315,000      AZ         5,058
Roma Texarkoma Joint Venture...  Johnny Carino's    4/1/99      4/1/06        446,250      TX         7,241
Olajuwon Holdings..............  Denny's            4/1/99      4/1/07        306,737      AL         4,576
Morgan's Foods of Ohio, Inc....  KFC                6/1/99      6/1/06        196,469      OH         3,019
Chi-Co, Inc....................  Arby's             6/1/99      6/1/06        105,000      IL         1,671
American Hospitality Corp......  Taco Bell          6/1/99      6/1/06        195,430      NC         3,110
The Snyder Group Company.......  Red Robin         5/15/95     5/15/00        787,500      CO        16,988
DenAmerica Corp................  Denny's          11/15/95    11/15/00        286,593      FL         5,404
Checkers Corp..................  Checkers          3/15/96     3/15/03        236,250      FL         4,050
The Green Team Restaurants.....  Denny's            5/1/96      5/1/01        359,922      OR         7,541
J.M.C. Limited Partnership.....  Applebee's        9/15/96     9/15/03        403,411      UT         6,624
                                                                          -----------              --------
                                                                            4,029,674                40,606
                                                                          -----------              --------
Total:.................................................................   $23,989,914              $210,633
                                                                          ===========              ========

<CAPTION>

                                  ANNUAL
                                 RATE OF
                                 INCREASE
          LESSEE NAME              (4)      SQ. FT.
          -----------            --------   -------
<S>                              <C>        <C>
PROPERTIES
Platinum Properties, LLC.......   2.50%      3,007
America's Favorite Chicken
  Co...........................   1.92%      1,850
Gourmet Systems, Inc...........   3.00%      5,580
DenAmerica Corp................   2.41%      3,012
Red Robin International,
  Inc..........................   2.50%      7,485
New Jersey Rose, LLC...........   1.92%      3,333
Foodmaker, Inc.................   1.92%      2,860
Hollywood Entertainment
  Corp.........................      0%      7,500
Corral South Store #3, Inc.....   2.39%      8,825
DenAmerica Corp................      0%      5,445
Foodmaker, Inc.................   1.50%      2,669
Tec-Foods, Inc.................   0.66%      2,356
Romacorp, Inc..................   1.96%      6,297
RTM, Inc.......................   0.99%      2,554
Border Foods...................   1.33%      2,687
EQUIPMENT
J.M.C. Limited Partnership.....
KG Restaurants, Inc............
Roma Texarkoma Joint Venture...
Olajuwon Holdings..............
Morgan's Foods of Ohio, Inc....
Chi-Co, Inc....................
American Hospitality Corp......
The Snyder Group Company.......
DenAmerica Corp................
Checkers Corp..................
The Green Team Restaurants.....
J.M.C. Limited Partnership.....
Total:.........................
</TABLE>

-------------------------

(1) Rent Increase equals the greater of CPI or 10.0%.

(2) Rent Increase equals the lesser of CPI or 12.0%.

(3) Rent Increase equals the lesser of CPI or 10.0%.

(4) Rate of increase was calculated on a compounded annual basis.

                                        2
<PAGE>   4

REAL ESTATE

     General Real Estate Lease Provisions: All of the properties are subject to
leases which are triple net leases whereby the tenant is responsible for all
expenses related to the cost of operating the Properties including real estate
taxes, insurance, maintenance and repair costs.

     The General Partners or their affiliates analyzed demographic, geographic
and market diversification data for the areas in which each of the properties
are located and reviewed the appraisals of the properties and the analysis
regarding comparable properties contained therein. All of the purchase prices
were negotiated by General Partners or their affiliates, considering factors
such as the potential value of the site, the financial condition and business
and operating history of the tenants and demographic data for the areas in which
the properties are located.

     The lessees generally pay all expenses incident to the closing of these
transactions including, the Partnership's attorney's fees, title insurance
premiums, recording fees and expenses and transfer.

EQUIPMENT

     General Equipment Lease Provisions: All of the equipment leases are on the
Partnership's standard form of lease whereby the lessee is responsible for all
expenses related to the equipment including taxes, insurance, maintenance and
repair costs. Prior to entering into the leases, an affiliate of the General
Partner considered factors such as the financial condition and business and
operating history of the lessees and demographic data for the area in which the
equipment is located. All of the equipment was purchased with cash from offering
proceeds. The General Partner believes that the amount of insurance carried by
each lessee is adequate.

SUMMARY OF INVESTMENT OBJECTIVES AND POLICIES

     The Partnership acquires income-producing property and equipment which is
leased primarily to operators of nationally franchised fast-food, family style
and dinner house restaurants as well as other franchised service-type businesses
such as automotive and specialty retail franchises. Properties are 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 history of the proposed lessee, the demographics of the area in which
the property is located, the proposed purchase price and lease terms, geographic
and market diversification, and potential operating results. Similar analyses
are utilized in selecting equipment. 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 making investments, the General Partners 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, the General Partners generally 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 ten and twenty
     years.

     In selecting specific equipment, the General Partners typically 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

                                        3
<PAGE>   5

          (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 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.

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 1999.

                                    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."

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

RESULTS OF OPERATIONS

     For the year ended December 31, 1999, operating revenue increased 30% to
$2.5 million as compared to $1.9 million for the year ended December 31, 1998.
Rental income from operating leases for 1999 increased 33% to $2.3 million as
compared to $1.7 million for 1998 primarily from the benefit of a full year of
rental

                                        4
<PAGE>   6

income from properties acquired and leased in preceding periods. Earned income
from financing leases for 1999 increased 5% to $203,000 as compared to $193,000
for 1998 as a result of the addition of four financing leases in April 1999 and
three financing leases in June 1999 offset by approximately $16,000 due to the
impairment of one equipment lease.

     General and administrative expenses decreased to $73,000 for 1999 as
compared to $75,000 for 1998. Depreciation expense increased 28% to $291,000 for
1999 as compared to $228,000 for 1998 principally due to the effect of a full
period of depreciation of properties acquired and leased in the preceding year.
Interest expense increased to $695,000 for 1999 as compared to $43,000 for 1998.
The increase is the result of the $6.2 million term note that the Partnership
entered into in November 1998 and the $2.0 million term note that the
Partnership entered into in March 1999.

     The Partnership incurred a loss of approximately $158,000 on net proceeds
of approximately $1,011,000 for the disposition of vacant property and two
equipment leases during 1999, including one impaired lease.

     As a result of the foregoing, the Partnership's net income for 1999
decreased 7% to $1.3 million from $1.4 million in 1998. The Partnership is not
subject to income taxation as all of its income and expenses flow through to the
Partners. During the year ended December 31, 1999, the Partnership made
distributions to Limited Partners totaling $1,984,885, as compared with
$2,133,000 for the preceding year.

LIQUIDITY AND CAPITAL RESOURCES

     The Partnership commenced the Offering of up to 20,000 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 on August 12, 1996, with subscriptions for the entire 20,000 Units
and funds totaling $20,000,000. Net proceeds after offering expenses were
$17,400,000.

     In November 1998, the Partnership entered into a $6.2 million term note.
The Partnership entered into an additional $2.0 million term note in March 1999.
Proceeds from the notes were used to acquire additional properties and
equipment. The notes have a 10 year term, are collateralized by certain
properties subject to operating leases, and bear interest at rates ranging from
8.37 to 8.5% per annum. Debt issuance costs of approximately $478,000 in
aggregate incurred in connection with the issuance of the notes are being
amortized over the life of the note to interest expense using the straight-line
method.

     During 1999, the Partnership funded approximately $1.1 million for the
continued development and acquisition of four real estate properties. The
Partnership also purchased seven equipment leases during 1999 for approximately
$2.0 million. As of December 31, 1999, the Partnership had $20.0 million
invested in 15 net leased real estate properties and $4.0 million invested in 12
performing equipment packages. The Partnership also owns equipment from one
impaired financing lease.

     The Partnership expects that only limited amounts of liquid assets will be
required for existing properties since the form of lease which it uses for its
properties and equipment requires 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 provide adequate liquidity and
capital resources to pay operating expenses and provide distributions to Limited
Partners.

ITEM 7. FINANCIAL STATEMENTS

     See Index to Financial Statements on Page F-I of this Form 10-KSB for
Financial Statements.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None.

                                        5
<PAGE>   7

                                    PART III

ITEM 9. 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.

ITEM 10. EXECUTIVE COMPENSATION

     The Partnership has no officers or directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     To the best knowledge of the Partnership, as of December 31, 1999, no
person beneficially owned more than 5% of the outstanding Units.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1999 and 1998, the General Partners received acquisition fees from
the Partnership of $119,741 and $433,756, respectively, for services rendered in
connection with the selection, evaluation and acquisition of the properties and
equipment, as provided for in the Partnership Agreement.

     The General Partners believe that the Asset Management Agreement entered
into is on terms no less favorable to the Partnership than those customary for
similar services by independent firms in the relevant geographic area. The Asset
Management Agreement provides for termination by a majority vote of the Limited
Partners, without penalty, upon 60 days prior written notice. The asset
management fees incurred by the Partnership in 1999 and 1998 were $26,670 and
$21,220, respectively.

     In August, 1998 the general partnership interest in the Partnership was
acquired by Captec Net Lease Realty, Inc., an affiliate of Captec, for
$1,483,000.

     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 12
through 16 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 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 been 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 affiliates are not prohibited from providing services
to, and otherwise dealing or doing business with, persons (for example,
franchisees), who may deal with the Partnership. However, the Partnership
Agreement prohibits receipt of rebates or "give-ups" or participation in any
reciprocal business arrangements which would have the effect of circumventing
any of the provisions of the Partnership Agreement.

                                        6
<PAGE>   8

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>
NUMBER                              EXHIBIT
------                              -------
<C>       <S>
    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)
  4.1     Amended Agreement of Limited Partnership of Registrant.
          (Incorporated by reference to the corresponding exhibit in
          the Registrant's Form 10-KSB for the fiscal year ended
          December 31, 1998)
 10.1     Promissory Note dated November 28, 1998 between Registrant
          and National Realty Funding L.C. (Incorporated by reference
          to the corresponding exhibit in the Registrant's Form 10-KSB
          for the fiscal year ended December 31, 1998)
 10.2     Promissory Note dated March 31, 1999 between Registrant and
          National Realty Funding L.C. (Incorporated by reference to
          the corresponding exhibit in the Registrant's Form 10-QSB
          for the quarter ended March 31, 1999)
   27     Financial Data Schedule
 99.1     Pages 12-16 of the final Prospectus dated August 12, 1994,
          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. 33-77510C
</TABLE>

     (b) Reports on Form 8-K:

     There were no reports filed on Form 8-K for the fourth quarter ended
December 31, 1999.

                                        7
<PAGE>   9

                                   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. III

                                          By: Captec Net Lease Realty, Inc.,
                                            Managing General Partner

                                          By: /s/ W. ROSS MARTIN
                                            ------------------------------------
                                            W. Ross Martin
                                            Executive Vice President,
                                            Chief Financial Officer

                                          Date: March 30, 2000

     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
    of Captec Net Lease Realty, Inc.

Date: March 30, 2000

By: /s/ W. ROSS MARTIN
    ----------------------------------
    W. Ross Martin
    Executive Vice President,
    Chief Financial Officer
    of Captec Net Lease Realty, Inc.

Date: March 30, 2000

                                        8
<PAGE>   10

                         INDEX TO FINANCIAL STATEMENTS

CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

<TABLE>
<CAPTION>
                                                                 PAGE
                                                                 ----
<S>                                                             <C>
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
</TABLE>

                                        i
<PAGE>   11

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Captec Net Lease Realty, Inc.
Managing General Partner of
Captec Franchise Capital Partners L.P. III:

     In our opinion, the accompanying balance sheets and the related statements
of operations, partners capital and of cash flows present fairly, in all
material respects, the financial position of Captec Franchise Capital Partners
L.P. III at December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which 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 the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan
March 6, 2000

                                     F(a)-1
<PAGE>   12

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                                 BALANCE SHEET
                           December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                   1999           1998
                                                                   ----           ----
<S>                                                             <C>            <C>
ASSETS
Cash and cash equivalents...................................    $   327,903    $   493,136
Restricted cash.............................................        266,452        153,142
Investment in leases:
  Operating leases, net.....................................     19,104,889     19,340,098
  Financing leases, net.....................................      2,574,417      1,249,313
  Impaired financing leases, net............................         27,492         50,000
Accounts receivable.........................................         56,405        154,948
Unbilled rent, net..........................................        816,948        571,705
Due from related parties....................................         17,184        140,948
Deferred financing costs, net...............................        430,118        390,066
                                                                -----------    -----------
     Total assets...........................................    $23,621,808    $22,543,356
                                                                ===========    ===========

LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
  Notes payable.............................................    $ 8,194,000    $ 6,200,000
  Accounts payable and accrued expenses.....................         73,796        165,907
  Due to related parties....................................         40,214         36,662
  Security deposits held on leases..........................         54,774         59,329
                                                                -----------    -----------
     Total liabilities......................................      8,362,784      6,461,898
                                                                -----------    -----------
Partners' capital:
Limited partners' capital accounts..........................     15,240,812     16,035,439
General partner's capital accounts..........................         18,212         46,019
                                                                -----------    -----------
     Total partners' capital................................     15,259,024     16,081,458
                                                                -----------    -----------
     Total liabilities and partners' capital................    $23,621,808    $22,543,356
                                                                ===========    ===========
</TABLE>

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

                                     F(a)-2
<PAGE>   13

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                            STATEMENT OF OPERATIONS
                 for the years ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                   1999          1998
                                                                   ----          ----
<S>                                                             <C>           <C>
Operating revenue:
  Rental income.............................................    $2,261,327    $1,697,848
  Finance income............................................       203,058       193,114
                                                                ----------    ----------
     Total operating revenue................................     2,464,385     1,890,962
Operating costs and expenses:
  Interest expense..........................................       694,790        43,245
  Depreciation..............................................       290,777       227,925
  General and administrative................................        73,496        75,326
  Provision for unbilled rent...............................            --        21,567
  Provision for impaired financing leases...................            --       178,838
                                                                ----------    ----------
     Total operating costs and expenses.....................     1,059,063       546,901
                                                                ----------    ----------
     Income from operations.................................     1,405,322     1,344,061
Other (expense) income:
  Gain (loss) on sale of equipment..........................         1,012        (1,104)
  Loss on sale of real estate...............................      (159,422)           --
  Interest income...........................................         4,923         8,763
  Other.....................................................        10,673         6,065
                                                                ----------    ----------
     Total other (expense) income...........................      (142,814)       13,724
                                                                ----------    ----------
Net income..................................................     1,262,508     1,357,785
Net income allocable to general partner.....................        12,625        13,578
                                                                ----------    ----------
Net income allocable to limited partners....................    $1,249,883    $1,344,207
                                                                ==========    ==========
Net income per limited partnership unit.....................    $    62.63    $    67.33
                                                                ==========    ==========
Weighted average number of limited partnership units
  outstanding...............................................        19,956        19,963
                                                                ==========    ==========
</TABLE>

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

                                     F(a)-3
<PAGE>   14

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
                 for the years ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                     LIMITED       LIMITED       GENERAL        TOTAL
                                                    PARTNERS'     PARTNERS'     PARTNERS'     PARTNERS'
                                                      UNITS       ACCOUNTS      ACCOUNTS       CAPITAL
                                                    ---------     ---------     ---------     ---------
<S>                                                 <C>          <C>            <C>          <C>
Balance, January 1, 1998........................     19,963      $16,824,232    $ 32,441     $16,856,673
Distributions -- ($106.85 per unit).............         --       (2,133,000)         --      (2,133,000)
Net income......................................         --        1,344,207      13,578       1,357,785
                                                     ------      -----------    --------     -----------
Balance, December 31, 1998......................     19,963       16,035,439      46,019      16,081,458
Repurchase of limited partnership units.........        (79)         (59,625)                    (59,625)
Distributions -- ($99.82 per unit)..............                  (1,984,885)    (40,432)     (2,025,317)
Net income......................................         --        1,249,883      12,625       1,262,508
                                                     ------      -----------    --------     -----------
Balance, December 31, 1999......................     19,884      $15,240,812    $ 18,212     $15,259,024
                                                     ======      ===========    ========     ===========
</TABLE>

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

                                     F(a)-4
<PAGE>   15

                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                            STATEMENT OF CASH FLOWS
                 for the years ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
                                                                   1999          1998
                                                                   ----          ----
<S>                                                             <C>           <C>
Cash flows from operating activities:
  Net Income................................................    $1,262,508    $1,357,785
  Adjustments to net income:
     Depreciation...........................................       290,777       227,925
     Amortization of debt issuance costs....................        47,791            --
     (Gain) loss on sale of equipment.......................        (1,012)        1,104
     Provision for credit losses............................            --       178,838
     Loss on sale of real estate............................       159,422            --
     Increase in unbilled rent..............................      (245,243)     (160,594)
     Decrease in accounts receivable........................        98,543      (143,434)
     Decrease in security deposits..........................        (4,555)           --
     (Decrease) increase in accounts payable and accrued
      expenses..............................................       (92,111)      147,876
     Increase in restricted cash............................      (113,310)     (153,142)
     Decrease (increase) in due from related parties........       123,764      (113,457)
     (Decrease) increase in due to related parties..........         3,552       (22,721)
                                                                ----------    ----------
Net cash provided by operating activities...................     1,530,126     1,320,180
                                                                ----------    ----------
Cash flows from investing activities:
  Purchase and construction cost of properties subject to
     operating leases.......................................    (1,127,118)   (5,691,374)
  Net proceeds from disposition of properties subject to
     operating leases.......................................       912,128            --
  Net proceeds from sale of equipment.......................        98,389       263,453
  Purchase of equipment for financing leases................    (1,955,999)           --
  Principal payments on financing leases....................       556,026       370,263
                                                                ----------    ----------
Net cash used in investing activities.......................    (1,516,574)   (5,057,658)
                                                                ----------    ----------
Cash flows from financing activities:
  Proceeds from issuance of notes payable...................     1,994,000     6,200,000
  Debt issuance costs.......................................       (87,843)     (390,066)
  Repurchase of limited partnership units...................       (59,625)           --
  Distributions to limited partners.........................    (1,984,885)   (2,133,000)
  Distributions to general partner..........................       (40,432)           --
                                                                ----------    ----------
Net cash (used in) provided by financing activities.........      (178,785)    3,676,934
                                                                ----------    ----------
Net decrease in cash and cash equivalents...................      (165,233)      (60,544)
Cash and cash equivalents, beginning of period..............       493,136       553,680
                                                                ----------    ----------
Cash and cash equivalents, end of period....................    $  327,903    $  493,136
                                                                ==========    ==========
</TABLE>

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

                                     F(a)-5
<PAGE>   16

                   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 upon formation of the Partnership were Captec
Franchise Capital Corporation III (the "Corporation"), a wholly owned subsidiary
of Captec Financial Group, Inc. ("Captec") and Patrick L. Beach, the Chairman of
the Board of Directors, President and Chief Executive Officer of the Corporation
and Captec. In August 1998, the General Partnership interest of the Partnership
was acquired by Captec Net Lease Realty, Inc., an affiliate of Captec.

     The Partnership commenced a public offering of 20,000 limited partnership
interests ("Units"), priced at $1,000 per Unit, on August 12, 1994. The
Partnership commenced operations on January 24, 1995.

     In December 1997, the Partnership repurchased a total of 37 Units for
$31,450, or 85% of the investor's capital account. An additional 79 Units were
repurchased on December 1, 1999 for $59,625, or 75% of the investor's capital
account. The repurchase of the Units was completed pursuant to the terms of the
Repurchase Plan set forth in the Partnership's Prospectus. At December 31, 1999,
the Partnership had 19,884 units issued and outstanding.

     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.

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

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

          B. RESTRICTED CASH: The Partnership is required to maintain a cash
     balance in an escrow account until specific post closing requirements have
     been satisfied related to the note payable.

          C. 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. In addition to scheduled rent increases, certain of the
     Partnership's leases also have percentage and overage rent clauses, which
     the Partnership recognizes after the tenants' reported sales have exceeded
     the applicable sales breakpoint.

          D. 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). The Partnership periodically
     reviews its real estate portfolio for impairment whenever events or changes
     in circumstances indicate that the carrying amount of the property may not
     be recoverable. If an impairment loss were indicated using undiscounted
     cash flows, the loss is measured as the amount by which the carrying amount
     of the asset exceeds the estimated fair or present value of the asset.

          E. NET INVESTMENT IN FINANCING LEASES: Net investment in financing
     leases primarily represents equipment used in restaurant operations and are
     leased under a triple-net basis. 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.
     Direct origination costs are deferred and amortized over the life of the
     lease as an adjustment to
                                     F(a)-6
<PAGE>   17
                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED

1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES -- CONTINUED:
     yield. Financing leases delinquent for 90 or more days are determined to be
     impaired, and income accrual is suspended at that time. A loss reserve is
     calculated based on the estimated amounts recoverable. At December 31, 1999
     the Partnership has provided for an allowance of $153,837 for uncollectible
     amounts associated with its financing leases.

          F. NOTE PAYABLE: The fair value of fixed rate debt approximates the
     book value, and is estimated based on current rates offered for notes
     payable of the equivalent remaining maturity.

          G. 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.

          H. 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.

          I. 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.

          J. RECLASSIFICATIONS: Certain prior period financial statement amounts
     have been reclassified to conform to the 1999 presentations.

2. DISTRIBUTIONS:

     Cash flows of the Partnership are allocated 99% to the Limited Partners and
1% to the General Partner, except that the General Partner's share is
subordinated to a 10% preferred return to the limited partners. Net sale or
refinancing proceeds of the Partnership will be allocated 90% to the limited
partners and 10% to the General Partner, except that the General Partner's share
will be subordinated to an 11% preferred return plus return of the original
contributions to the limited partners.

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

3. RELATED PARTY TRANSACTIONS AND AGREEMENTS:

     Pursuant to the Partnership Agreement, acquisition fees of 4%, plus an
additional .00624% for each 1% of indebtedness incurred in acquiring properties
and equipment, of the aggregate purchase prices of properties and equipment (not
to exceed a total 5% acquisition fee) are incurred to the General Partner. The
Partnership incurred $119,741 and $433,756 in acquisition fees during 1999 and
1998, respectively. The acquisition fees were capitalized as part of the
Partnership's investment in land and buildings subject to operating leases and
net investment in financing leases.

     The Partnership has entered into an asset management agreement with the
General Partner and its affiliates, whereby the General Partner and the General
Partner's affiliates provide various property and equipment management services
for the Partnership. A subordinated asset management fee is charged, in an
amount equal to 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 10% per annum on their adjusted invested capital. Management fees of
$26,670 and $21,220 were incurred during 1999 and 1998, respectively.

                                     F(a)-7
<PAGE>   18
                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED

3. RELATED PARTY TRANSACTIONS AND AGREEMENTS -- CONTINUED:
     The Partnership Agreement provides for the General Partner to receive real
estate liquidation fees limited to the lesser of 3% of the gross sales price or
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 11% per annum on
their adjusted invested capital plus distributions of sale or refinancing
proceeds equal to 100% of their original contributions. The Partnership's
Prospectus provides for the reinvestment of net sale proceeds during the four
year period beginning on the date the Partnership terminated the offering,
August 12, 1996. During 1999, the Partnership paid real estate liquidation fees
of $29,250 (see Note 4).

     The Partnership Agreement provides for the General Partner to receive
equipment liquidation fees in the amount of 3% of the contract sales price.
During 1999, the Partnership paid equipment liquidation fees of $8,804 (see Note
5).

4. LAND AND BUILDING SUBJECT TO OPERATING LEASES:

     The net investment in operating leases as of December 31, 1999 and 1998 is
comprised of the following:

<TABLE>
<CAPTION>
                                                           1999           1998
                                                           ----           ----
<S>                                                     <C>            <C>
Land................................................    $ 8,163,346    $ 7,330,991
Building and improvements...........................     11,796,894     11,109,390
Construction draws on properties....................             --      1,485,750
                                                        -----------    -----------
                                                         19,960,240     19,926,131
Less accumulated depreciation.......................       (855,351)      (586,033)
                                                        -----------    -----------
       Total........................................    $19,104,889    $19,340,098
                                                        ===========    ===========
</TABLE>

     All construction draws are subject to the terms of a standard lease
agreement with the Partnership, which fully obligates the tenant under the
long-term lease to all construction related cost amounts advanced through
construction draws including interest during the construction period. Upon
completion of construction and when the tenant lease payments begin, the
construction draws are then capitalized as land and building.

     The following is a schedule of future minimum lease payments to be received
on the operating leases as of December 31, 1999.

<TABLE>
<S>                                                             <C>
2000........................................................    $ 2,059,960
2001........................................................      2,099,686
2002........................................................      2,150,614
2003........................................................      2,177,910
2004........................................................      2,227,412
Thereafter..................................................     24,595,284
                                                                -----------
       Total................................................    $35,310,866
                                                                ===========
</TABLE>

     During 1999, the Partnership recognized a loss of $159,422 on the sale of
real estate. The Partnership received proceeds of $912,128, net of $33,622 of
selling expenses and $29,250 of real estate liquidation fees (see Note 3). The
carrying amount of the real estate was $1,071,550.

                                     F(a)-8
<PAGE>   19
                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED

5. NET INVESTMENT IN FINANCING LEASES:

     The net investment in financing leases as of December 31, 1999 and 1998 is
comprised of the following:

<TABLE>
<CAPTION>
                                                             1999          1998
                                                             ----          ----
<S>                                                       <C>           <C>
Minimum lease payments to be received.................    $3,055,244    $1,228,972
Estimated residual value..............................       177,101       193,101
                                                          ----------    ----------
Gross investment in financing leases..................     3,232,345     1,422,073
Less unearned income..................................      (474,246)      (98,018)
Less direct origination costs.........................      (183,682)      (74,742)
                                                          ----------    ----------
Net investment in financing leases....................    $2,574,417    $1,249,313
                                                          ==========    ==========
</TABLE>

     The following is a schedule of future minimum lease payments to be received
on the financing leases as of December 31, 1999:

<TABLE>
<S>                                                             <C>
2000........................................................    $  693,060
2001........................................................       520,445
2002........................................................       497,821
2003........................................................       420,153
2004........................................................       369,737
Thereafter..................................................       554,028
                                                                ----------
       Total................................................    $3,055,244
                                                                ==========
</TABLE>

     During 1999, the Partnership recognized a gain of $1,012 on the sale of
equipment leases. The Partnership received net proceeds of $98,389, net of
equipment liquidation fees of $8,804 (see Note 3). The net investment in the
equipment leases was $97,377.

6. IMPAIRED FINANCING LEASES

     At December 31, 1999, the Partnership's investment in impaired financing
leases was comprised of one lease. The recorded investment in the lease is
$181,329 net of a related allowance of $153,837. Installment payments on this
lease are delinquent by more than 90 days, and income accrual has been suspended
by the Partnership. The net investment in the impaired lease represents the
estimated net proceeds that the Partnership expects to receive.

7. NOTES PAYABLE

     In November 1998, the Partnership entered into a $6.2 million term note,
the proceeds of which were used to acquire properties. The note has a 10 year
term, is collateralized by certain properties subject to operating leases, and
bears an interest rate of 8.37% per annum.

     In March 1999, the Partnership entered into an additional $2.0 million term
note. The note also has a 10-year term, is collateralized by certain properties
subject to operating leases, and bears an interest rate of 8.5% per annum.

                                     F(a)-9
<PAGE>   20
                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III

                   NOTES TO FINANCIAL STATEMENTS -- CONTINUED

7. NOTES PAYABLE -- CONTINUED:
     At December 31, 1999, annual maturities on the notes in aggregate are as
follows:

<TABLE>
<S>                                                             <C>
2000........................................................    $       --
2001........................................................       151,430
2002........................................................       178,243
2003........................................................       193,806
2004........................................................       210,729
Thereafter..................................................     7,459,792
                                                                ----------
       Total................................................    $8,194,000
                                                                ==========
</TABLE>

     Debt issuance costs of $477,909 in aggregate were incurred in connection
with the issuance of the notes, and are being amortized to interest expense
using the straight-line method over the 10-year term.

8. SUBSEQUENT EVENT:

     Based upon the results of operations for the three month period ended
December 31, 1999, the Partnership declared distributions of $512,000 to its
limited partners on January 15, 2000.

                                     F(a)-10
<PAGE>   21

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER                              EXHIBIT                             PAGE
------                              -------                             ----
<C>       <S>                                                           <C>
    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)
  4.1     Amended Agreement of Limited Partnership of Registrant.
          (Incorporated by reference to the corresponding exhibit in
          the Registrant's Form 10-KSB for the fiscal year ended
          December 31, 1998)
 10.1     Promissory Note dated November 28, 1998 between Registrant
          and National Realty Funding L.C. (Incorporated by reference
          to the corresponding exhibit in the Registrant's Form 10-KSB
          for the fiscal year ended December 31, 1998)
 10.2     Promissory Note dated March 31, 1999 between Registrant and
          National Realty Funding L.C. (Incorporated by reference to
          the corresponding exhibit in the Registrant's Form 10-QSB
          for the quarter ended March 31, 1999)
   27     Financial Data Schedule
 99.1     Pages 12-16 of the final Prospectus dated August 12, 1994,
          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. 33-77510C
</TABLE>