<PAGE>   1

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

(Mark One)                                 FORM 10-KSB/A

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

                   For the fiscal year ended December 31, 1997

                                       OR

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

            For the Transition period from          to
                                          ----------  ----------

                        Commission file number 33-77510C

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

       Delaware                                               38-3160141
---------------------------------                         -------------------
(State or other jurisdiction                               (I.R.S. Employer
of incorporation or organization)                         Identification No.)


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

Issuer's telephone number:  (734) 994-5505
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
                                                               ($1.0000)
                                                               ----------------
                                                               (Title of Class)

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. [ X ] 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, 1997 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, 1997, 19,963 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.


                                       1
<PAGE>   2



                    CAPTEC FRANCHISE CAPITAL PARTNERS L.P. IV
               ITEM 14-EXHIBITS, FINANCIAL STATEMENTS AND REPORTS


         Due to information being transferred between computer applications, the
balance sheets submitted March 31, 1998 for the year ended December 31, 1997
were misstated.

         As required, we are submitting the entire financial statements and
auditors' reports including the corrected balance sheets.


















                                       2
<PAGE>   3


                          INDEX TO FINANCIAL STATEMENTS


CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III                                 PAGE
                                                                           ----

Report of Independent Accountants.............................................4

Financial Statements:

       Balance Sheet..........................................................5

       Statement of Operations................................................6

       Statement of Changes in Partners' Capital..............................7

       Statement of Cash Flows................................................8

       Notes to Financial Statements..........................................9


CAPTEC FRANCHISE CAPITAL CORPORATION III


Report of Independent Accountants............................................15

Financial Statements:

       Balance Sheet.........................................................16

       Statement of Operations...............................................17

       Statement of Changes in Stockholders' Equity..........................18

       Statement of Cash Flows...............................................19

       Notes to Financial Statements.........................................20




                                       3
<PAGE>   4

REPORT OF INDEPENDENT ACCOUNTANTS



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

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

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

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






/s/ Coopers & Lybrand

Detroit, Michigan
March 14, 1998




                                       4
<PAGE>   5


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



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

<S>                                                                    <C>           <C>
Cash and cash equivalents                                              $   553,680   $   690,175
Investment in property under leases:
   Operating leases, net                                                13,876,649    13,732,321
   Financing leases, net                                                 2,062,971     2,905,751
   Impaired financing lease, net                                            50,000             -
Accounts receivable                                                         11,514         1,959
Unbilled rent                                                              411,111       210,673
Due from related parties                                                    27,491        20,589
                                                                       -----------   -----------
Total assets                                                           $16,993,416   $17,561,468
                                                                       ===========   ===========

                                     LIABILITIES & PARTNERS' CAPITAL

Liabilities:
   Accounts payable                                                    $    18,031   $     4,852
   Due to related parties                                                   59,383         7,728
   Operating lease rents received in advance                                     -        43,916
   Security deposits held on leases                                         59,329        65,953
                                                                       -----------   -----------
Total liabilities                                                          136,743       122,449
                                                                       -----------   -----------
Partners' Capital:
Limited partners' capital accounts                                      16,824,232    17,422,518
General partners' capital accounts                                          32,441        16,501
                                                                       -----------   -----------
Total partners' capital                                                 16,856,673    17,439,019
                                                                       -----------   -----------
Total liabilities & partners' capital                                  $16,993,416   $17,561,468
                                                                       ===========   ===========
</TABLE>


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


                                       5
<PAGE>   6
                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                             STATEMENT OF OPERATIONS
                 for the years ended December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                      1997           1996
                                                   ----------   ----------
<S>                                                <C>          <C>
Operating revenue:
   Rental income                                   $1,672,274   $  983,625
   Finance income                                     328,204      341,142
                                                   ----------   ----------

             Total operating revenue                2,000,478    1,324,767
                                                   ----------   ----------

Operating costs and expenses:
   Depreciation                                       209,859      114,272
   General and administrative                          89,781       55,125
   Credit allowance for impaired financing lease      169,775            -
                                                   ----------   ----------

             Total operating costs and expenses       469,415      169,397
                                                   ----------   ----------

             Income from operations                 1,531,063    1,155,370
                                                   ----------   ----------
Other income:
   Gain on sale of equipment                            9,299            -
   Interest income                                     50,460      154,575
   Other                                                3,190       12,141
                                                   ----------   ----------

             Total other income                        62,949      166,716
                                                   ----------   ----------

Net income                                          1,594,012    1,322,086

Net income allocable to general partners               15,940       13,222
                                                   ----------   ----------

Net income allocable to limited partners           $1,578,072   $1,308,864
                                                   ==========   ==========

Net income per limited partnership unit            $    78.91   $    84.07
                                                   ==========   ==========
Weighted average number of limited partnership
   units outstanding                                   19,998       15,569
                                                   ==========   ==========
</TABLE>



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


                                       6
<PAGE>   7
                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                    STATEMENT OF CHANGES IN PARTNERS' CAPITAL
                 for the years ended December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                   Limited       Limited        General           Total
                                                  Partners'      Partners'      Partners'        Partners'
                                                    Units        Accounts       Accounts         Capital
                                               ------------   ------------    -----------     ------------ 
<S>                                               <C>         <C>             <C>             <C>
Balance, January 1, 1996                             7,400    $  6,527,785    $      3,279    $  6,531,064

Issuance of 12,600 limited partnership, net         12,600      10,957,187                      10,957,187

Distributions - ($88.08 per unit)                               (1,371,318)                     (1,371,318)

Net income                                                       1,308,864          13,222       1,322,086
                                                ----------    ------------    ------------    ------------

Balance, January 1, 1997                            20,000      17,422,518          16,501      17,439,019

Repurchase of limited partnership units                (37)        (31,450)                        (31,450)

Distributions - ($107.26 per unit)                              (2,144,908)              -      (2,144,908)

Net income                                                       1,578,072          15,940       1,594,012
                                                ----------    ------------    ------------    ------------

Balance, December 31, 1997                          19,963    $ 16,824,232    $     32,441    $ 16,856,673
                                                ==========    ============    ============    ============
</TABLE>



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





                                       7
<PAGE>   8





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


<TABLE>
<CAPTION>
                                                                                  1997            1996
                                                                                  ----            ----
<S>                                                                          <C>             <C>
Cash flows from operating activities:
   Net Income                                                                $  1,594,012    $  1,322,086
   Adjustments to net income:
        Depreciation                                                              209,859         114,272
        Gain on sale of equipment                                                  (9,299)              -  
        Provision for credit losses                                               169,775               -

        Increase in unbilled rent                                                (200,438)       (163,522)
        Increase in receivables                                                    (9,555)         (1,959)
        (Decrease) increase in payables                                            13,179         (20,387)
        (Decrease) increase in lease rents received in advance                    (43,916)         43,916 
                                                                                  
        (Decrease) increase in security deposits held on leases                    (6,624)         38,584   
                                                                             ------------    ------------

Net cash provided by operating activities                                       1,716,993       1,332,990
                                                                             ------------    ------------

Cash flows from investing activities:
   Purchase and construction advances of real estate
        for operating leases                                                     (926,187)    (10,477,310)
   Proceeds from disposition of real estate for operating leases                  572,000               -
   Purchase of equipment for financing leases                                           -      (1,357,856)
   Proceeds from sale of equipment                                                 15,842               - 
   Reduction of net investment in financing leases                                616,462         331,707
                                                                             ------------    ------------

Net cash provided by (used in) investing activities                               278,117     (11,503,459)
                                                                             ------------    ------------

Cash flows from financing activities:
   Increase in due from related parties                                            (6,902)        (14,180)    
   Increase in due to related parties                                              51,655           5,300
   Issuance of limited partnership units                                                -      12,585,027

   Repurchase of limited partnership units                                        (31,450)              - 
   Offering costs                                                                       -      (1,627,840)
   Distributions to limited partners                                           (2,144,908)     (1,371,318)
                                                                             ------------    ------------

Net cash provided by (used in) financing activities                            (2,131,605)      9,576,989
                                                                             ------------    ------------

Net decrease  in cash and cash equivalents                                       (136,495)       (593,480)

Cash and cash equivalents, beginning of period                                    690,175       1,283,655
                                                                             ------------    ------------

Cash and cash equivalents, end of period                                     $    553,680    $    690,175
                                                                             ============    ============
</TABLE>

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



                                       8
<PAGE>   9




                   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.

       On December 1, 1997 the Partnership repurchased 25 Units for $21,250 or
       85% of the investor's capital account as of December 1, 1997. The
       repurchase of the Units was completed pursuant to the terms of the
       Repurchase Plan set forth in the Partnership's Prospectus. An additional
       12 Units were repurchased on December 31, 1997 for $10,200 under the same
       terms and conditions set forth above.

       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.     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.     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.




                                       9
<PAGE>   10



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


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

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

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

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

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

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


2.     DISTRIBUTIONS:

       Cash flows of the Partnership are allocated ninety-nine percent (99%) to
       the limited partners and one percent (1%) to the Sponsor, except that the
       Sponsor's share is subordinated to a ten percent (10%) 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 an eleven percent (11%) preferred return
       plus return of the original contributions to the limited partners.

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


                                       10
<PAGE>   11


                   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 Sponsor and its affiliate
       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.
       The Sponsor was reimbursed for $629,978 during 1996. These costs were
       accounted for as capital issuance costs and have been netted against the
       limited partners' capital accounts.

       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.
       Total commissions incurred during 1996 were $1,007,966. These costs were
       accounted for as capital issuance costs and have been netted against the
       limited partners' capital accounts.

       An acquisition fee is charged, not to exceed the lesser of: (i) four
       percent (4%) of gross proceeds plus an additional .00624% for each 1% of
       indebtedness incurred in acquiring properties and/or equipment but in no
       event will acquisition fees exceed five percent (5%) of the aggregate
       purchase prices of properties and equipment; or (ii) compensation
       customarily charged in arm's length transactions by others rendering
       similar services. The Partnership paid the sponsor $23,104 and $455,017
       in acquisition fees during 1997 and 1996, respectively. In addition, the
       Partnership recovered $22,000 resulting from the Co-tenancy with LP IV on
       one of the financing leases. Of these amounts, $61,524 was capitalized
       into net investment in financing leases and $416,597 was capitalized into
       land and building subject to operating leases.

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

       A subordinated asset management fee is charged, in an amount equal to one
       percent (1%) of the gross rental revenues derived from the properties and
       equipment. Payment of the asset management fee is subordinated to receipt
       by the limited partners of annual distributions equal to a cumulative
       non-compounded return of ten percent (10%) per annum on their adjusted
       invested capital. There were no asset management fees paid or accrued to
       the Sponsor during 1996. For the twelve months ended December 31, 1997,
       $41,400 was incurred.

       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 equipment liquidation services. There were no equipment
       liquidation fees paid during 1997 or 1996.



                                       11
<PAGE>   12



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


3.     RELATED PARTY TRANSACTIONS AND AGREEMENTS, CONTINUED:

       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 in 1997 or 1996.

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



4.     LAND AND BUILDING SUBJECT TO OPERATING LEASES:

       The net investment in operating leases as of December 31, 1997 and 1996
       is comprised of the following:

<TABLE>
<CAPTION>
                                                  1997            1996

<S>                                           <C>             <C>
Land                                          $  5,482,775    $  5,127,875
Building and improvements                        8,751,982       7,812,917
Construction draws on properties (including
  land cost of $555,000)                                           939,778
                                              ------------    ------------

                                                14,234,757      13,880,570
Less accumulated depreciation                     (358,108)       (148,249)
                                              ------------    ------------

Total                                         $ 13,876,649    $ 13,732,321
                                              ============    ============
</TABLE>

       As indicated above, at December 31, 1996, 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 December 31, 1997, the Company had
       funded all commitments on properties under construction.


                                       12
<PAGE>   13


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


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

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

<TABLE>
<CAPTION>
<S>        <C>                                              <C>
           1998                                             $     1,518,499
           1999                                                   1,535,055
           2000                                                   1,556,756
           2001                                                   1,595,843
           2002                                                   1,633,354
           Thereafter                                            20,295,533
                                                            ---------------

           Total                                            $    28,135,040
                                                            ===============
</TABLE>

5.     NET INVESTMENT IN FINANCING LEASES:

       The net investment in financing leases as of December 31, 1997 and 1996
       is comprised of the following:

<TABLE>
<CAPTION>
                                                       1997             1996

<S>                                                <C>              <C>
Minimum lease payments to be received              $ 2,292,057      $ 3,535,259
Estimated residual value                               241,327          269,812
                                                   -----------      -----------

Gross investment in financing leases                 2,533,384        3,805,070
Less unearned income                                  (470,413)        (899,320)
                                                   -----------      -----------

Net investment in financing leases                 $ 2,062,971      $ 2,905,751
                                                   ===========      ===========
</TABLE>

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

<TABLE>
<CAPTION>
<S>        <C>                                              <C>
           1998                                             $       683,288
           1999                                                     687,338
           2000                                                     505,422
           2001                                                     211,149
           2002                                                     154,443
           Thereafter                                                50,409
                                                            ---------------

           Total                                            $     2,292,057
                                                            ===============
</TABLE>





                                       13
<PAGE>   14


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


6.   IMPAIRED FINANCING LEASE

     At December 31, 1997, the Partnership's investment in impaired financing
     leases was comprised of one lease to a single restaurant obligor. The
     recorded investment in the lease is $219,775 net of a related credit
     allowance of $169,775. Installment payments on this lease are delinquent by
     more than 120 days and income accrual has been suspended by the
     Partnership. The restaurant was subsequently closed during February, 1998
     and the Partnership expects to sell the leased equipment at auction. The
     net investment in the impaired lease represents the estimated net proceeds
     that the Partnership expects to receive.


7.   SUBSEQUENT EVENT:

     In January 1998, the Partnership made a distribution to its limited
     partners totaling approximately $474,000.















                                       14
<PAGE>   15



REPORT OF INDEPENDENT ACCOUNTANTS



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

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

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

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





/s/ Coopers & Lybrand

Detroit, Michigan
March 14, 1998






                                       15
<PAGE>   16

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



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

<S>                                                            <C>       <C>
Cash                                                           $    14   $ 2,670
Investment in partnership                                       16,221     8,250
Receivable from affiliate                                        9,048    13,549
Other assets                                                     5,672     5,672
                                                               -------   -------

Total assets                                                   $30,955   $30,141
                                                               =======   =======

                          LIABILITIES & STOCKHOLDERS' EQUITY

Total liabilities:
   Accounts payable                                            $     -   $ 5,187
   Payable to affiliate                                         13,973    15,942
   Income tax payable                                            5,730     2,732
                                                               -------   -------

Total liabilities                                               19,703    23,861
                                                               -------   -------

Stockholders' equity:
Common stock, no par value; 100 shares authorized,
   issued and outstanding                                            -         -
Paid-in capital                                                  1,000     1,000
Retained earnings (accumulated deficit)                         10,252     5,280
                                                               -------   -------

Total stockholders' equity                                      11,252     6,280
                                                               -------   -------

Total liabilities & stockholders' equity                       $30,955   $30,141
                                                               =======   =======
</TABLE>



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


                                       16
<PAGE>   17



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



<TABLE>
<CAPTION>
                                                                  1997     1996
                                                                 ------   ------
<S>                                                              <C>      <C>
Investment income from partnership                               $7,970   $6,611

Interest
                                                                      -      101
General and administrative
                                                                      -        -
                                                                 ------   ------

             Net income before taxes                              7,970    6,510

Income tax provision                                              2,998    2,200
                                                                 ------   ------

             Net income                                          $4,972   $4,310
                                                                 ======   ======
</TABLE>



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


                                       17
<PAGE>   18
                    CAPTEC FRANCHISE CAPITAL CORPORATION III
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                 for the years ended December 31, 1997 and 1996



<TABLE>
<CAPTION>
                                                  RETAINED
                                                  EARNINGS
                             COMMON    PAID-IN    (ACCUM.
                             STOCK     CAPITAL    DEFICIT)     TOTAL
                             ------    -------    --------    -------
<S>                          <C>       <C>        <C>         <C>  
Balance, January 1, 1996     $   -     $1,000     $   970     $ 1,970

Net Income                       -          -       4,310       4,310
                             -----     ------     -------     -------

Balance, December 31, 1996       -      1,000       5,280       6,280

Net income                       -          -       4,972       4,972
                             -----     ------     -------     -------

Balance, December 31, 1997   $   -     $1,000     $10,252     $11,252
                             =====     ======     =======     =======
</TABLE>


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






                                       18
<PAGE>   19
                    CAPTEC FRANCHISE CAPITAL CORPORATION III
                             STATEMENT OF CASH FLOWS
                 for the years ended December 31, 1997 and 1996


<TABLE>
<CAPTION>

                                                             1997           1996
                                                           -------      ---------
<S>                                                        <C>          <C>
Cash flows from operating activities:
   Net income                                              $ 4,972      $   4,310
   Adjustments to net income:
      Undistributed income from partnership                 (7,971)        (6,610)
      Increase in income tax payable                         2,998          2,200
      (Increase) decrease in receivable from affiliate
          and other assets                                   4,501        (10,162)
      Decrease in accounts payable                          (5,187)       (30,021)
                                                           -------      ---------

Net cash provided by operating activities                     (687)       (40,283)
                                                           -------      ---------

Cash flows from financing activities:
   Proceeds from borrowings from affiliates                 (1,969)        42,567
   Receipt of offering expense reimbursements                    -        632,248
   Repayment of borrowings from affiliates                       -       (632,248)
                                                           -------      ---------

Net cash provided by (used in) financing activities         (1,969)        42,567
                                                           -------      ---------

Net increase (decrease) in cash                             (2,656)         2,284

Cash, beginning of year                                      2,670            386
                                                           -------      ---------

Cash, end of period                                        $    14      $   2,670
                                                           =======      =========
</TABLE>


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



                                       19
<PAGE>   20



                    CAPTEC FRANCHISE CAPITAL CORPORATION III
                          NOTES TO FINANCIAL STATEMENTS


1.     ORGANIZATION AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:

       Captec Franchise Capital Corporation III (the "Corporation") is a
       Michigan corporation organized on February 15, 1994. The Corporation was
       formed for the purpose of serving as the managing general partner of
       Captec Franchise Capital Partners L.P. III (the "Partnership"), a 
       Delaware limited partnership.

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

       The Partnership undertook a public offering of limited partnership
       interests ("Units") in 1994. A minimum of 1,150 Units and a maximum of
       20,000 Units, priced at $1,000 per Unit, are being offered on a "best
       efforts, part or none" basis. The Partnership broke impound on January
       24, 1995. At December 31, 1997, the Partnership had accepted
       subscriptions for 20,000 Units and received offering proceeds totaling
       $20,000,000.

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

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

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

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




                                       20
<PAGE>   21


                    CAPTEC FRANCHISE CAPITAL CORPORATION III
                          NOTES TO FINANCIAL STATEMENTS


2.     OPERATIONS:

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


3.     RELATED PARTY TRANSACTIONS:

       Organization and offering expenses related to the offering of Units are
       prepaid by the Corporation and reimbursed by the Partnership in an amount
       equal to up to three percent (3%) of the gross proceeds of the offering
       (less any amounts paid directly by the Partnership). The Corporation is
       also reimbursed by the Partnership for a non-accountable expense
       allowance in an amount equal to two percent (2%) of the gross proceeds of
       the offering. During 1996 the Corporation received reimbursements from
       the Partnership totaling $632,248.

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









                                       21
<PAGE>   22




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.


                             CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                             By:  Captec Franchise Capital Corporation III
                                  Managing General Partner of
                                  Captec Franchise Capital Partners L.P. III


                             By:   /s/ W. Ross Martin
                                  ----------------------------------------------
                                  W. Ross Martin
                                  Chief Financial Officer and Sr. Vice President
                                  a duly authorized officer

                             Date:     June 23, 1998















                                       22