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


(Mark One)                         FORM 10-KSB

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


                  For the fiscal year ended  December 31, 1996

                                       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. Box 544, Ann Arbor, Michigan               48106-0544
 (Address of principal executive offices)                  (Zip Code)


Issuer's telephone number:  (313) 994-5505

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

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


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, 1996 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, 1996,  20,000 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.

<PAGE>   2



                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                                 Page
                                     PART I


<S>      <C>                                                                                                      <C>
Item 1.  Description of Business ................................................................................  1
Item 2.  Description of Properties  .............................................................................  2
Item 3.  Legal Proceedings ...................................................................................... 19
Item 4.  Submission of Matters to a Vote of Security Holders..................................................... 20


                                    PART II



Item 5.  Market for Registrant's Limited Partnership Interests
         and Related Security Holder Matters..................................................................... 21
Item 6.  Management's Discussion and Analysis or Plan of Operation............................................... 21
Item 7.  Financial Statements  .................................................................................. 23
Item 8.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure..................................................................... 24


                                         PART III


Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act...................................................... 25
Item 10. Executive Compensation................................................................................. 26
Item 11. Security Ownership of Certain Beneficial Owners and Management......................................... 26
Item 12. Certain Relationships and Related Transactions......................................................... 26
Item 13. Exhibits and Reports on Form 8-K....................................................................... 28

SIGNATURES ..................................................................................................... 29

INDEX TO FINANCIAL STATEMENTS.................................................................................. F-i
</TABLE>

                                       i




<PAGE>   3


                                     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 on a "triple-net" basis primarily to operators of nationally
franchised fast-food, family style and dinner house restaurants as well as
other franchised service-type businesses.  The general partners of the
Partnership are Captec Franchise Capital Corporation III (the "Managing General
Partner") and Patrick L. Beach, an individual (collectively, the "General
Partners"). The Managing General Partner is a Michigan corporation which is a
wholly-owned subsidiary of Captec Financial Group, Inc. (the "Captec Group").

     The Partnership commenced a public offering (the "Offering") of up to
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.

     Pending sale of the Minimum Number of Units, subscribers' funds were
forwarded to Michigan National Bank, Farmington Hills, Michigan, as escrow
agent (the "Escrow Agent"), and were held by the Escrow Agent in one or more
interest-bearing accounts.  On January 24, 1995, the Partnership broke impound,
at which time funds totaling $1,155,255 were released from escrow and the
Partnership immediately commenced operations.  At December 31, 1996, the
Partnership had accepted subscriptions for the entire 20,000 Units and funds
from 1392 limited partners totaling $20,000,000.

     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 for Limited Partners.

     The Partnership intends to acquire income-producing commercial real estate
("Property") and equipment ("Equipment") which will be leased on a "triple net"
basis primarily to operators of nationally franchised fast-food, family style
and dinner house restaurants as well as other franchised service-type
businesses.  The Partnership will use not less than 75% but not more than 90%
of Net Offering Proceeds to acquire Properties (primarily for lease to
restaurant franchisees) and up to 25% but not less than 10% to acquire
Equipment (for lease to restaurant and service-type franchisees).  The
Properties generally will be leased on terms which provide for a base minimum
annual rent with fixed increases on specific dates or indexation of rent to
indices such as the Consumer Price Index and/or percentage rents.  The
Equipment will be leased only pursuant to leases under which the present value
of non-cancelable rental payments payable during the initial term of the lease
is at least sufficient to permit a lessor to recover the purchase price of the
equipment ("Full Payout Leases").

     The Partnership competes with many other entities engaged in the purchase
of triple-net leased real estate and the purchase of equipment, some of which
have greater assets than the Partnership.  In addition, the number of competing
entities and the amount of funds available for investment in these types of
properties or equipment suitable for investment by the Partnership may
increase, resulting in

                                       1



<PAGE>   4

increased competition for such investments and possible increases in the prices
paid or less favorable lease terms on the Property or Equipment.

     In addition, the Partnership may compete with other entities engaged in
the disposition of Property and Equipment.  The ability to locate purchasers at
the time of disposition of the Property and Equipment will depend primarily on
the success of the operating Properties, the location of the Properties and the
physical condition of the Property and Equipment.  The General Partners and
their Affiliates are not aware of any current favorable or unfavorable
competitive business conditions.

     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.

REAL ESTATE ACQUISITIONS

     Boston Chicken Restaurant, Raleigh, North Carolina (Land and Building):
On January 31, 1995, the Partnership completed the acquisition of the land and
a 3,007 square foot building comprising a Boston Market restaurant located at
4150 Fayetteville Road in Raleigh, North Carolina (the "North Carolina
Property").  The North Carolina Property was constructed for its present use in
1994 and was fully operational at the time of the purchase.  The Partnership
purchased a fee simple interest in the North Carolina Property for a purchase
price of $1,000,000 which was negotiated by an affiliate of the Managing
General Partner, which considered factors such as the potential value of the
site, the financial condition and business and operating history of the Tenant
and demographic data for the area in which the North Carolina Property is
located.  The Purchase Price was supported by an independent MAI appraisal.

     The North Carolina Property was purchased from, and leased back to,
Platinum Properties, L.L.C., a North Carolina limited liability company (the
"Tenant").  The Tenant, pursuant to consent from the Partnership, has sublet
the North Carolina Property to Platinum Rotisserie Corp., an affiliate of the
Tenant.  Platinum Rotisserie Corp. operates the Boston Market restaurant
pursuant to a franchise agreement with Boston Chicken, Inc.  The Tenant's
obligations under the Lease (as that term is defined below) are guaranteed for
the benefit of the Partnership by Platinum Rotisserie Corp. and Platinum
Service Corp. (collectively the "Guarantors").  Platinum Service Corp., an
affiliate of the Tenant, provides management services to Platinum Rotisserie
Corp.  The Tenant has guaranteed the payment of a $10 million note payable to
American National Bank & Trust Company of Chicago by Platinum Rotisserie Corp.

     The Tenant and the Partnership have entered into the Partnership's
standard form of lease (the "Lease"), which is an absolute net lease, whereby
the Tenant is responsible for all expenses related to the North Carolina
Property including real estate taxes, insurance, maintenance and repair costs.
The Lease term expires on September 30, 2009, followed by two (2) renewal
options of five (5) years each.  The initial annual rent is equal to eleven
percent (11.0%) of the purchase price and will be payable in monthly
installments on the first day of each month.  Thus, based on the purchase price
of $1,000,000, the rent in the first year of the Lease is $110,000 per year, or
$9,167 per month.  The annual rent will be increased by two and one-half
percent (2.5%) on each anniversary date of the Lease.  The current annual rent
at December 31, 1996 is $112,752, or $9,396 per month.


                                       2



<PAGE>   5


     The Tenant has an option to purchase the North Carolina Property
commencing on the first day following the fifth (5th) anniversary date of the
Lease and expiring thirty (30) days thereafter or on the first day following
the seventh (7th) anniversary date of the Lease and expiring thirty (30) days
thereafter.  The option price the Tenant shall pay for the North Carolina
Property shall be calculated using a ten and three-quarters percent (10.75%)
capitalization rate applied to the annualized rental revenue for the North
Carolina Property during the sixth year of the Lease (if the option is
exercised in the sixty-first month) or during the eighth year of the Lease (if
the option is exercised in the eighty-fifth month).

     The current annual rent per square foot for the North Carolina Property is
$37.50. The depreciable basis of the North Carolina Property for federal tax
purposes is $555,000 and is being depreciated using the straight line method
over 39 years; a rate of $14,231 per year.  The 1994-1995 tax rate for the
county in which the North Carolina Property is located is $1.40 per $100 of
appraisal value.  The annual realty taxes at the time of the purchase was
$3,030.

     Applebee's Neighborhood Grill & Bar, Mt. Vernon, Illinois (Land and
Building):  On September 13, 1995, the Partnership executed an agreement
pursuant to which it acquired, effective as of August 1, 1995, the land and
5,580 square foot building comprising an Applebee's Neighborhood Grill & Bar
located at 105 Potomac Boulevard, Mt. Vernon, Illinois (the "Illinois
Property").  The Partnership acquired the Illinois Property from an affiliated
party which purchased the Illinois Property on July 24, 1995 from, and leased
back to, Apple Partners Limited Partnership, an Ohio limited partnership (the
"Tenant").  The affiliated party received no fees or mark-up in connection with
this transaction.  The Tenant operates the Applebee's Neighborhood Grill & Bar
pursuant to a franchise agreement with Applebee's International, Inc.  The
Tenant had owned the Illinois Property since August 1994 when it was
constructed for its present use.  The Illinois Property was fully operational
at the time of the purchase by the affiliated entity.

     The Partnership purchased a fee simple interest in the Illinois Property
for a purchase price of $1,640,000, which is equal to the acquisition price
paid by the affiliated party and was negotiated by an affiliate of the Managing
General Partner.  The Purchase price is supported by an independent MAI
appraisal.

     The lease entered into by the Tenant and the affiliated party was assigned
to the Partnership by the affiliated party on September 13, 1995.  According to
the terms of the lease assignment, the Partnership will receive lease payments
retroactive to August 1, 1995.  The Tenant entered into the Partnership's
standard form of lease (the "Lease"), which is an absolute net lease, whereby
the Tenant is responsible for all expenses related to the Illinois Property
including real estate taxes, insurance, maintenance and repair costs.  The
Lease term expires on August 23, 2014, with two (2) renewal options of five
years each.  The initial annual rent is equal to eleven percent (11%) of the
purchase price and will be payable in monthly installments on the first day of
each month.  Thus, based on the purchase price of $1,640,000, the rent in the
first year of the Lease is $180,400 per year (the "Minimum Annual Rent"), or
$15,033 per month.  The Minimum Annual Rent will be increased by a minimum of
three percent (3%) on August 1, 1996 and every August 1 thereafter.  However,
in the event that Tenant's gross annual sales for the preceding calendar year
shall exceed Three Million Dollars ($3,000,000), then the Minimum Annual Rent
for the Lease year shall instead increase by the greater of: (a) six percent
(6%) of such excess; or (b) three percent (3%) of the Minimum Annual Rent for
the preceding Lease year.  The Minimum Annual rent was increased pursuant to
the terms of the Lease on August 1, 1996 to $185,812 or $15,484 per month.


                                       3




<PAGE>   6


     The Tenant has an option to purchase the Illinois Property commencing on
the first day of the sixtieth (60) month of the Lease and expiring ninety (90)
days thereafter.  The option purchase price the Tenant must pay for the
Illinois Property will be the greater of $1,640,000 (the price at which the
Illinois Property was purchased by the Partnership) or the MAI appraised value
at the time the option is exercised.

     The Tenant's obligations under the Lease are guaranteed for the benefit of
the Partnership by dirigiste I.M. Co., an Ohio corporation, the general partner
of the Tenant, and its principals: Richard Adler and Mary Adler, jointly and
severally; and Thomas K. DeNomme and Michelle DeNomme, jointly and severally.

     The current annual rent per square foot for the Illinois Property is
$33.30. The depreciable basis of the Illinois Property for federal tax purposes
is $1,282,460 and is being depreciated using the straight line method over 39
years; a rate of $32,884 per year.  The 1995 tax rate for the county in which
the Illinois Property is located is $1.0418 per $100 of assessed value and the
township tax rate is $7.3165 per $100 of assessed value.  The Illinois Property
is located in an "Enterprise Zone" with real estate taxes due on the land only
for the next three years.  The annual property taxes at the time of the
purchase were $3,067.

     Church's Chicken Restaurant, San Antonio, Texas (Land and Building):  On
October 23, 1995 the Partnership acquired the land and 1,850 square foot
building comprising a Church's Chicken Restaurant located at 1003 S.E. Military
Drive, San Antonio, Texas (the "Texas Property").  The Texas Property was
constructed for its present use in August of 1995 and was fully operational at
the time of the purchase. The Texas Property was purchased from, and leased
back to America's Favorite Chicken Company, a Minnesota corporation (the
"Tenant").  The Tenant operates and franchises quick-service restaurants under
the primary trade names of Popeye's Famous Fried Chicken & Biscuits and
Church's Chicken.  The Partnership purchased a fee simple interest in the Texas
Property for a purchase price of $630,000, which was negotiated by an affiliate
of the Managing General Partner.  The Purchase Price was supported by an
independent MAI appraisal.

     The Tenant and the Partnership have entered into the Partnership's
standard form of lease (the "Lease"), which is an absolute net lease, whereby
the Tenant is responsible for all expenses related to the Texas Property
including real estate taxes, insurance, maintenance and repair costs.  The
Lease term expires on October 31, 2015 with four (4) renewal options of five
(5) years each.  The initial annual rent is equal to eleven percent (11%) of
the purchase price and will be payable in monthly installments on the first day
of each month.  Thus, based on the purchase price of $630,000, the rent in the
first year of the Lease is $69,300 per year, or $5,775 per month.  The Minimum
Annual Rent will be increased on November 1, 1999 and every five (5) years
thereafter.  The Minimum Annual Rent will be increased by ten percent (10%) on
each adjustment date.

     The Tenant has an option to purchase the Texas Property commencing on the
first day of the eighty-fifth (85th) month of the Lease and expiring ninety
(90) days thereafter.  The option price the Tenant shall pay for the Texas
Property shall be the greater of: (a) $756,000 or (b) one hundred twenty
percent (120%) of the then current fair market value of the Texas Property.
The Tenant has a right of first refusal to purchase the Texas Property if at
any time during the Lease Term, the Partnership receives a bona fide offer
("Offer") to purchase the Texas Property which the Partnership desires to
accept.  Tenant shall have a one-time right to purchase the Texas Property at
the same price and on the same terms as the Offer.  In the event Tenant accepts
the Offer, Tenant shall close on the purchase of the Texas Property within
forty-five (45) days after the date of Tenant's written notice of its election
to exercise its right of first refusal.

                                       4




<PAGE>   7



     The current annual rent per square foot for the Texas Property is $37.46.
The depreciable basis of the Texas Property for federal tax purposes is
$504,000 and it is being depreciated using the straight line method over 39
years; a rate of $12,923 per year.  The 1994 tax rate of the county in which
the Texas Property is located is $3.15788 per $100 of assessed value.  The
annual realty taxes at the time of the purchase were $7,639.

     Red Robin Property, Grapevine, Texas (Land and Building): On March 29,
1996 the Partnership acquired the land and 7,485 square foot building
comprising a Red Robin Grill & Spirits restaurant located at 1701 William D.
Tate Avenue, Grapevine, Texas (the "Grapevine Property").  The Grapevine
Property was constructed for its present use in August of 1995 and was fully
operational at the time of the purchase. The Grapevine Property was purchased
from, and leased back to Red Robin International, Inc. a Nevada corporation
(the "Tenant").  The Tenant operates and franchises casual dining restaurants
under the primary trade name of Red Robin Restaurants.  The headquarters
offices of the Tenant are located at 5575 DTC Way, Suite 100, Englewood,
Colorado.  The Partnership purchased a fee simple interest in the Grapevine
Property for a purchase price of $2,711,393 which was negotiated by an
affiliate of the Managing General Partner.  The purchase price for the
Grapevine Property is supported by an independent MAI appraisal.

     The Tenant and the Partnership have entered into the Partnership's
standard form of lease (the "Lease"), which is an absolute net lease, whereby
the Tenant is responsible for all expenses related to the Grapevine Property
including real estate taxes, insurance, maintenance and repair costs.  The
Lease term expires on March 31, 2016 with two renewal options of five years
each. The initial annual rent is equal to eleven percent (11%) of the purchase
price and will be payable in monthly installments on the first day of each
month.  Thus, based on the purchase price of $2,711,393, the rent in the first
year of the Lease is $298,253 per year, or $24,854 per month.  The Minimum
Annual Rent shall be increased on April 1, 1997 and every April 1 thereafter by
two and one half percent (2.5%).

     The Tenant has an option to purchase the Grapevine Property during two
"window periods;" the first window period  commencing on April 1, 2000 and
expiring on June 29, 2000, and the second window period commencing on April 1,
2003 and expiring on June 29, 2003.  The option price the Tenant shall pay for
the Grapevine Property shall $3,211,861 if the option is exercised during the
first window period, or $3,458,823 if the option is exercised during the second
window period

     The current annual rent per square foot for the Grapevine Property is
$39.85.  The depreciable basis of the Grapevine Property for federal tax
purposes is $1,611,393 and it is being depreciated using the straight line
method over 39 years; a rate of $41,318 per year.  The 1995 tax rate of the
county in which the Grapevine Property is located is $2.455 per $100 of
assessed value.  The annual realty taxes at the time of purchase were $13,644.
The Tenant has deposited with the Partnership the amount of $24,854 as security
for Tenant's faithful performance of Tenant's obligations under the lease.

     The Lease contains a substitution option that in the event that the Tenant
determines that the Grapevine Property is inadequate or unprofitable or the
Grapevine Property is rendered unsuitable by condemnation or casualty, the
Tenant may substitute another property having a Red Robin Grill & Spirits
restaurant located thereon, of equal or greater current value.  The substitute
property shall be subject to the approval of the Partnership.

     Boston Market, Ewing Twp., New Jersey (Land and Building): On June 6,
1996, the Partnership acquired the land and 3,333 square foot building
comprising a Boston Market restaurant

                                       5




<PAGE>   8

located at 1729 North Olden Ave., Ewing Twp., New Jersey (the "New Jersey
Property").  The New Jersey Property was constructed for its present use in May
of 1996 and was fully operational at the time of the purchase.  The New Jersey
Property was purchased from BC Real Estate Investments, Inc., and leased back
to New Jersey Rose, L.L.C., a New Jersey limited liability company (the
"Tenant").  The Tenant operates casual dining restaurants under the primary
trade name of Boston Market.  The headquarters offices of the Tenant are
located at 3 Terry Drive, Suite 103, Newton, Pennsylvania.  The Partnership
purchased a fee simple interest in the New Jersey Property for a purchase price
of $1,143,000 ("Purchase Price"). The purchase price for the New Jersey
Property is supported by an independent MAI appraisal.

     The Tenant and the Partnership have entered into a lease (the "Lease"),
which is an absolute net lease, whereby the Tenant is responsible for all
expenses related to the New Jersey Property including real estate taxes,
insurance, maintenance and repair costs.  The Lease term expires on July 1,
2011 with five renewal options of five years each.  The initial annual rent is
equal to ten and one-half percent (10.5%) of the purchase price and will be
payable in monthly installments on the first day of each month.  Thus, based on
the purchase price of $1,143,000 the rent in the first year of the Lease is
$120,015 per year, or $10,001 per month.  The Annual Rent shall be increased
beginning on the sixth lease year to $132,017; beginning on the eleventh lease
year to $142,275 and at the end of every five years thereafter by ten percent
of the Annual Rent payable during the lease year immediately preceding.
Beginning in the sixth year, and in addition to the Annual Rent provided above,
the Tenant shall pay Percentage Rent on an annual basis equal to the difference
between five percent of "gross sales" (as defined in the lease) for such lease
year minus the Annual Rent payable for such lease year.

     The Tenant has an option to purchase and first right of refusal to
purchase the New Jersey Property.  The Tenant shall have the right to purchase
the New Jersey Property on the same terms and conditions as set forth in the
offer or the Tenant may elect an alternate purchase price as follows:  (a)
during the first and second lease year the purchase price shall be an amount
equal to the total rent payable for the lease year subsequent to the lease year
in which the option is exercised divided by 9.462%;  (b)  during the third
lease year in an amount equal to the Annual Rent for lease year 3 divided by
9.978%;  (c)  during the fourth lease year in an amount equal to the Annual
Rent for lease year four divided by 9.785% and in lease year five in an amount
equal to the Annual Rent for lease year five divided by 9.580%.

     Tenant shall have the option to purchase the New Jersey Property any time
after the fifth year for the following option price:  (a) if the Tenant
exercises its option to purchase during the sixth through eighth lease year,
the option price shall be equal to the total rent payable for the lease year
subsequent to the lease year in which the option is exercised, divided by ten
percent.;  (b)  if the Tenant exercises its option to purchase after the eighth
lease year, the option purchase price shall be the greater of the fair market
value of the New Jersey Property or an amount equal to the total rent payable
for the lease year subsequent to the lease year in which the option is
exercised, divided by ten percent.

     The current annual rent per square foot for the New Jersey Property is
$36.00.  The depreciable basis of the New Jersey Property for federal tax
purposes is $763,000 and it is being depreciated using the straight line method
over 39 years, a rate of $19,564 per year.  The 1996 tax rate of the township
in which the New Jersey Property is located is $2.63 per $100 of assessed
value.  The realty taxes for the first six months of 1996 on the New Jersey
Property were $8,099 but the current assessed value is for the land only.  It
is anticipated that there will be a new assessment to reflect the improvements
to the land (i.e., the restaurant facility).


                                       6




<PAGE>   9


     The Lease contains a substitution option that in the event that the Tenant
determines that the New Jersey Property is inadequate or unprofitable or is
rendered unsuitable by condemnation or casualty, the Tenant may substitute
another property having a Boston Market restaurant located thereon, of equal or
greater current value.  The substitute property shall be subject to the
approval of the Partnership.

     Hollywood Video, Enid, Oklahoma (Land and Building):  On August 4, 1996,
the Partnership acquired the land and a 7,500 square foot building comprising a
Hollywood Video located at 3400 West Owen K. Garriott Road, Enid, Oklahoma (the
"Hollywood Video Property").  The Hollywood Video Property was constructed for
its present use in June 1996 and was fully operational at the time of the
purchase.  The Hollywood Video Property was purchased from Terry S. Ward &
Associates and the Partnership assumed a lease between Caltex Entertainment,
Ltd., a Texas Limited Partnership and Hollywood Entertainment Corp., an Oregon
corporation (the "Tenant").  The Tenant operates video rental stores under the
trade name of Hollywood Video.  The headquarters of the Tenant are located at
10300 S. W. Allen Blvd., Beaverton, Oregon 97005.  The Partnership purchased a
fee simple interest in the Hollywood Video Property for the purchase price of
$1,050,000 which was negotiated by an affiliate of the Managing General
Partner.  The purchase price for the Hollywood Video Property is supported by
an independent MAI appraisal.

     The Lease dated January 15, 1996 between Caltex Entertainment, Ltd. and
Hollywood Entertainment Corporation, which the Partnership assumed on July 31,
1996 (the "Lease"), is an absolute net lease, whereby the Tenant is responsible
for all expenses related to the Hollywood Video Property including real estate
taxes, insurance, maintenance and repair costs.  The Lease term expires on May
10, 2011 with two renewal options of five years each.  The initial annual rent
is equal to eleven and one quarter percent (11.25%) of the purchase price and
will be payable in monthly installments on the first day of each month.  Thus,
based on the purchase price of $1,050,000, the rent in the first five years of
the Lease is $118,125 per year, or $9,844 per month.  The rent shall be
increased on May 10, 2001 and on the first day of each renewal term by the
percentage increase in the Consumer Price Index over the five year period
preceding the increase date, but no more than twelve percent (12%).  In the
event the Consumer Price Index has decreased, the rent shall remain unchanged.
The current annual rent per square foot of the Hollywood Video Property is
$15.75.  The depreciable basis of the Hollywood Video Property is $842,700 and
it is being depreciated using the straight-line method over 39 years at a rate
of $21,608 per year. The estimated 1997 tax rate for the county in which the
Hollywood Video Property is located is $8.005 per $100 of current assessed
value.  The estimated current annual realty taxes are $1,977, however, the
current assessment on the Hollywood Video Property for realty tax purposes is
for the land only.  It is anticipated that there will be a new assessment to
reflect the improvements to the land.

     Kettle Restaurant, Virginia Beach, Virginia (Land and Building): On August
5, 1996, the Partnership acquired the land and 3,012 square foot building
comprising a Kettle restaurant located at 5720 Northamton Road, Virginia Beach,
Virginia (the "Virginia Beach Property").  The Partnership purchased a fee
simple interest in the Virginia Beach Property from Captec Net Lease Realty,
Inc., an affiliate of the General Partner, for Seven Hundred Eighty-Nine
Thousand Five Hundred Forty-Three Dollars ($789,543) (the "Purchase Price").
On August 5, 1996, the Partnership took assignment of the lease entered into
between the Partnership and Captec Net Lease Realty, Inc. and DenAmerica Inc.,
a Delaware corporation (the "Tenant") dated August 25, 1995 (the "Lease").  The
Lease provides for a one-time increase in the Purchase Price by up to Two
Hundred Fifty Thousand Dollars ($250,000) to cover costs actually incurred and
paid by Tenant to third parties for additional improvements to the Virginia
Beach Property completed and paid for on or before December 31, 1996.   The
Tenant intends to convert the Virginia Beach Property to a Denny's Restaurant
and operate it under the Denny's

                                       7



<PAGE>   10

name.  The headquarters of the Tenant are located at 7373 North Scottsdale Rd.,
Suite D-120, Scottsdale, Arizona.  The Tenant franchises and operates casual
dining restaurants under the primary trade name of Denny's.  The Purchase Price
is supported by an independent MAI appraisal.

     The Lease is an absolute net lease whereby the Tenant is responsible for
all expenses related to the Virginia Beach Property including real estate
taxes, insurance, maintenance and repair costs.  The Tenant shall convert the
Virginia Beach Property for operation as a Denny's restaurant as soon as
practicable and in no event later than eighteen (18) months after the date of
the Lease.  If the Tenant fails to convert, the Landlord may (1) declare the
Tenant in default under the Lease, (2) require Tenant to substitute another
franchised operation in exchange for the Virginia Beach Property, or (3)
require Tenant to repurchase the Virginia Beach Property.  The Lease term
expires on August 31, 2015, with two renewal options of five years each.  The
initial annual rent is equal to 10.8% of the purchase price and will be payable
in monthly installments on the first day of each month.  The annual rent on the
Virginia Beach Property is $85,271, or $7,106 per month.  The annual rent shall
increase by 10% on September 1, 2000 and every five years thereafter.  The
annual rent per square foot on the Virginia Beach Property is $28.31.  The
depreciable basis of the Virginia Beach Property is $316,543 and is being
depreciated using the straight-line method over 39 years at a rate of $8,116.49
per year.  The 1995 tax rate for the county in which the Virginia Beach
Property is located is $1.14 per $100 of current appraised value.  The current
annual realty taxes are $4,121.

     The Tenant has an option to purchase the Virginia Beach Property
commencing on September 1, 2000 and expiring 90 days thereafter for the greater
of:  (1) the then fair market value or (b) the annual rent payable during the
sixth year of the lease divided by ninety-eight one-thousandths (.098).  The
Tenant has deposited with the Partnership $7,106 as security for Tenant's
faithful performance of the Tenant's obligations under the Lease.

     At December 31, 1996, the reimaging of the Kettle Restaurant to a Denny's
Restaurant had not been completed and the Partnership granted an extension to
the Tenant.  The Partnership anticipates the completion of the reimaging during
the second quarter of 1997.

     Golden Corral Restaurant, Lakeland, Florida (Land and Improvements):  On
August 6, 1996, the Partnership acquired the land with all improvements,
including a building to be located thereon, located at 4532 South Florida
Avenue, Lakeland, Florida (the "Lakeland Property").  The Partnership purchased
the Lakeland Property from and leased it back to Corral South Store 3, Inc., a
Florida corporation (the "Tenant").  The Tenant operates casual dining
restaurants under the primary trade name of Golden Corral Restaurants.  The
headquarters of the Tenant are located at 2665 Oak Ridge Court, Ft. Meyers,
Florida.  The Partnership purchased a fee simple interest in the Lakeland
Property.  The total purchase price will equal the lowest of (i) One Million
Six Hundred Thousand ($1,600,000); (ii)  actual certified costs, or (iii) the
appraised value set forth in the required MAI appraisal ("Purchase Price").  As
of December 31, 1996, $899,083 was paid with cash from offering proceeds with
the remaining funds to be disbursed according to a disbursement agreement dated
August 6, 1996 (the "Disbursement Agreement").  The Tenant shall commence
construction of an approximate 8,825 square foot building on or before August
31, 1996 and shall complete construction of the building on or before December
31, 1996.  At December 31, 1996, the construction was not complete and the
Partnership granted an extension for the completion.

     The Lease is an absolute net lease whereby the Tenant is responsible for
all expenses related to the Lakeland Property including real estate taxes,
insurance, maintenance and repair costs. The interim term of the Lease shall
commence on August 6, 1996 and shall expire on the last day of the month in
which the final disbursement is made but in no event beyond December 31, 1996
("Interim

                                       8




<PAGE>   11

Term").  The base term of the Lease shall commence on the day following the
expiration of the Interim Term and shall expire 15 years thereafter ("Base
Term").  The Tenant has two renewal options of five years each.

     During the Interim Term of the Lease, Interim Rent shall be payable
monthly in an amount equal to: (i) the Applicable Rental Percentage multiplied
by the Purchase Price and the Soft Costs advanced as of the first disbursement
plus (ii) the Applicable Rental Percentage multiplied by the average daily
balance of total funds disbursed to the Tenant for Hard Costs and soft Costs
related to the construction of the Improvements calculated as of the end of the
immediately preceding calendar month.  The Applicable Rental Percentage is
defined as (i) the "Prime Rate" plus two percent; (ii) divided by 12.  Interim
Rent shall be paid to the Partnership from funds held by the Partnership for
disbursement of costs related to the construction of the improvements.  Upon
commencement of the Base Term, the annual rent will be payable in monthly
installments on the first day of each month in an amount equal to ten and
90/100 percent (10.90%) of the total of all funds advanced by the Partnership.
Thus, based on the anticipated Purchase Price of $1,600,000, the annual rent on
the Lakeland Property will be $174,400, or $14,533 per month.  The annual rent
shall increase by 8% on the fifth anniversary date of the Base Term and every
five years thereafter by 8%.  The annual rent per square foot on the Lakeland
Property is $19.76.  The estimated depreciable basis of the Lakeland Property
is $1,135,000 and it will be depreciated using the straight-line method over 39
years at a rate of approximately $29,102 per year.  The 1996 tax rate for the
county in which the Lakeland Property is located is $2.1413 per $100 of current
assessed value.  The 1995 annual realty taxes were $5,699 however, the current
assessment on the Lakeland Property for realty tax purposes is for the land
only.  It is anticipated that there will be a new assessment to reflect the
improvements to the land.

     The Tenant's obligations under the Lease are guaranteed for the benefit of
the Partnership by David C. Brown, an individual.  David C. Brown is the sole
stockholder of the Tenant corporation.  The Tenant has an option to purchase
the Lakeland Property commencing on the sixty-first month of the Base Term of
the Lease. The option price that Tenant shall pay shall equal the scheduled
minimum annual rent during the fifth year of the Base Term divided by 0.10.

     The Tenant has paid to the Partnership a construction funding fee equal to
one half percent (.5%) of the maximum Purchase Price or $8,000.  The Tenant has
paid all of the expenses incident to the closing of the transaction
contemplated by this commitment including, without limitation, the
Partnership's attorney's fees, title insurance premiums, recording fees and
expenses and transfer taxes.

     Boston Market, S. Kent, Washington (Land and Building): On September 26,
1996, the Partnership acquired the land and 3,320 square foot building
comprising a Boston Market restaurant located at 25947 Pacific Highway South,
Kent, Washington (the "Washington Property").  The Washington Property was
constructed for its present use in 1995 and was fully operational at the time
of the purchase.  The Washington Property was purchased from and leased back to
BC Northwest, L.P., a Delaware limited partnership (the "Tenant").  The Tenant
is a Franchise Area Developer which operates casual dining restaurants under
the primary trade name of Boston Market.  The headquarters offices of the
Tenant are located at 1601 114th Avenue S.E., Alderwood Building, Suite 130,
Bellevue, Washington.  The Partnership purchased a fee simple interest in the
Washington Property for a purchase price of $1,050,000 which was negotiated by
an affiliate of the Managing General Partner who considered factors such as the
potential value of the site, the financial condition and business and operating
history of the Tenant and demographic data for the area in which the Washington
Property is located.  The purchase price for the Washington Property is
supported by an independent MAI appraisal.

                                       9




<PAGE>   12



     The Tenant and the Partnership have entered into a lease (the "Lease"),
which is an absolute net lease, whereby the Tenant is responsible for all
expenses related to the Washington Property including real estate taxes,
insurance, maintenance and repair costs.  The Lease term expires on September
26, 2011 with five renewal options of five years each.  The initial annual rent
is equal to ten and one-half percent (10.5%) of the purchase price and will be
payable in monthly installments on the first day of each month.  Thus, based on
the purchase price of $1,050,000 the rent in the first year of the Lease is
$110,250 per year, or $9,188 per month.  The Annual Rent shall  be increased
beginning on the sixth lease year to $121,275; beginning on the eleventh lease
year to $133,455 and at the end of every five years thereafter by ten percent
of the Annual Rent payable during the lease year immediately preceding.
Beginning in the sixth year, and in addition to the Annual Rent provided above,
the Tenant shall pay Percentage Rent on an annual basis equal to the difference
between five percent of "gross sales" (as defined in the lease) for such lease
year minus the Annual Rent payable for such lease year.  The Tenant's financial
obligations under the lease are unconditionally guaranteed by Boston Chicken,
Inc., a Delaware corporation.

     The Tenant has an option to purchase and first right of refusal to
purchase the Washington Property.  The Tenant shall have the right to purchase
the Washington Property on the same terms and conditions as set forth in the
offer or the Tenant may elect an alternate purchase price as follows:  (a)
during the first and second lease year the purchase price shall be an amount
equal to the total rent payable for the lease year subsequent to the lease year
in which the option is exercised divided by 9.462%;  (b)  during the third
lease year in an amount equal to the Annual Rent for lease year 3 divided by
9.978%;  (c)  during the fourth lease year in an amount equal to the Annual
Rent for lease year four divided by 9.785% and in lease year five in an amount
equal to the Annual Rent for lease year five divided by 9.580%.

     Tenant shall have the option to purchase the Washington Property any time
after the fifth year for the following option price:  (a) if the Tenant
exercises its option at purchase during the sixth through eighth lease year,
the option price shall be equal to the total rent payable for the lease year
subsequent to the lease year in which the option is exercised, divided by ten
percent.;  (b)  if the Tenant exercises its option to purchase after the eighth
lease  year, the option purchase price shall be the greater of the fair market
value of the Washington Property or an amount equal to the total rent payable
for the lease year subsequent to the lease year in which the option is
exercised, divided by ten percent.

     The current annual rent per square foot for the Washington Property is
$33.21.  The depreciable basis of the Washington Property for federal tax
purposes is $630,000 and it is being depreciated using the straight line method
over 39 years, a rate of $16,154 per year.  The 1996 tax rate of the township
in which the Washington Property is located is $1.559 per $100 of assessed
value.  The 1996 realty taxes on the Washington Property are $3,275; however,
the current assessment is for the land only.  It is anticipated that there will
be a new assessment to reflect the improvements to the land (i.e., the
restaurant facility).

     The Lease contains a substitution option that in the event that the Tenant
determines that the Washington Property is inadequate or unprofitable or is
rendered unsuitable by condemnation or casualty, the Tenant may substitute
another property having a Boston Market restaurant located thereon, of equal or
greater current value.  The substitute property shall be subject to the
approval of the Partnership.


                                       10



<PAGE>   13


     Jack-In-The-Box, Hurst, Texas (Land and Building)  On September 27, 1996
the Partnership acquired the land and a 2860 square foot building comprising a
Jack-In-The-Box restaurant located at 320 Grapevine Highway, Hurst, Texas (the
"Jack-In-The-Box Property").  The Jack-In-The-Box Property was constructed for
its present use in May 1996 and was fully operational at the time of the
purchase.  The Jack-In-The-Box Property was purchased from and leased back to
Foodmaker, Inc., a Delaware corporation (the "Tenant").  The Tenant operates
and franchises casual dining restaurants under the primary trade name of
Jack-In-The-Box.  The headquarters of the Tenant are located at 9330 Balboa
Ave., San Diego, CA.  The Partnership purchased a fee simple interest in the
Jack-In-The-Box Property for the purchase price of $965,000 which was
negotiated by an affiliate of the Managing General Partner.  The purchase price
for the Jack-In-The-Box Property is supported by an independent MAI appraisal.

     The Tenant and the Partnership have entered into the Partnership's
standard form of lease (the "Lease"), which is an absolute net lease, whereby
the Tenant is responsible for all expenses related to the Jack-In-The-Box
Property including real estate taxes, insurance, maintenance and repair costs.
The Lease term expires on September 30, 2014 with four renewal options of five
years each.  The initial annual rent is equal to ten and one-half percent
(10.5%) of the purchase price and will be payable in monthly installments on
the first day of each month.  Thus, based on the purchase price of $965,000,
the annual rent in the first five years of the Lease is $101,325 per year, or
$8,444 per month.  The Minimum Annual Rent shall be increased on October 1,
2001 and every five years thereafter by the greater of : a) the percentage
increase in the Consumer Price Index over the five year period preceding the
increase date; or (b) ten percent (10%).

     The Tenant has a continuing right of first refusal to purchase the
Jack-In-The-Box Property in accordance with the same terms and conditions set
forth in a bona fide offer in which the Partnership desires to accept.  The
current annual rent per square foot on the Jack-In-The-Box Property is $35.43.
The depreciable basis of the Jack-In-The-Box Property is $585,000 and it is
being depreciated on the straight-line basis over a period of 39 years at a
rate of $15,000 per year. The 1995 tax rate for the county and city in which
the Jack-In-The-Box Property is located is $2.6089 per $100 of current
appraised value.  The 1995 current annual realty taxes are $21,965.63; however,
the current assessment on the Jack-In-The-Box Property for realty tax purposes
is for the land only.  It is anticipated that there will be a new assessment to
reflect the improvements to the land

     Black-Eyed Pea, Plano, Texas (Land and Building):  On September 30, 1996
the Partnership acquired the land and a 5,445 square foot building comprising a
Black-Eyed-Pea restaurant located at 1905 Preston Boulevard, Plano, Texas (the
"Black-Eyed Pea Property").  The Black-Eyed Pea Property was constructed for
its present use in September 1996 and was fully operational at the time of the
purchase.  The Black-Eyed Pea Property was purchased from and leased back  to
DenAmerica Corp., a Delaware corporation (the "Tenant").  The Tenant operates
and franchises casual dining restaurants under the primary trade names of
Denny's and Black-Eyed Pea.  The headquarters of the Tenant are located at 7373
North Scottsdale Road, Suite D-120, Scottsdale, Arizona.  The Partnership
purchased a fee simple interest in the Black-Eyed Pea Property for the purchase
price of $1,486,768 which was negotiated by an affiliate of the Managing
General Partner.  The purchase price for the Black-Eyed Pea Property is
supported by an independent MAI appraisal.

     The Tenant and the Partnership have entered into the Partnership's
standard form of lease (the "Lease"), which is an absolute net lease, whereby
the Tenant is responsible for all expenses related to the Black-Eyed Pea
Property including real estate taxes, insurance, maintenance and repair costs.
The Lease term expires on September 30, 2016 with two renewal options of five
years each.


                                       11




<PAGE>   14


     The initial annual rent is equal to 10.625% of the purchase price and will
be payable in monthly installments on the first day of each month.  Thus, based
on the purchase price of $1,486,768, the rent in the first year of the Lease is
$157,969 ("Minimum Annual Rent"), or $13,164 per month.  The Minimum Annual
Rent shall be increased on October 1, 2002 and every five years thereafter by
the  percentage increase in the Consumer Price Index over the five year period
preceding the increase date; provided that the increase does not exceed ten
percent (10%).  The current annual rent per square foot on the Black-Eyed Pea
Property is $29.01.

     The depreciable basis of the Black-Eyed Pea Property is $661,768 and it is
being depreciated on the straight-line basis over a period of 39 years at a
rate of $16,968 per year. The 1995 tax rate for the county and city in which
the Black-Eyed Pea Property is located is $2.3464 per $100 of current appraised
value.  The current annual realty taxes are $20,273; however, the current
assessment on the Black-Eyed Pea Property for realty tax purposes is for the
land only.  It is anticipated that there will be a new assessment to reflect
the improvements to the land.

General Real Estate Lease Provisions:  An affiliate of the Managing General
Partner analyzed demographic, geographic and market diversification data for
the areas in which the North Carolina Property, the Illinois Property, the
Texas Property, the New Jersey Property, the Hollywood Video Property, the
Virginia Beach Property, the Lakeland Property, the Washington Property, the
Jack-In-The Box Property, and the Black-Eyed Pea Property (collectively
referred to as the "Properties") are located and reviewed the appraisals of the
Properties and the analysis regarding comparable Properties contained therein.
Based upon the foregoing, the General Partners are unaware of any unfavorable
competitive conditions regarding the Properties.  All of the Purchase Prices
were negotiated by an affiliate of the Managing General Partner, which
considered 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 General Partners believe that the amount of insurance carried by the
Tenants is adequate.  The Partnership purchased the Properties with cash from
offering proceeds.  It is anticipated that the Properties will be leveraged as
provided for in the Prospectus, however, the Partnership presently does not
have a financing commitment.  The Tenants paid all of the expenses incident to
the closing of the transaction contemplated by this commitment including,
without limitation, the Partnership's attorney's fees, title insurance
premiums, recording fees and expenses and transfer

     The Leases contain material default provisions that include, but are not
limited to : (1) the vacating or abandonment of the Properties by the Tenants;
(2) the failure by the Tenants to make any payment due under the Leases; (3)
the failure by the Tenants to observe or perform any of the covenants,
conditions, or provisions of the Leases; (4) the making by the Tenants of any
general arrangement or general assignment for the benefit of creditors.  In the
event of a material default by the Tenant, the Leases contain remedy provisions
which are summarized as follows:  (1) the Partnership may terminate the Leases
and take possession of the Property, in which case the Partnership would be
entitled to damages incurred by reason of the material default; (2) the
Partnership may maintain the Tenant's right to possession of the Properties, in
which case the Leases would continue to be in effect; of (3) the Partnership
may pursue any other legal remedy available.


EQUIPMENT ACQUISITIONS

     Red Robin Restaurant Equipment:  On May 10, 1995 the Partnership purchased
restaurant equipment ("Equipment") to be used in the operation of a new Red
Robin Restaurant located at 701 E.

                                       12




<PAGE>   15

Harmony Rd., Fort Collins, Colorado.  The Equipment was purchased from various
vendors for a total cost of $750,000 and leased to The Snyder Group Company, a
Delaware Corporation, DBA Red Robin Restaurant ("Lessee").  The headquarters'
offices of the Lessee are located at 5575 DTC Parkway, Suite 370, Englewood,
Colorado.  The Lessee owns and operates the Red Robin Restaurant under a
franchise agreement.

     The Lessee and Partnership entered into the Partnership's standard form of
lease ("Lease") whereby the Lessee is responsible for all expenses related to
the Equipment including taxes, insurance, maintenance and repair costs.  The
Lease term is 60 months and the minimum annual rent is $203,856 payable in
monthly installments of $16,988 on the fifteenth day of each month.  The annual
rent remains fixed for the entire Lease term.  At closing, the Lessee paid the
first and last month's rent to the Partnership in the amount of $33,975.

     The Lease is guaranteed by the following individuals:  Stephen S. Snyder
and Louise Snyder; and Michael J. Snyder and Nadine Snyder.  The Lessee has an
option to purchase all of the Equipment on the termination date or any
extension thereof, upon at least ninety (90) days prior irrevocable notice to
the Partnership for a sum to be determined to be the fair market value plus all
unpaid rental and other amounts owing.  Notwithstanding the foregoing, the fair
market value shall not exceed the sum of seventy-five thousand dollars
($75,000).  The General Partners believe that the amount of insurance carried
by the Lessee is adequate.

     Kenny Rogers Roasters Restaurant Equipment (Tennessee):  On July 28, 1995,
the Partnership purchased restaurant equipment (the "KRR Equipment") to be used
in the operation of a new Kenny Rogers Roasters Restaurant located at 5390
Highway #153, Chattanooga, Tennessee.  The KRR Equipment was purchased from
various vendors for a total cost of $249,187, and leased to Roasters Corp., a
Florida Corporation, DBA Kenny Rogers Roasters (the "Lessee").  The
headquarters' offices of the Lessee are located at 899 West Cypress Creek Rd.,
Suite 500, Ft.  Lauderdale, Florida.  The Lessee is the Parent Company of
Roasters Franchise Corp. which grants franchises for the ownership and
operation of Kenny Rogers Roasters Restaurants.

     The Lessee and Partnership entered into the Partnership's standard form of
lease ("Lease") commencing on August 15, 1995, whereby the Lessee is
responsible for all expenses related to the KRR Equipment including taxes,
insurance, maintenance and repair costs.  The Lease term is 84 months and the
minimum annual rent is $52,716 payable in monthly installments of $4,393 on the
15th day of each month.  The annual rent remains fixed for the entire Lease
term.  At closing, the Lessee paid the first and last month's rent to the
Partnership in the amount of $8,786 as well as interim rent of $1,757.  At the
end of the lease term, upon at least 90 days prior irrevocable notice to the
Partnership, the Lessee may renew the lease for a minimum renewal term of
twenty-four (24) months at a monthly renewal rent of $1,142, exclusive of tax,
or purchase the KRR Equipment for 10% of the original cost ($24,918).

     Checkers Drive-In Restaurant Equipment:  On September 27, 1995, the
Partnership purchased restaurant equipment and a modular building (the
"Checkers Equipment") to be used in the operation of a Checkers Drive-In
Restaurant located at 4335 St. Barnabas Rd., Marlow Heights, Maryland.  The
Checkers Equipment was purchased from Champion Modular Restaurant Company, Inc.
for $200,000 and leased to Drive Thru Realty Limited Partnership, a Maryland
limited partnership DBA Checkers Drive-In Restaurant (the "Lessee").  The
headquarters' offices of the Lessee are located at 15942 Shady Grove Road,
Gaithersburg, Maryland.  The Lessee owns and operates the Checkers Drive-In
Restaurant under a franchise agreement.


                                       13



<PAGE>   16


     The Lessee and Partnership entered into the Partnership's standard form of
lease (the "Lease") commencing on October 1, 1995, whereby the Lessee is
responsible for all expenses related to the Checkers Equipment including taxes,
insurance, maintenance and repair costs.  The Lease term is 60 months and the
minimum annual rent is $54,660 payable in monthly installments of $4,555 on the
first day of each month.  The annual rent remains fixed for the entire Lease
term.  At closing, the Lessee paid the first and last month's rent to the
Partnership in the amount of $9,110 and interim rent of $607.

     The Lease is guaranteed by the following entity and its members: Maryland
Drive Thru L.L.C.; and Adam Schwartz, David Terzian, Robert P. Begelman, and
John Smith, jointly and severally.  The Lessee has an option to purchase the
Checkers Equipment on the termination date or any extension thereof, upon at
least ninety (90) days irrevocable notice to the Partnership, for $20,000.

     Kenny Rogers Roasters Restaurant Equipment (Arizona):  On October 11,
1995, the Partnership executed an agreement pursuant to which it acquired
restaurant equipment ("KRR Arizona Equipment") for $224,115.  The KRR Arizona
Equipment is to be used in the operation of a new Kenny Rogers Roasters
Restaurant located at 1949 E. Camelback, Suite 160, Phoenix, Arizona.  The KRR
Arizona Equipment was acquired from an affiliated party which purchased the KRR
Arizona Equipment on May 30, 1995 from various vendors for a total cost of
$235,258 and leased it to Kenny Rogers Roasters of Arizona, Inc., an Arizona
corporation, DBA Kenny Rogers Roasters (the "Lessee").  The headquarters'
offices of the Lessee are located at 3450 Buschwood Park Drive, Suite 195,
Tampa Florida.  The Lessee owns and operates the Kenny Rogers Roasters under a
franchise agreement.

     On October 11, 1995 the Partnership took assignment from the same
affiliated party, effective as of October 1, 1995, of the Partnership's
standard form of lease ("Lease") dated June 1, 1995.  Under the terms of the
Lease, the Lessee is responsible for all expenses related to the KRR Arizona
Equipment including taxes, insurance, maintenance and repair costs.  The
remainder of the Lease term at the time of the assignment was 79 months and the
minimum annual rent is $51,098 payable in monthly installments of $4,258 on the
first day of each month.  The annual rent remains fixed for the entire Lease
term.

     At the end of the Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, the Lessee may purchase all of the Equipment for
twenty three thousand five hundred twenty-six dollars ($23,526).  The General
Partners believe that the amount of insurance carried by the Lessee is
adequate.

     During 1996, the Lessee defaulted on the Lease due to non-payment of rents
from February 1, 1996 and forward.  On October 1, 1996, the Partnership signed
a letter of intent with Roaster Corp., a Florida corporation and franchisor of
the Kenny Rogers Roasters restaurants.  Roasters is currently operating the
Kenny Rogers Roasters restaurant where the KRR Arizona Equipment is located
pursuant to the letter of intent.  The new tenant will enter into a mutually
agreeable equipment lease in substantially the same form as the existing lease.
As of December 31, 1996, a new lease has not been signed however, the General
Partners are in the process of negotiating a lease agreement.

     Arby's Restaurant Equipment:  On December 29, 1995, the Partnership
executed an agreement pursuant to which it acquired restaurant equipment (the
"Arby's Equipment") to be used in the operation of an Arby's Restaurant located
at 912 Maye Blvd., Greenville, North Carolina.  The Arby's Equipment was
acquired from an affiliated party, which purchased the Arby's Equipment on
November 1, 1995 from various vendors at a total cost of $228,055 and leased
the Arby's Equipment back to Charmes, Inc. a North Carolina corporation, DBA
Arby's Restaurant (the "Lessee").  The Partnership acquired the Arby's
Equipment at the original cost to the affiliated party.  The headquarters'
offices of

                                       14



<PAGE>   17

the Lessee are located at 1479 Lake Meadow Court, Kernersville, North Carolina.
The Lessee owns and operates the Arby's Restaurant under a franchise agreement.

     On December 29, 1995, the Partnership took assignment from the same
affiliated party, effective as of November 1, 1995, of the Partnership's
standard form of lease ("Lease") dated November 1, 1995.  Under the terms of
the Lease, the Lessee is responsible for all expenses related to the Arby's
Equipment including taxes, insurance, maintenance and repair costs.  The Lease
term is 60 months and the minimum annual rent is $61,301 payable in monthly
installments of  $5,108 on the first day of each month.  The annual rent
remains fixed for the entire Lease term.  At closing, the Lessee paid the first
and last month's rent to the Partnership in the amount of $10,217.

     The Lease is guaranteed by the following: Charles Freeman, Sr. and Linda
Freeman;  Lewis F. Rothrock and Jean B. Rothrock; and James G. Dudgeon and
Christine B. Dudgeon, jointly and severally.   At the end of the Lease term,
upon at least 90 days prior irrevocable notice to the Partnership, the Lessee
may purchase all of the Arby's Equipment for $11,403.  The General Partners
believe that the amount of insurance carried by the Lessee is adequate.

     Denny's Restaurant Equipment:  On December 29, 1995, the Partnership
executed an agreement pursuant to which it acquired restaurant equipment  (the
"Denny's Equipment") to be used in the operation of a Denny's Restaurant
located at 4325 S. Florida Ave., Lakeland, Florida.  The Denny's Equipment was
acquired from an affiliated party which purchased the Denny's Equipment on
November 15, 1995 from various vendors at a total cost of $272,946 and leased
the Denny's Equipment back to American Family Restaurants, Inc., a Georgia
corporation, DBA Denny's Restaurant (the  "Lessee").  The Partnership acquired
the Denny's Equipment at the original cost to the affiliated party.  The
headquarters' offices of the Lessee are located at 3000 North Woods Parkway,
Suite 235, Norcross, Georgia.  The Lessee owns and operates the Denny's
Restaurant under a franchise agreement.

     On December 29, 1995, the Partnership took assignment from the same
affiliated party, effective as of November 15, 1995, of the Partnership's
standard form of lease ("Lease") dated November 15, 1995.  Under the terms of
the Lease, the Lessee is responsible for all expenses related to the Denny's
Equipment including taxes, insurance, maintenance and repair costs.  The Lease
term is 60 months and the minimum annual rent is $64,847 payable in monthly
installments of $5,404 on the fifteenth day of each month.  The annual rent
remains fixed for the entire Lease term.  At closing, the Lessee paid the first
month's rent to the Partnership in the amount of $5,404 and interim rent of
$1,081.  In addition, the Partnership received a security deposit of $13,647.

     At the end of the Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, the Lessee may purchase all of the Denny's Equipment
for $27,295.  The General Partners believe that the amount of insurance carried
by the Lessee is adequate.

     Denny's POS Equipment:  On July 15, 1996, the Partnership purchased point
of sale equipment ("POS Equipment) pursuant to an assignment effective as of
May 1, 1996, from an affiliate of the General Partner to be used in the
operation of twelve (12) Denny's restaurants located at the following
locations:

     425 N.E. Hassalo St., Portland, OR
     12201 N. Center St., Portland, OR
     7815 N.E 6th Ave., Vancouver, WA
     8787 S.W. Scholls Ferry Rd., Portland, OR

                                       15




<PAGE>   18


     12101 SE 82nd Ave., Portland, OR
     105 E. Burnside R., Gresham, OR
     10428 S. E. Stark, Portland, OR
     1020 W. 6th Ave., Dalles, OR
     10412 N. E. 4th Plain, Orchards, WA
     400 E. Plain Mill Blvd., Vancouver, WA
     15815 S. E. 82nd Dr., Clackamas, OR
     3680 Market St., Salem, OR

     The Partnership purchased the POS Equipment for $342,783 and leased it to
The Green Team Restaurants, LLC, a Delaware limited liability company, dba
Denny's (the "Lessee").  The Lessee owns and operates the twelve Denny's under
a franchise agreement.

     The Lessee and Partnership entered into the Partnership's standard form of
lease (the "Lease") commencing on May 1, 1996, whereby the Lessee is
responsible for all expenses related to the POS Equipment including taxes,
insurance, maintenance and repair costs.  The Lease term is 60 months and the
minimum annual rent is $90,495.24 payable in monthly installments of $7,541.27
on the first day of each month.  The annual rent remains fixed for the entire
Lease term.

     At the end of the Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, the Lessee may purchase all of the POS Equipment for
the Fair Market Value, not to exceed the sum of Thirty Four Thousand Two
Hundred Seventy Eight and 35/100 Dollars (34,278.35).  The General Partners
believe that the amount of insurance carried by the Lessee is adequate.  The
Lease is unconditionally guaranteed by the following individuals:  Doug Koch,
Robbie Qualls and Justin M. Hathaway, jointly and severally.

     Checkers Equipment, Palm Harbor, Florida.  On March 11, 1996 the
Partnership purchased restaurant equipment and a modular building ("Palm Harbor
Equipment") to be used in the operation of a Checkers Drive-In Restaurant
located at 33225 U. S. Highway 19, North, Palm Harbor, Florida.  The Palm
Harbor Equipment was purchased from Checkers of Palm Harbor, a Franchise, Inc.,
for $225,000 and leased back to Checkers of Palm Harbor, a Franchise, Inc., a
Florida Corporation, DBA Checkers Drive-In Restaurant (the "Lessee").  The
Lessee owns and operates the Checkers Drive-In Restaurant under a franchise
agreement.

     The Lessee and Partnership entered into the Partnership's standard form of
lease (the "Lease") commencing on March 15, 1996, whereby the Lessee is
responsible for all expenses related to the Palm Harbor Equipment including
taxes, insurance, maintenance and repair costs.  The Lease term is 84 months
and the minimum annual rent is $48,600 payable in monthly installments of
$4,050 on the fifteenth day of each month.  The annual rent remains fixed for
the entire Lease term.  The first and last month's rent totaling $8,100 was
paid to the Partnership at the time of closing.  At the end of the Lease term,
upon at least 90 days prior irrevocable notice to the Partnership, the Lessee
may purchase all of the Palm Harbor Equipment for $22,500.  The Lease is
guaranteed by the following individuals:  George W. Cook and Michael G. Perez.

     Denny's Equipment, Cypress, Florida.  On March 29, 1996 the Partnership
purchased restaurant equipment ("Cypress Equipment") to be used in the
operation of a Denny's Restaurant located at 2380 NW Highway 19, Crystal River,
Florida.  The Cypress Equipment was purchased for $353,647 and leased to
Cypress Partners 1995, Ltd., a Florida limited partnership, dba Denny's (the
"Lessee").  The Lessee owns and operates the Denny's Restaurant under a
franchise agreement.  The

                                       16



<PAGE>   19

headquarters' office of the Lessee are located at 115 marks Street, Orlando,
Florida.  The purchase was made in cash from proceeds of the Partnership.

     The Lessee and Partnership entered into the Partnership's standard form of
lease (the "Lease") commencing on March 15, 1996, whereby the Lessee is
responsible for all expenses related to the Cypress Equipment including taxes,
insurance, maintenance and repair costs.  The Lease term is 60 months and the
minimum annual rent is $92,684 payable in monthly installments of $7,723.65 on
the fifteenth day of each month.  The annual rent remains fixed for the entire
Lease term.  At the time of closing, the first and last month's rent totaling
$15,447 was paid to the Partnership.

     At the end of the Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, the Lessee may purchase all of the Cypress Equipment
for the fair market value, however the fair market value shall not exceed the
sum of $35,364.70.  The Lease is jointly and severally guaranteed by the
following:  Cypress Associates, a Florida partnership; Cypress Ormond Beach,
Inc., a Florida corporation; Transam Financial Services, Inc., a Florida
corporation; Gerald F. Hilbrich, an individual;  Thomas E. McIntyre, an
individual;  George Noga, an individual; and Larry K. Walker, an individual.


     Applebee's Neighborhood Grill & Bar Equipment, Orem, Utah.  On September
11, 1996, the Partnership acquired restaurant equipment to be used in the
operation of an Applebee's Neighborhood Grill & Bar located at 290 West 1300
South, Orem, Utah (the "Applebee's Equipment").  The Applebee's Equipment was
purchased on September 11, 1996 from various vendors at a total cost of
$384,200.80 and leased to J.M.C. Limited Partnership, a Utah limited
partnership, DBA Applebee's Neighborhood Grill and Bar (the  "Lessee").  The
headquarter offices of the Lessee are located at 19 E. 200 South, Suite 1000,
Salt Lake City, Utah.  The Lessee owns and operates the Applebee's Neighborhood
Grill & Bar under a franchise agreement.

     The Lessee and Partnership entered into the Partnership's standard form of
lease whereby the Lessee is responsible for all expenses related to the
Applebee's Equipment including taxes, insurance, maintenance and repair costs
(the "Lease"). The General Partners believe that the amount of insurance
carried by the Lessee is adequate. The Lease term is 84 months and the minimum
annual rent is $79,484 payable in monthly installments of  $6,623,63 on the
fifteenth day of each month.  The annual rent remains fixed for the entire
lease term.  At closing, the Lessee paid the first and last month's rent to the
Partnership in the amount of $13,247 and interim rent of $883.

     At the end of the Lease term, upon at least 90 days prior irrevocable
notice to the Partnership, the Lessee may purchase all of the Applebee's
Equipment for the fair market value, not to exceed $38,420.  The Lease is
guaranteed by the following: John B. Prince, an individual; and William Tell,
Inc., a Utah corporation, jointly and severally.

     Equipment Leases - General Provisions:  All of the aforementioned
equipment leases are 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 Managing 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.  It is anticipated
that The Equipment will be leveraged as provided for in the prospectus,
however, the Partnership presently does not have a financing commitment. The
General Partners believe that the amount of insurance carried by the Lessees is
adequate.


                                       17



<PAGE>   20


Summary of Investment Objectives and Policies:

     The Partnership will acquire income-producing Property and Equipment which
will be 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.
The Partnership will use not less than 75% but not more than 90% of Net
Offering Proceeds to acquire Properties (primarily for lease to restaurant
franchisees) and up to 25% but not less than 10% to acquire Equipment (for
lease to restaurant and service-type franchisees).  The Properties generally
will be leased on terms which provide for a base minimum annual rent with fixed
increases on specific dates or indexation of rent to indices such as the
Consumer Price Index and/or percentage rents.  The Equipment will be leased
only pursuant to Full Payout Leases.

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

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

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

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


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

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

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


                                       18




<PAGE>   21


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

     The terms and conditions of any lease entered into by the Partnership with
regard to a tenant may vary substantially from those described herein.
However, all of the leases will be "triple net" leases, which means that the
lessees will be required to pay all real estate and other taxes and
assessments, utilities, insurance and cost of maintenance and repairs.

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

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

     The Partnership intends to acquire Properties and Equipment using
leverage, on a portfolio basis, of up to 30% of the sum of gross proceeds of
the Offering and the aggregate amount of Partnership indebtedness secured by
Partnership Assets (approximately 35% of the aggregate purchase prices of all
Properties and Equipment).  Notwithstanding the foregoing, the Partnership may
incur indebtedness on single Properties or Equipment packages equal to up to
80% of the purchase price thereof so long as aggregate portfolio indebtedness
does not exceed the above-referenced amount.  Borrowings for acquisition or
improvement will cause tax-exempt investors to recognize unrelated business
taxable income, although they will be allowed to offset such income with
deductions related thereto.


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.


                                       19



<PAGE>   22



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

     No matters were submitted to a vote of security holders during the fourth
quarter of the Partnership's most recent fiscal year covered by this report .

                                       20




<PAGE>   23


                                    PART II


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

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

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

     At December 31, 1996, the Partnership had 20,000 Units issued and
outstanding representing funds totaling $20,000,000 from 1,392 limited
partners.


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

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.  As of December 31, 1996 the Partnership had
accepted subscriptions for the entire 20,000 Units and funds totaling
$20,000,000.  After payment of all offering expenses, including selling
commissions, totaling $2,600,000, net proceeds available for investment from
the sale of Units totaled $17,400,000.

     As of December 31, 1996, this capital has been used to invest in eleven
net leased real estate properties and ten equipment packages in amounts
totaling $16,411,985.  The Partnership has committed additional funds of
$250,000 for the reimaging of the Kettle Restaurant and $700,917 for the final
construction draw on the Golden Corral Restaurant.  Additionally, as provided
for in the Prospectus, the Partnership paid $662,789 (4% of the purchase price)
in acquisition fees to an Affiliate of the Managing General Partner.  These
fees are paid for services rendered in connection with the selection,
evaluation and acquisition of the Assets and negotiating and closing the leases
associated therewith.  In addition, an affiliate of the Managing General
Partner will receive an additional fee of $164,120 (1% of the purchase price)
after leveraging the Assets, as provided for in the Prospectus.  The
Partnership ended 1996 with $325,226 of uninvested capital, excluding cash held
for distribution to partners.


                                       21




<PAGE>   24


     As of December 31, 1996, the Partnership's investments were allocated
80.3% to Properties and 19.7% to Equipment.  This allocation is expected to be
similar to the final asset mix allocation, which will be at least 75% and not
more than 90% Properties and up to 25% but not less than 10% Equipment.

     During 1997, the Partnership expects to obtain leverage of up to 30% of
the sum of gross proceeds and the aggregate amount of Partnership indebtedness
secured by Partnership assets (approximately 35% of the aggregate purchase
prices of Partnership assets).  Such leverage, when incurred, will provide
additional funds to be used by the Partnership to purchase additional
Properties and Equipment.  Presently, the Partnership does not have a financing
commitment for this leverage.

     During 1997, the Partnership intends to utilize its uninvested capital
from the remaining proceeds of the offering received during 1996 and leverage
to continue to acquire existing, income-producing commercial Properties and
Equipment which will be leased on a "triple net" basis primarily to operators
of nationally franchised fast-food, family style and dinner house restaurants
as well as other franchised service-type businesses. The Property leases are
expected to provide for a base minimum annual rent, with provisions for fixed
increases on specific dates of indexation of rent to indices such as the
Consumer Price Index and/or percentage rents.  Equipment will be leased only
pursuant to Full Payout Leases.

     The Partnership has invested some of its funds in liquid assets until such
time as the funds can be invested in Property and Equipment.  Once
substantially all of the Partnership's funds have been invested as intended,
the Partnership expects to require limited amounts of liquid assets 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.

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

RESULTS OF OPERATIONS

     The Partnership commenced operations in January of 1995, therefore, the
comparative information provided below for the prior year should be read with
the understanding that 1995 does not reflect a full twelve month period.
Furthermore, the Partnership was in the process of raising funds through the
Offering and at December 31, 1996 did not have all capital invested.  It is
anticipated that the Partnership will be borrowing an additional $8,135,000 in
capital to invest.

     For the year ended December 31, 1996, the Partnership earned revenues
totaling approximately $1,491,000 compared to $370,000 for the previous year.
Revenues for the year ended December 31, 1996 were comprised of approximately
$983,000 of rental income from operating leases, $341,000 of financing income
from financing leases and $167,000 of other income which includes approximately
$132,000 interest earned on the Partnership's bank accounts and approximately
$31,000 interest and fees earned on the construction loan.  For the preceding
year, the Partnership's revenues were comprised of approximately $243,000 of
rental income from operating leases, $115,000 of financing income from
financing leases and $12,000 of other income .  The

                                       22




<PAGE>   25

increase in revenues over the prior year (303%) was due to the effects of the
purchase of additional assets subject to triple-net leases and the income
generated therefrom.

     For the year ended December 31, 1996, the Partnership incurred expenses
totaling approximately $169,000, compared to $57,000 for the previous year.
Expenses for the year ended December 31, 1996 were comprised of approximately
$114,000 of depreciation on buildings leased under operating leases and $55,000
of general and administrative expenses.  For the preceding year, the
Partnership's expenses were comprised of approximately $34,000 of depreciation
on buildings leased under operating leases and $23,000 of general and
administrative expenses.  The increase in expenses over the prior year (196%)
was due to the effects of the purchase of additional Properties subject to
triple-net leases, and the resulting additional depreciation expense therefrom,
and the corresponding increase in general and administrative expense related to
the growth of the investment in such assets.

     For the year ended December 31, 1996, the Partnership earned net income of
approximately $1,322,000, compared to $313,000, for the previous year.  The
increase in net income over the prior year (323%) was due to the combined
effects on revenues and expenses as stated above.

     The Partnership is not subject to income taxation as all of its income and
expenses flow through to the Partners.  The Partnership's net assets and
liabilities as reported in its financial statements exceeds tax basis by
$591,000, as of December 31, 1996.

     During the year ended December 31, 1996, the Partnership made
distributions to limited partners totaling $1,371,318, as compared with
$219,503 for the preceding year.  Approximately $154,574 is interest from the
Partnership's bank accounts and construction loans and the remaining $1,216,744
is cash flow from operations for the year.

TENANT DEFAULTS

     The Partnership has invested in a financing lease, with a net investment
value of $319,364 as of December 31, 1996.  The lessee under this lease, Kenny
Rogers Roasters of Arizona, Inc., has defaulted on the lease agreement due to
non-payment of rents.  As of December 31, 1996, the Partnership is owed $46,840
of rents past due from February 1, 1996 and forward.  Presently, this default
has caused the suspension of cash flows from rents to the Partnership in an
amount equal to $4,258 per month, which amount represents 2.3% of the
Partnership's aggregate current monthly rental income (excluding additional
rent which may be received from any future acquisitions).

     On October 1, 1996, the Partnership signed a letter of intent with
Roasters Corp., a Florida corporation and franchisor of Kenny Rogers Roasters
Restaurants.  Roasters Corp. is currently operating the Kenny Rogers restaurant
located at 1940 Camelback Road, Phoenix, Arizona pursuant to the letter of
intent.  The letter of intent provides that the new tenant will enter into
mutually agreeable equipment lease in substantially the same form as the
existing lease.  While the Partnership is in the process of drafting the
documents, as of December 31, 1996, a new lease agreement has not been signed.

ITEM 7.  FINANCIAL STATEMENTS.

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


                                       23




<PAGE>   26




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

         None.


                                       24




<PAGE>   27


                                    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.  The General Partners
of the Partnership are Captec Franchise Capital Corporation III, a Michigan
corporation, as Managing General Partner, and Patrick L. Beach, an individual.
Captec Franchise Capital Corporation III is a wholly-owned subsidiary of the
Captec Group.

     The following is a list of the executive officers and directors of the
Managing General Partner as of December 31, 1996:


<TABLE>
<CAPTION>
              Name         Age  Position
         ----------------  ---  ---------------------------------------
         <S>               <C>  <C>

         Patrick L. Beach  40   Chairman of the Board of Directors,
                                President and Chief Executive Officer

         W. Ross Martin    36   Director, Vice President, Treasurer and
                                Chief Financial Officer
</TABLE>



     Patrick L. Beach has served as Chairman of the Board of Directors,
President and Chief Executive Officer of the Managing General Partner since
1994.  Mr. Beach is also the Chairman of the Board of Directors, President and
Chief Executive Officer of the Captec Group, Captec Franchise Capital
Corporation II ("Captec II") and Captec Franchise Capital Corporation IV
("Captec IV").  Captec II and Captec IV are Michigan corporations which serve
as the Managing General Partners of Captec Franchise Capital Partners L.P. II
and Captec Franchise Capital Partners L.P. IV, respectively, both of which are
public limited partnerships with investment objectives similar to the
Partnership. From 1977 until 1980 he was employed by the HydraMatic Division of
General Motors Corp., where he served in various manufacturing related
positions.  From March 1980 until February 1981 he served as Production Manager
for Quick Industries, Inc. of Jackson, Michigan with responsibility for
purchasing and production management for five plastics manufacturing plants in
five states.  In February 1981, Mr. Beach resigned from his previous position
to found the Captec Group.  He is responsible for the day to day management of
the Captec Group and its Affiliates.  From 1986 to 1990, Mr. Beach also served
as Chairman of Wendy's of San Diego, Inc., a 27-unit franchisee of Wendy's
International.  In 1990, Mr. Beach sold his interest in Wendy's of San Diego,
Inc. and resigned as Chairman of the Board.  Approximately twenty-two months
thereafter, Wendy's of San Diego, Inc. filed for protection under Chapter 11 of
the Bankruptcy Code.  From 1989 to 1991 Mr. Beach served as Chairman and
President of Illiana Printing, Inc., the master franchisor for American Speedy
Printing Centers, Inc. in the states of Illinois and Indiana.

     W. Ross Martin has served as a Director, Vice President, Treasurer and
Chief Financial Officer of the Managing General Partner since 1994.  Mr. Martin
also serves as Director, Vice President, Treasurer and Chief Financial Officer
of Captec II; Director, Senior Vice President, Treasurer and Chief Financial
Officer of Captec IV; and as Director, Senior Vice President and Chief
Financial Officer of the Captec Group.  Mr. Martin is also a Certified Public
Accountant.  From 1982 until 1985, he was employed by Deloitte Haskins & Sells,
most recently as senior consultant in that firm's Emerging Business Services
practice.  Mr. Martin joined the Captec Group in 1985 as Controller, was
promoted

                                       25



<PAGE>   28

to Vice President-Finance in 1986 and to Senior Vice President and Chief
Financial Officer in 1994.  He is responsible for the treasury, corporate
finance and strategic planning duties of the Captec Group as well as overseeing
the Accounting and Credit Departments.

     There were no filings required under Section 16(a) of the Securities and
Exchange Act of 1934 and the rules thereunder.

ITEM 10. EXECUTIVE COMPENSATION.

     The Partnership has no officers or directors.  Furthermore, the
Partnership is not required to pay the officers and directors of the General
Partners any current nor any proposed compensation in such capacities.
However, the Partnership is required to pay certain fees, make distributions
and allocate a share of the profits or losses of the Partnership to the General
Partners as described under the caption "Compensation Table" on pages 12
through 16 of the Partnership's Prospectus, which description is incorporated
herein by reference.

     See "Item 12.  Certain Relationships and Related Transactions."


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     To the best knowledge of the Partnership, as of December 31, 1996, no
person beneficially owned more than 5% of the outstanding Units.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     During 1996, an Affiliate of the Managing General Partner received
Acquisition Fees from the Partnership of $455,017 for services rendered in
connection with the selection, evaluation and acquisition of the Properties and
Equipment, as provided for in the Partnership Agreement.  In addition, the
Affiliate expects to receive an additional fee of $164,120 from the Partnership
after leveraging these acquired assets, as provided for in the Prospectus.

     It is anticipated that the Captec Group , the parent of the Managing
General Partner and of which Mr. Patrick Beach is a director, officer and
majority shareholder, may provide property and equipment management services
for the Partnership.  In such case, the General Partners believe that the
Captec Group would render management services to the Partnership on a
competitive basis in a manner consistent with customary business practices.
The General Partners further believe that the Captec Group has sufficient
personnel and other required resources to discharge all responsibilities to the
various properties that the Captec Group manages and will manage in the future.
The Captec Group also receives commitment fees paid by the Tenant's and
Lessees.  The commitment fees are paid by third parties and are limited to 1%
of the Purchase Price of the assets.  Commitment fees have been to an affiliate
of the Managing General Partner by the Lessees of the Partnership in an amount
equal to $167,974, of which $129,170 was paid during 1996.

     The Asset Management Agreement entered into between the Partnership and
the Captec Group will be 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 will provide for termination
by a majority vote of the Limited Partners, without penalty, upon 60 days prior
written notice.  No asset management fees were paid by the Partnership in 1996.

                                       26



<PAGE>   29



     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
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, although there are no
present arrangements with respect thereto.  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.

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

                                       27



<PAGE>   30


ITEM 13. EXHIBITS AND REPORTS ON FORM.

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


Number      Exhibit

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

 27             Financial Data Schedule

     (b)  Reports on Form 8-K:

                (Incorporated by reference from Registrant's SEC File No.
                33-77510C, filed October 16, 1996.)


                                       28




<PAGE>   31


                                   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 Franchise Capital Corporation III,
                                    Managing General Partner


                              By:   /s/ W. Ross Martin
                                    -----------------------------------------
                                    W. Ross Martin
                                    Vice President and
                                    Chief Financial Officer

                              Date: March 28, 1997

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




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

Date:  March 28, 1997



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

Date: March 28, 1997




                                       29



<PAGE>   32


                                    INDEX TO
                              FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
           Page
<S>                                         <C>

Captec Franchise Capital Partners L.P. III  F(a) - i


Captec Franchise Capital Corporation III    F(b) - i
</TABLE>





                                     F - i


<PAGE>   33












                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III


                    REPORT ON AUDITS OF FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995








                                   F(a)  - i


<PAGE>   34


CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
CONTENTS



<TABLE>
<CAPTION>

                                                                PAGES
<S>                                                         <C>
REPORT OF INDEPENDENT ACCOUNTANTS...........................   F(a) - 1



FINANCIAL STATEMENTS:

Consolidated Balance Sheet..................................   F(a) - 2

Consolidated Statement of Operations........................   F(a) - 3

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

Consolidated Statement of Cash Flows........................   F(a) - 5

Notes to Consolidated Financial Statements...  F(a) 6 through F(a) - 11
</TABLE>



                                   F(a)  - ii


<PAGE>   35

                                 [Letterhead]





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, 1996 and 1995, 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
from material misstatement.  An audit includes examining, on a test basis,
evidence supporting financial statement amounts and disclosures.  An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Captec Franchise Capital
Partners L.P. III as of December 31, 1996 and 1995, 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 L.L.P.

Detroit, Michigan
March 14, 1997



                                    F(a) - 1


<PAGE>   36

                  CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                                 BALANCE SHEET
                          December 31, 1996 and 1995




<TABLE>
<CAPTION>
                                                                                  1996                  1995
                                      ASSETS
<S>                                                                        <C>                  <C>
Cash                                                                       $      690,175       $     1,283,655
Investment in property under leases:
   Operating leases, net                                                       13,732,321             3,369,282
   Financing leases, net                                                        2,905,751             1,879,601
Property tax receivable                                                             1,959                   -
Unbilled rent                                                                     210,673                47,151
Due from related parties                                                           20,589                 6,409
                                                                           --------------       ---------------
Total assets                                                               $   17,561,468       $     6,586,098
                                                                           ==============       ===============


                            LIABILITIES & PARTNERS' CAPITAL

Liabilities:
   Accounts payable                                                        $        4,852       $        25,237
   Due to related parties                                                           7,728                 2,428
   Operating lease rents received in advance                                       43,916                   -
   Security deposits held on leases                                                65,953                27,369
                                                                           --------------       ---------------

Total liabilities                                                                 122,449                55,034
                                                                           --------------       ---------------

Partners' Capital:
Limited partners' capital accounts                                             17,422,518             6,527,785
General partners' capital accounts                                                 16,501                 3,279
                                                                           --------------       ---------------

Total partners' capital                                                        17,439,019             6,531,064
                                                                           --------------       ---------------

Total liabilities & partners' capital                                      $   17,561,468       $     6,586,098
                                                                           ==============       ===============
</TABLE>



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

                                    F(a)-2
<PAGE>   37

                  CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                           STATEMENT OF OPERATIONS
                for the years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                                                  1996                  1995
<S>                                                                        <C>                  <C>
Operating revenue:
   Rental income                                                           $      983,625       $       242,987
   Finance income                                                                 341,142               114,895
                                                                           --------------       ---------------
           Total operating revenue                                              1,324,767               357,882
                                                                           --------------       ---------------

Operating costs and expenses:
   Depreciation                                                                   114,272                33,978
   General and administrative                                                      55,125                23,119
                                                                           --------------       ---------------

           Total operating costs and expenses                                     169,397                57,097
                                                                           --------------       ---------------

           Income from operations                                               1,155,370               300,785
                                                                           --------------       ---------------

Other income:
   Interest income                                                                154,575                10,928
   Other                                                                           12,141                 1,136
                                                                           --------------       ---------------

           Total other income                                                     166,716                12,064
                                                                           --------------       ---------------

Net income                                                                      1,322,086               312,849

Net income allocable to general partners                                           13,222                 3,128
                                                                           --------------       ---------------

Net income allocable to limited partners                                   $    1,308,864       $       309,721
                                                                           ==============       ===============

Net income per limited partnership unit                                    $        84.07       $         80.34
                                                                           ==============       ===============

Weighted average number of limited partnership
   units outstanding                                                               15,569                 3,855
                                                                           ==============       ===============


</TABLE>


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


                                    F(a)-3
<PAGE>   38

                  CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
                for the years ended December 31, 1996 and 1995




<TABLE>
<CAPTION>
                                                           Limited               General               Total
                                                          Partners'             Partners'            Partners'
                                                          Accounts              Accounts              Capital
                                                          --------              --------             ---------
<S>                                                 <C>                    <C>                  <C>
Balance, January 1, 1995                            $            100       $          151       $           251

Withdrawal of initial limited partner                           (100)                                      (100)

Issuance of 7,400 limited partnership
   units, net                                              6,437,567                   -              6,437,567

Distributions - ($56.94 per unit)                           (219,503)                  -               (219,503)

Net income                                                   309,721                3,128               312,849
                                                    ----------------       --------------       ---------------
Balance, December 31, 1995                                 6,527,785                3,279             6,531,064

Issuance of 12,600 limited partnership
   units, net                                             10,957,197                   -             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, December 31, 1996                          $     17,422,518       $       16,501       $    17,439,019
                                                    ================       ==============       ===============
</TABLE>



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

                                    F(a)-4
<PAGE>   39

                  CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                           STATEMENT OF CASH FLOWS
                for the years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                                                  1996                  1995
<S>                                                                        <C>                    <C>
Cash flows from operating activities:
   Net Income                                                              $    1,322,086          $    312,849
   Adjustments to net income:
        Depreciation                                                              114,272                33,978
        Increase in unbilled rent                                                (163,522)              (47,151)
        Increase in receivables                                                    (1,959)                   -
        (Decrease) increase in payables                                           (20,387)               25,237
        Increase in lease rents received in advance                                43,916                    -
        Increase in security deposits held on leases                               38,584                27,369
                                                                           --------------       ---------------

Net cash provided by operating activities                                       1,332,990               352,282
                                                                           --------------       ---------------

Cash flows from investing activities:
   Purchase of real estate for operating leases                                (9,537,532)           (3,403,260)
   Construction loan draws                                                       (939,778)                  -
   Purchase of equipment for financing leases                                  (1,357,856)           (2,001,275)
   Reduction of net investment in financing leases                                331,707               121,674
                                                                           --------------       ---------------

Net cash used in investing activities                                         (11,503,459)           (5,282,861)
                                                                           --------------       ---------------

Cash flows from financing activities:
   Increase in due from related parties                                           (14,180)               (6,409)
   Increase in due to related parties                                               5,300                 2,428
   Issuance of limited partnership units                                       12,585,027             7,399,427
   Offering costs                                                              (1,627,840)             (961,860)
   Return of initial limited partner's capital contribution                           -                    (100)
   Distributions to limited partners                                           (1,371,318)             (219,503)
                                                                           --------------       ---------------

Net cash provided by financing activities                                       9,576,989             6,213,983
                                                                           --------------       ---------------

Net (decrease) increase in cash                                                  (593,480)            1,283,404

Cash, beginning of period                                                       1,283,655                   251
                                                                           --------------       ---------------
Cash, end of period                                                        $      690,175       $     1,283,655
                                                                           ==============       ===============

</TABLE>



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

                                    F(a)-5
<PAGE>   40

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


1.  THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING PRINCIPLES:

    Captec Franchise Capital Partners L.P. III (the "Partnership"), a Delaware
    limited partnership, was formed on February 18, 1994 for the purpose of
    acquiring income-producing commercial real properties and equipment leased
    on a "triple net" basis, primarily to operators of national and regional
    franchised businesses.  The general partners of the Partnership are Captec
    Franchise Capital Corporation III (the "Corporation"), a wholly owned
    subsidiary of Captec Financial Group, Inc. ("Captec") and Patrick L. Beach,
    an individual, hereinafter collectively referred to as the Sponsor.
    Patrick L. Beach is also the Chairman of the Board of Directors, President
    and Chief Executive Officer of the Corporation and Captec.  The general
    partners have each contributed $100 in cash to the Partnership as a capital
    contribution.

    The Partnership commenced a public offering of limited partnership
    interests ("Units") on August 12, 1994.  A minimum of 1,150 Units and a
    maximum of 20,000 Units, priced at $1,000 per Unit, were offered on a "best
    efforts, part or none" basis.  The Partnership broke impound on January 24,
    1995, at which time funds totaling $1,155,255 were released from escrow and
    the Partnership immediately commenced operations.  At December 31, 1996,
    the Partnership had accepted subscriptions for 20,000 Units, and funds
    totaling $20,000,000.

    Allocation of profits, losses and cash distributions from operations and
    cash distributions from sale or refinancing are made pursuant to the terms
    of the Partnership Agreement.  Profits and losses from operations are
    allocated among the limited partners based upon the number of Units owned.
    In no event will the Sponsor be allocated less than one percent of profits
    and losses in any year.

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

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

    B.   LAND AND BUILDING 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).


                                    F(a) - 6



<PAGE>   41


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


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

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

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

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

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


2.   DISTRIBUTIONS:

    Cash flows of the Partnership are allocated ninety-nine percent (99%) to
    the limited partners and one percent (1%) to the Sponsor, except that the
    Sponsor's share is subordinated to a ten percent (10%) preferred return to
    the limited partners.  Net sale or refinancing proceeds of the Partnership
    will be allocated ninety percent (90%) to the limited partners and ten
    percent (10%) to the Sponsor, except that the Sponsor's share will be
    subordinated to an eleven percent (11%) preferred return plus return of the
    original contributions to the limited partners.

    The first cash distribution to the limited partners took place on April 17,
    1995 and included interest income on cash contributions earned during
    impound, as well as cash flow from operations for the partial three month
    period ended March 31, 1995.  Thereafter, additional distributions of cash
    flow from operations were made quarterly in arrears.



                                    F(a) - 7



<PAGE>   42


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


3.  RELATED PARTY TRANSACTIONS AND AGREEMENTS:

    Organization and offering expenses, excluding selling commissions, were
    initially paid by the General Partners and/or their Affiliates and were
    reimbursed by the Partnership in an amount equal to up to three percent
    (3%) of the gross proceeds of the offering (less any amounts paid directly
    by the Partnership).  In addition, the Sponsors and/or their affiliates
    were paid a non-accountable expense allowance by the Partnership in an
    amount equal to two percent (2%) of the gross proceeds of the offering.
    The Sponsor was reimbursed for $632,248 and $355,199 during 1996 and 1995,
    respectively.  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 and 1995, were $1,007,966 and
    $590,505, respectively.  These costs were accounted for as capital issuance
    costs and have been netted against the limited partners' capital accounts.
    The Sponsor has also guaranteed payment of organization and offering
    expenses which exceed 13%, including selling commissions, of the gross
    proceeds of the offering.

    An acquisition fee is charged, not to exceed the lesser of: (i) four
    percent (4%) of gross proceeds plus an additional .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 $455,017 and $207,771
    in acquisition fees during 1996 and 1995, respectively.  Of these amounts,
    $533,592 was capitalized into net investment in financing leases and
    $129,196 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
    noncompounded 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 or 1995.

    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
    liquidations during 1996 or 1995.


                                    F(a) - 8


<PAGE>   43


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                   NOTES TO CONSOLIDATED 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 1996 or 1995.

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



4.  LAND AND BUILDING SUBJECT TO OPERATING LEASES:

    The net investment in operating leases as of December 31, 1996 and 1995 is
    comprised of the following:


<TABLE>
<CAPTION>
                                                 1996              1995
 <S>                                          <C>           <C>

 Land                                         $ 5,127,875   $  968,240
 Building and improvements                      7,812,917    2,435,020
 Construction draws on properties (including
  land cost of $555,000)                          939,778           -
                                              -----------   ----------

                                               13,880,570    3,403,260
 Less accumulated depreciation                   (148,249)     (33,978)
                                              -----------   ----------

 Total                                        $13,732,321   $3,369,282
                                              ===========   ==========
</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, 1996, the Company had
    approximately $701,000 of unfunded commitments on properties under
    construction.

                                    F(a) - 9


<PAGE>   44


                   CAPTEC FRANCHISE CAPITAL PARTNERS L.P. III
                   NOTES TO CONSOLIDATED 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, 1996.  This schedule excludes
    additional rents due under unfunded commitments on properties under
    construction which are estimated to be equal to an additional $1,146,000 in
    aggregate.


<TABLE>
<S>                                               <C>
1997                                              $ 1,590,813
1998                                                1,655,941
1999                                                1,677,748
2000                                                1,704,152
2001                                                1,747,402
Thereafter                                         24,132,910
                                                  -----------

Total                                             $32,508,966
                                                  ===========
</TABLE>



5.  NET INVESTMENT IN FINANCING LEASES:

    The net investment in financing leases as of December 31, 1996 and 1995 is
    comprised of the following:


<TABLE>
<CAPTION>
                                                  1996          1995
    <S>                                       <C>            <C>

       Minimum lease payments to be received   $ 3,535,259   $2,392,145
       Estimated residual value                    269,811      146,254
                                              ------------   ----------

       Gross investment in financing leases      3,805,070    2,538,399
       Less unearned income                       (899,320)    (658,798)
                                              ------------   ----------

       Net investment in financing leases       $2,905,750   $1,879,601
                                              ============   ==========
</TABLE>


    The following is a schedule of future minimum lease payments to be
    received on the  financing leases as of December 31, 1996:

<TABLE>
<S>                                           <C>
       1997                                   $    849,150
       1998                                        799,737
       1999                                        799,737
       2000                                        602,496
       2001                                        262,247
       Thereafter                                  221,892
                                              ------------

       Total                                  $  3,535,259
                                              ============
</TABLE>



                                   F(a) - 10


<PAGE>   45


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


6.  SUBSEQUENT EVENT:

    In January 1997, the Partnership made a distribution to its limited
    partners totaling approximately $435,000, which represented the quarterly
    distribution of cash flow from operations for the quarter ended December
    31, 1996 in the amount of $505,000, less approximately $70,000 of elective
    monthly distributions previously distributed during that quarter.




                                   F(a) - 11

<PAGE>   46






                    CAPTEC FRANCHISE CAPITAL CORPORATION III

                    REPORT ON AUDITS OF FINANCIAL STATEMENTS

                 FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995



                                    F(b) - i


<PAGE>   47


CAPTEC FRANCHISE CAPITAL CORPORATION III
CONTENTS



<TABLE>
<CAPTION>


                                                                           PAGES
<S>                                                                     <C>
REPORT OF INDEPENDENT ACCOUNTANTS  .....................................  F(b) - 1



FINANCIAL STATEMENTS:

    Balance Sheet.......................................................  F(b) - 2

    Statement of Operations.............................................  F(b) - 3

    Statement of Changes in Stockholders' Equity........................  F(b) - 4

    Statement of Cash Flows.............................................  F(b) - 5

    Notes to Financial Statements......................  F(b) - 6 through F(b) - 7
</TABLE>



                                   F(b) - ii


<PAGE>   48

                                 [Letterhead]


REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying balance sheet of Captec Franchise Capital
Corporation III as of December 31, 1996 and 1995, and the related statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended.  These financial statements are the responsibility of the Corporation's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Captec Franchise Capital
Corporation III as of December 31, 1996 and 1995, and the results of its
operations, changes in stockholders' equity and its cash flows for the years
then ended, in conformity with generally accepted accounting principles.


/s/ Coopers & Lybrand L.L.P.

Detroit, Michigan
March 14, 1997





                                    F(b) - 1



<PAGE>   49

                   CAPTEC FRANCHISE CAPITAL CORPORATION III
                                BALANCE SHEET
                          December 31, 1996 and 1995



<TABLE>
<CAPTION>
                                                                  1996                1995
<S>                                                           <C>                <C>
                                  ASSETS

Cash                                                          $       2,670      $         386
Investment in partnership                                             8,250              1,640
Reimbursable organizational & offering expenses                         -              850,826
Receivable from affiliate                                            13,549                -
Other assets                                                          5,672              9,059
                                                              -------------      -------------
Total assets                                                  $      30,141      $     861,911
                                                              =============      =============

                         LIABILITIES & STOCKHOLDERS' EQUITY

Total liabilities:
   Accounts payable                                           $       5,187      $      35,207
   Payable to affiliate                                              15,942            824,202
   Income tax payable                                                 2,732                532
                                                              -------------      -------------
Total liabilities                                                    23,861            859,941
                                                              -------------      -------------
Total
Stockholders' equity:
Common stock, no par value; 100 shares authorized,
   issued and outstanding                                               -                  -
Paid-in capital                                                       1,000              1,000
Retained earnings (accumulated deficit)                               5,280                970
                                                              -------------      -------------
Total stockholders' equity                                            6,280              1,970
                                                              -------------      -------------
Total liabilities & stockholders' equity                      $      30,141      $     861,911
                                                              =============      =============

</TABLE>



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

                                    F(b)-2
<PAGE>   50

                   CAPTEC FRANCHISE CAPITAL CORPORATION III
                            STATEMENT OF OPERATIONS
                for the years ended December 31, 1996 and 1995



<TABLE>
<CAPTION>
                                                                    1996                1995
<S>                                                          <C>                <C>
Investment income from partnership                            $       6,611      $       1,564

Interest                                                                101                -
General and administrative                                              -                  -
                                                              -------------      -------------
          Net income before taxes                                     6,510              1,564

Income tax provision                                                  2,200                532
                                                              -------------      -------------
          Net income                                          $       4,310      $       1,032
                                                              =============      =============

</TABLE>


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


                                    F(b)-3
<PAGE>   51

                   CAPTEC FRANCHISE CAPITAL CORPORATION III
                 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                for the years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>

                                                                RETAINED
                                                                EARNINGS
                             COMMON        PAID-IN               (ACCUM.
                              STOCK        CAPITAL              DEFICIT)           TOTAL
                             ------        -------              --------           -----
<S>                         <C>           <C>                  <C>                <C>
Balance, January 1, 1995    $     -         $1,000                $    -          $1,000

Issuance of common stock
Net Income                        -              -                   970             970
                            -------         ------                ------         -------
Balance, December 31, 1995        -          1,000                   970           1,970

Net income                        -              -                 4,310           4,310
                            -------         ------               -------         -------
Balance, December 31, 1996  $     -         $1,000                $5,280          $6,280
                            =======         ======               =======         =======

</TABLE>


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


                                    F(b)-4
<PAGE>   52

                   CAPTEC FRANCHISE CAPITAL CORPORATION III
                           STATEMENT OF CASH FLOWS
                for the years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>

                                                                    1996                1995
<S>                                                           <C>                <C>
Cash flows from operating activities:
   Net income                                                 $       4,310      $      1,032
   Adjustments to net income:
      Undistributed income from partnership                          (6,610)           (1,564)
      Increase in income tax payable                                  2,200               532
      Increase in other assets                                      (10,162)               -
      Decrease in accounts payable                                  (30,021)               -
                                                              -------------      ------------
Net cash provided by operating activities                           (40,283)               -
                                                              -------------      ------------
Cash flows from financing activities:
   Proceeds from borrowings from affiliates                          42,567         1,098,538
   Receipt of offering expense reimbursements                       632,248           274,336
   Payment of reimbursable offering expenses                            -          (1,099,015)
   Repayment of borrowings from affiliates                         (632,248)         (274,336)
                                                              -------------      ------------
Net cash provided by (used in) financing activities                  42,567              (477)
                                                              -------------      ------------

Net increase (decrease) in cash                                       2,284              (477)

Cash, beginning of year                                                 386               863
                                                              -------------      ------------
Cash, end of period                                           $       2,670      $        386
                                                              =============      ============

</TABLE>



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


                                    F(b)-5
<PAGE>   53

                    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, 1996, 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.


                                    F(b) - 6


<PAGE>   54


                    CAPTEC FRANCHISE CAPITAL CORPORATION III
                         NOTES TO FINANCIAL STATEMENTS


2.  OPERATIONS:

    The Corporation's only source of revenue in 1996 and 1995 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, and 1995 the Corporation received reimbursements
    from the Partnership totaling $632,248 and $355,199.

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




                                    F(b) - 7

<PAGE>   55
                                        EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                         SEQUENTIALLY
EXHIBIT                                                    NUMBERED
NUMBER                  DESCRIPTION                          PAGE
--------                -----------                      ------------
<S>              <C>                                    <C>
27        --      Financial Data Schedule

</TABLE>