<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended September 30, 1999
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from to
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Commission file number
0-15666
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CNL Income Fund, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2666264
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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CONTENTS
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Page
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Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Part II.
Other Information 15-17
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CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
------
Land and buildings on operating leases, less
accumulated depreciation of $2,430,042 and
$2,277,627 in 1999 and 1998, respectively $ 7,421,773 $ 7,574,188
Investment in joint ventures 827,584 841,379
Cash and cash equivalents 159,163 252,521
Receivables, less allowance for doubtful accounts
of $30,168 in 1999 11,163 30,959
Prepaid expenses 8,594 5,463
Lease costs, less accumulated amortization of
$26,250 and $24,375 in 1999 and 1998, respectively 23,750 25,625
Accrued rental income 32,382 30,791
------------------ ------------------
$ 8,484,409 $ 8,760,926
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 66,222 $ 736
Escrowed real estate taxes payable 7,841 1,024
Distributions payable 266,982 266,982
Due to related parties 92,257 129,060
Rents paid in advance and deposits 32,150 36,105
------------------ ------------------
Total liabilities 465,452 433,907
Commitments and Contingencies (Note 3)
Partners' capital 8,018,957 8,327,019
------------------ ------------------
$ 8,484,409 $ 8,760,926
================== ==================
</TABLE>
See accompanying notes to condensed financial statements.
1
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CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $248,638 $243,612 $730,797 $774,444
Interest and other income 1,422 6,597 6,625 19,053
----------- ----------- ----------- -----------
250,060 250,209 737,422 793,497
----------- ----------- ----------- -----------
Expenses:
General operating and administrative 21,792 20,145 60,872 65,647
Professional services 4,996 2,404 16,198 15,006
Real estate taxes -- 1,080 1,091 3,241
State and other taxes 301 -- 5,968 4,450
Depreciation and amortization 51,430 51,429 154,290 157,251
Transaction costs 19,885 -- 77,455 --
----------- ----------- ----------- -----------
98,404 75,058 315,874 245,595
----------- ----------- ----------- -----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Building 151,656 175,151 421,548 547,902
Equity in Earnings of Joint Ventures 23,928 20,937 71,336 62,394
Gain on Sale of Land and Building -- -- -- 235,804
----------- ----------- ----------- -----------
Net Income $175,584 $196,088 $492,884 $846,100
=========== =========== =========== ===========
Allocation of Net Income:
General partners $ 1,756 $ 1,961 $ 4,929 $ 7,118
Limited partners 173,828 194,127 487,955 838,982
----------- ----------- ----------- -----------
$175,584 $196,088 $492,884 $846,100
=========== =========== =========== ===========
Net Income Per Limited Partner Unit $ 5.79 $ 6.47 $ 16.27 $ 27.97
=========== =========== =========== ===========
Weighted Average Number of Limited Partner
Units Outstanding 30,000 30,000 30,000 30,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
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CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
--------------------------- -----------------------
<S> <C> <C>
General partners:
Beginning balance $ 330,430 $ 321,759
Net income 4,929 8,671
---------------- -----------------
335,359 330,430
---------------- -----------------
Limited partners:
Beginning balance 7,996,589 8,707,291
Net income 487,955 992,766
Distributions ($26.70 and $56.78 per
limited partner unit, respectively) (800,946) (1,703,468)
---------------- -----------------
7,683,598 7,996,589
---------------- -----------------
Total partners' capital $ 8,018,957 $ 8,327,019
================ =================
</TABLE>
See accompanying notes to condensed financial statements.
3
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CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities $ 707,588 $ 799,653
-------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building -- 661,300
Decrease in restricted cash -- 126,009
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Net cash provided by investing activities -- 787,309
-------------- --------------
Cash Flows from Financing Activities:
Proceeds from loan from corporate
general partner 21,000 --
Repayment of loan from corporate
general partner (21,000) --
Distributions to limited partners (800,946) (1,485,725)
-------------- --------------
Net cash used in financing activities (800,946) (1,485,725)
-------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents (93,358) 101,237
Cash and Cash Equivalents at Beginning of Period 252,521 184,130
-------------- --------------
Cash and Cash Equivalents at End of Period $ 159,163 $ 285,367
============== ==============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fee incurred and
unpaid at end of period $ -- $ 20,400
-------------- --------------
Distributions declared and unpaid at end of
quarter $ 266,982 $ 266,982
============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
4
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CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
1. Basis of Presentation:
---------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1999 may not be
indicative of the results that may be expected for the year ending
December 31, 1999. Amounts as of December 31, 1998, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund, Ltd. (the "Partnership") for the year ended December 31,
1998.
2. Related Party Transactions:
--------------------------
On September 1, 1999, CNL American Properties Fund, Inc. ("APF"), an
affiliate of the general partners, acquired CNL Fund Advisors, Inc.
("CFA"), an affiliate who provides certain services relating to
management of the Partnership and its properties pursuant to a property
management agreement with the Partnership. As a result of this
acquisition, CFA became a wholly owned subsidiary of APF; however, the
terms of the property management agreement between the Partnership and
CFA remain unchanged and in effect.
3. Commitments and Contingencies:
-----------------------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 578,880 shares of its common stock, par value $0.01 per share
(the "APF Shares"). In order to assist the general partners in
evaluating the proposed merger consideration, the general partners
retained Valuation Associates, a nationally recognized real estate
appraisal firm, to appraise the Partnership's restaurant property
portfolio. Based on Valuation Associates' appraisal, the fair value of
the Partnership's property portfolio and other assets was $11,384,042
as of December 31, 1998. The APF Shares are expected to be listed for
trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at
the option of the former limited partners. At a special meeting of the
partners that is expected to be held in the first quarter of 2000,
limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve
5
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CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
3. Commitments and Contingencies - Continued:
-----------------------------------------
the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the
properties and other assets of the Partnership. The general partners
intend to recommend that the limited partners of the Partnership
approve the Merger. In connection with their recommendation, the
general partners will solicit the consent of the limited partners at
the special meeting. If the limited partners reject the Merger, the
Partnership will bear the portion of the transaction costs based upon
the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates in
connection with the proposed Merger. On September 23, 1999, the judge
assigned to the two lawsuits entered an order consolidating the two
cases. Pursuant to this order, the plaintiffs in these cases filed a
consolidated and amended complaint on November 8, 1999. The various
defendants, including the general partners, have 45 days to respond to
that consolidated complaint. The general partners and APF believe that
the lawsuits are without merit and intend to defend vigorously against
the claims. See Part II - Item 1. Legal Proceedings.
4. Subsequent Event:
----------------
In October 1999, the Partnership entered into a promissory note with
the corporate general partner for a loan in the amount of $101,000 in
connection with the operations of the Partnership. The loan is
uncollateralized, non-interest bearing and due on demand.
In addition, in October 1999, the Partnership sold its property in Kent
Island, Maryland to a third party for $875,000 and received net sales
proceeds of approximately $820,500, resulting in a gain of $315,649 for
financial reporting purposes. In connection with the sale, the
Partnership also received $50,000 from the former tenant in
consideration of the Partnership's releasing the tenant from its
obligation under the terms of its lease. The Partnership intends to
reinvest the net sales proceeds in an additional property.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on November 26, 1985 to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of national and regional
fast-food restaurant chains (collectively, the "Properties"). The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of September 30,
1999, the Partnership owned 17 Properties, which included interests in two
Properties owned by joint ventures in which the Partnership is a co-venturer and
one Property owned with affiliates of the general partners as tenants-in-common.
Capital Resources
- -----------------
The Partnership's primary source of capital for the nine months ended
September 30, 1999 and 1998, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and other
income received, less cash paid for expenses). For the nine months ended
September 30, 1999 and 1998, the Partnership generated cash from operations of
$707,588 and $799,653, respectively. The decrease in cash from operations for
the nine months ended September 30, 1999 is primarily a result of changes in
income and expenses as described in "Results of Operations" below and changes in
the Partnership's working capital.
In July 1999, the Partnership entered into a promissory note with the
corporate general partner for a loan in the amount of $21,000 in connection with
the operations of the Partnership. The loan was uncollateralized, non-interest
bearing and due on demand. As of September 30, 1999, the Partnership had repaid
the loan in full to the corporate general partner. In addition, in October 1999,
the Partnership entered into a promissory note with the corporate general
partner for a loan in the amount of $101,000 in connection with the operations
of the Partnership. The loan is uncollateralized, non-interest bearing and due
on demand.
In October 1999, the Partnership sold its Property in Kent Island,
Maryland to a third party for $875,000 and received net sales proceeds of
approximately $820,500, resulting in a gain of $315,649 for financial reporting
purposes. In connection with the sale, the Partnership also received $50,000
from the former tenant in consideration of the Partnership's releasing the
tenant from its obligation under the terms of its lease. The Partnership intends
to reinvest the net sales proceeds in an additional Property. The General
Partners believe that the transaction, or a portion thereof, relating to the
sale of this Property and the reinvestment of the proceeds will be structured to
quality as a like-kind exchange transaction for federal income tax purposes.
Currently, rental income from the Partnership's Properties are invested
in money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, certificates of deposit, and money
market accounts with less than a 30-day maturity date, pending the Partnership's
use of such funds to pay Partnership expenses or to make distributions to the
limited partners. At September 30, 1999, the Partnership had $159,163
7
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invested in such short-term investments, as compared to $252,521 at December 31,
1998. The funds remaining at September 30, 1999 will be used to pay
distributions and other liabilities.
Short-Term Liquidity
- --------------------
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, for the nine
months ended September 30, 1998, proceeds from the sale of a Property, and for
the nine months ended September 30, 1999, the loan of $10,000 received from the
corporate general partner in October 1999, as described above in "Capital
Resources", the Partnership declared distributions to limited partners of
$800,946 and $1,436,486 for the nine months ended September 30, 1999 and 1998,
respectively ($266,982 for each of the quarters ended September 30, 1999 and
1998). This represents distributions of $26.70 and $47.88 per unit for the nine
months ended September 30, 1999 and 1998, respectively ($8.90 per unit for each
of the quarters ended September 30, 1999 and 1998). The distribution for the
nine months ended September 30, 1998, included $586,300 of net sales proceeds
from the sale of the Property in Kissimmee, Florida. This special distribution
was effectively a return of a portion of the limited partners' investment,
although, in accordance with the Partnership agreement, $216,361 was applied
towards the limited partners' ten percent preferred return and the balance of
$369,939 was treated as a return of capital for purposes of calculating the
limited partners' ten percent preferred return. As a result of this return of
capital, the amount of the limited partners' invested capital contributions
(which generally is the limited partners' capital contributions, less
distributions from the sale of a Property that are considered to be a return of
capital) was decreased; therefore, the amount of the limited partners' invested
capital contributions on which the ten percent preferred return is calculated
was lowered accordingly. As a result of the sale of the Property, the
Partnership's total revenues were reduced, while the majority of the
Partnership's operating expenses remained fixed; therefore, distributions of net
cash flow were adjusted. No distributions were made to the general partners for
the quarters and nine months ended September 30, 1999 and 1998. No amounts
distributed to the limited partners for the nine months ended September 30, 1999
and 1998, except for $369,939 as described above, are required to be or have
been treated by the Partnership as a return of capital for purposes of
calculating the limited partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the limited partners on a quarterly basis.
8
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Total liabilities of the Partnership, including distributions payable,
increased to $465,452 at September 30, 1999, from $433,907 at December 31, 1998,
primarily as a result of the Partnership accruing transaction costs relating to
the proposed merger with CNL American Properties Fund, Inc. ("APF"), as
described below. The increase in liabilities at September 30, 1999 was partially
offset by a decrease in amounts due to related parties at September 30, 1999, as
compared to December 31, 1998. Liabilities at September 30, 1999, to the extent
they exceed cash and cash equivalents at September 30, 1999, will be paid from
future cash from operations and the loan of $101,000 received from the corporate
general partner in October 1999, and, in the event the general partners elect to
make additional capital contributions or loans to the Partnership, from future
general partner capital contributions or loans.
Long-Term Liquidity
- -------------------
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
- ---------------------
During the nine months ended September 30, 1998, the Partnership owned
and leased 15 wholly owned Properties (which included one Property in Kissimmee,
Florida, which was sold in April 1998), and during the nine months ended
September 30, 1999, the Partnership owned and leased 14 wholly owned Properties,
to operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1999 and 1998, the
Partnership earned $730,797 and $774,444, respectively, in rental income from
these Properties, $248,638 and $243,612 of which was earned during the quarters
ended September 30, 1999 and 1998, respectively. The decrease in rental income
during the nine months ended September 30, 1999, as compared to the nine months
ended September 30, 1998, is partially attributable to a decrease in rental
income as a result of the sale of the Property in Kissimmee, Florida, in April
1998. The decrease is also partially a result of the fact that the Partnership
established an allowance for doubtful accounts in connection with the tenant of
the Property in Mesquite, Texas filing for bankruptcy in January 1999. While the
tenant has not rejected or affirmed this lease, there can be no assurance that
the lease will not be rejected in the future. The possible rejection of this
lease could have an adverse effect on the results of operations of the
Partnership, if the Partnership is not able to re-lease the Property in a timely
manner.
For the nine months ended September 30, 1999 and 1998, the Partnership
owned and leased two Properties indirectly through joint venture arrangements
and one Property with affiliates of the general partners as tenants-in-common.
In connection therewith, during the nine months ended September 30, 1999 and
1998, the Partnership earned $71,336 and $62,394, respectively, attributable to
net income earned by these joint ventures, $23,928 and $20,937 of which was
earned during the quarters ended September 30, 1999 and 1998, respectively.
Operating expenses, including depreciation and amortization expense,
were $315,874 and $245,595 for the nine months ended September 30, 1999 and
1998, respectively, of which $98,404 and $75,058 were incurred for the quarters
ended September 30, 1999 and 1998, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1999, as
compared to the quarter and nine months ended September 30, 1998, is primarily
attributable to the fact that the Partnership incurred $19,885 and $77,455,
respectively,
9
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in transaction costs related to the general partners retaining financial and
legal advisors to assist them in evaluating and negotiating the proposed merger
with APF, as described below. If the limited partners reject the merger, the
Partnership will bear the portion of the transaction costs based upon the
percentage of "For" votes and the general partners will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.
As a result of the sale of a Property during the nine months ended
September 30, 1998, the Partnership recognized a gain of $235,804 for financial
reporting purposes. No Properties were sold during the nine months ended
September 30, 1999.
Proposed Merger
- ---------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF
has agreed to issue 578,880 shares of its common stock, par value $0.01 per
share (the "APF Shares"). In order to assist the general partners in evaluating
the proposed merger consideration, the general partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $11,384,042 as of December 31, 1998. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the first quarter of 2000, limited partners holding in
excess of 50% of the Partnership's outstanding limited partnership interest must
approve the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the Properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income Funds served
a lawsuit against the general partners and APF in connection with the proposed
Merger. On July 8, 1999, the plaintiffs amended the complaint to add three
additional limited partners as plaintiffs. Additionally, on June 22, 1999, a
limited partner in certain of the CNL Income Funds served a lawsuit against the
general partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates, in
connection with the proposed Merger. On September 23, 1999, the judge assigned
to the two lawsuits entered an order consolidating the two cases. Pursuant to
this order, the plaintiffs in these cases filed a consolidated and amended
complaint on November 8, 1999. The various defendants, including the general
partners, have 45 days to respond to that consolidated complaint. The general
partners and APF believe that the lawsuits are without merit and intend to
defend vigorously against the claims. See Part II - Item 1. Legal Proceedings.
10
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Year 2000 Readiness Disclosure
- ------------------------------
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information
technology systems. The general partners and their affiliates provide all
services requiring the use of information and non-information technology systems
pursuant to a management agreement with the Partnership. The information
technology system of the general partners' affiliates consists of a network of
personal computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the general partners and their affiliates formed a Year
2000 committee (the "Y2K Team") for the purpose of identifying, understanding
and addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the general partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consisted
of identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections, interviews
and tests to identify which of the systems used by the Partnership could have a
potential year 2000 problem.
The information system of the general partners' affiliates is comprised
of hardware and software applications from mainstream suppliers. Accordingly,
the Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the
non-information technology systems providers of the affiliates.
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In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.
As of September 30, 1999, the Y2K Team had received responses from
approximately 62 percent of the third parties. All of the responses were in
writing. Of the third parties responding, all indicated that they are currently
year 2000 compliant or will be year 2000 compliant prior to the year 2000.
Although the Y2K Team continues to receive positive responses from the companies
with which the Partnership has third party relationships regarding their year
2000 compliance, the general partners cannot be assured that the third parties
have adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. As of September 30, 1999, the Y2K Team had received
responses from approximately 63 percent of the tenants. All of the responses
were in writing. Of the tenant's responding, all indicated that they are
currently year 2000 compliant or will be year 2000 compliant prior to the year
2000. The general partners cannot be assured that the tenants have adequately
considered the impact of the year 2000. The Partnership has also instituted a
policy of requiring any new tenants to indicate that their systems are year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades for its hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the general partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the general partners and their affiliates. The general
partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The general partners believe that the reasonably likely worst case
scenario with regard to the information and non-information technology systems
used by the Partnership is the failure of one or more of these systems as a
result of year 2000 problems. Because the Partnership's major source of income
is rental payments under long-term triple-net leases, any failure of information
or non-information technology systems used by the Partnership is not expected to
have a material impact on the results of operations of the Partnership. Even if
such systems failed, the payment
12
<PAGE>
of rent under the Partnership's leases would not be affected. In addition, the
Y2K Team is expected to correct any Y2K problems within the control of the
general partners and their affiliates before the year 2000.
The Y2K Team has determined that a contingency plan to address this
risk is not necessary at this time. However, if the Y2K Team identifies
additional risks associated with the year 2000 compliance of the information or
non-information technology systems used by the Partnership, the Y2K Team will
develop a contingency plan if deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records
The general partners believe that the reasonably likely worst case
scenario with regard to the Partnership's transfer agent is that the transfer
agent will fail to achieve year 2000 compliance of its systems and will not be
able to accurately maintain the records of the Partnership. This could result in
the inability of the Partnership to accurately identify its limited partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the general partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which the
general partners and their affiliates would maintain the records of the
Partnership manually, in the event that the systems of the transfer agent are
not year 2000 compliant. The general partners and their affiliates would have to
allocate resources to internally perform the functions of the transfer agent.
The general partners do not anticipate that the additional cost of these
resources would have a material impact on the results of operations of the
Partnership.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The general partners believe that the reasonably likely worst case
scenario with regard to the Partnership's financial institutions is that some or
all of its funds on deposit with such financial institutions may be temporarily
unavailable. The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the general
partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues. The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis. The general
partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.
Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
13
<PAGE>
Risks of Late Payment or Non-Payment of Rent by Tenants
The general partners believe that the reasonably likely worst case
scenario with regard to the Partnership's tenants is that some of the tenants
may make rental payments late as the result of the failure of the tenants to
achieve year 2000 compliance of their systems used in the payment of rent, the
failure of the tenant's financial institutions to achieve year 2000 compliance,
or the temporary disruption of the tenants' businesses. The Y2K Team is in the
process of requesting responses from the Partnership's tenants indicating the
extent to which their systems are currently year 2000 compliant or are expected
to be year 2000 compliant prior to the year 2000. The general partners cannot be
assured that the tenants have addressed all possible year 2000 issues. The late
payment of rent by one or more tenants would affect the results of operations of
the Partnership in the short-term.
The general partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The general
partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's
tenants, the Y2K Team is not able to develop a contingency plan to address these
risks. In the event of late payment or non-payment of rent, the general partners
will assess the remedies available to the Partnership under its lease
agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On May 11, 1999, four limited partners in several CNL Income Funds
served a derivative and purported class action lawsuit filed April
22, 1999 against the general partners and APF in the Circuit Court
of the Ninth Judicial Circuit of Orange County, Florida, alleging
that the general partners breached their fiduciary duties and
violated provisions of certain of the CNL Income Fund partnership
agreements in connection with the proposed Merger. The plaintiffs
are seeking unspecified damages and equitable relief. On July 8,
1999, the plaintiffs filed an amended complaint which, in addition
to naming three additional plaintiffs, includes allegations of
aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended, the
caption of the case is Jon Hale, Mary J. Hewitt, Charles A.
------------------------------------
Hewitt, Gretchen M. Hewitt Bernard J. Schulte, Edward M. and
------------------------------------------------------------
Margaret Berol Trust, and Vicky Berol v. James M. Seneff, Jr.,
--------------------------------------------------------------
Robert A. Bourne, CNL Realty Corporation, and CNL American
----------------------------------------------------------
Properties Fund, Inc., Case No. CIO-99-0003561.
----------------------
On June 22, 1999, a limited partner of several CNL Income Funds
served a purported class action lawsuit filed April 29, 1999
against the general partners and APF, Ira Gaines, individually and
----------------------------
on behalf of a class of persons similarly situated, v. CNL
----------------------------------------------------------
American Properties Fund, Inc., James M. Seneff, Jr., Robert A.
---------------------------------------------------------------
Bourne, CNL Realty Corporation, CNL Fund Advisors, Inc., CNL
------------------------------------------------------------
Financial Corporation a/k/a CNL Financial Corp., CNL Financial
--------------------------------------------------------------
Services, Inc. and CNL Group, Inc., Case NO. CIO-99-3796, in the
-----------------------------------
Circuit Court of the Ninth Judicial Circuit of Orange County,
Florida, alleging that the general partners breached their
fiduciary duties and that APF aided and abetted their breach of
fiduciary duties in connection with the proposed Merger. The
plaintiff is seeking unspecified damages and equitable relief.
On September 23, 1999, Judge Lawrence Kirkwood entered an order
consolidating the two cases under the caption In re: CNL Income
-----------------
Funds Litigation, Case No. 99-3561. Pursuant to this order, the
----------------------------------
plaintiffs in these cases filed a consolidated and amended complaint on
November 8, 1999, and the various defendants, including the general
partners, have 45 days to respond to that consolidated complaint.
Item 2. Changes in Securities. Inapplicable.
---------------------
Item 3. Defaults upon Senior Securities. Inapplicable.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
---------------------------------------------------
Item 5. Other Information. Inapplicable.
-----------------
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund, Inc.
("APF") dated March 11, 1999, as amended June 4,
1999, and as amended October 27, 1999 (Filed as
Appendix B to the Prospectus Supplement for the
Registrant, constituting a part of Amendment No.
3 to the Registration Statement of APF on Form
S-4, File No. 333-74329.)
3.1 Certificate of Limited Partnership of CNL Income
Fund, Ltd., as amended. (Included as Exhibit 3.1
to Amendment No. 1 to Registration Statement No.
33-2850 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Certificate and Agreement of
Limited Partnership of CNL Income Fund, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with
the Securities and Exchange Commission on March
27, 1998, and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income
Fund, Ltd., as amended. (Included as Exhibit 4.1
to Amendment No. 1 to Registration Statement No.
33-2850 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Certificate and Agreement of
Limited Partnership of CNL Income Fund, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with
the Securities and Exchange Commission on March
27, 1998, and incorporated herein by reference.)
10.1 Property Management Agreement. (Included as
Exhibit 10.1 to Form 10-K filed with the
Securities and Exchange Commission on March 27,
1998, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from
CNL Investment Company to CNL Income Fund
Advisors, Inc. (Included as Exhibit 10.2 to Form
10-K filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Property Management Agreement from
CNL Income Fund Advisors, Inc. to CNL Fund
Advisors, Inc. (Included as Exhibit 10.3 to Form
10-K filed with the Securities and Exchange
Commission on March 29, 1996, and incorporated
herein by reference.)
27 Financial Data Schedule (Filed herewith.)
16
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November, 1999.
CNL INCOME FUND, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
--------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
--------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund, Ltd. at September 30, 1999, and its statement of
income for the nine months then ended and is qualified in its entirety by
reference to the Form 10-Q of CNL Income Fund, Ltd. for the nine months ended
September, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 159,163
<SECURITIES> 0
<RECEIVABLES> 41,331
<ALLOWANCES> 30,168
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 9,851,815
<DEPRECIATION> 2,430,042
<TOTAL-ASSETS> 8,484,409
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 8,018,957
<TOTAL-LIABILITY-AND-EQUITY> 8,484,409
<SALES> 0
<TOTAL-REVENUES> 737,422
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 315,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 492,884
<INCOME-TAX> 0
<INCOME-CONTINUING> 492,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 492,884
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund, Ltd. has an unclassified
balance sheet; therefore, no values are shown above for current assets and
current liabilities.
</FN>
</TABLE>
