<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 2
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number 0-15666
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 Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 650-1000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 _____
---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 30,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is
no market for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
The Form 10-K of CNL Income Fund, Ltd. for the year ended December 31, 1998
is being amended to revise the disclosure under Item 1. Business and Item 8.
Financial Statements and Supplementary Data.
PART I
Item 1. Business
CNL Income Fund, Ltd. (the "Registrant" or the "Partnership") is a limited
partnership which was organized pursuant to the laws of the State of Florida on
November 26, 1985. The general partners of the Partnership are Robert A.
Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida corporation
(the "General Partners"). Beginning on April 16, 1986, the Partnership offered
for sale up to $15,000,000 in limited partnership interests (the "Units")
(30,000 Units at $500 per Unit) pursuant to a registration statement on Form S-
11 under the Securities Act of 1933, as amended. The offering terminated on
December 31, 1986, as of which date the maximum offering proceeds of $15,000,000
had been received from investors who were admitted to the Partnership as limited
partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of selected national and regional fast-food restaurant chains (the
"Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totaled
$13,284,970, and were used to acquire 20 Properties, including interests in
three Properties owned by joint ventures in which the Partnership is a co-
venturer. During the year ended December 31, 1996, the Partnership sold a
small, undeveloped portion of land relating to its Property in Mesquite, Texas.
This sale of land had no bearing on the operations of the Property or the
restaurant business. During the year ended December 31, 1997, the Partnership
sold its Property in Casa Grande, Arizona to a third party. In addition, during
1997, Seventh Avenue Joint Venture, in which the Partnership owned a 50 percent
interest, sold its Property to the tenant and the Partnership received a return
of capital from the net sales proceeds. The Partnership reinvested the majority
of the net sales proceeds from the sale of the Property in Casa Grande, Arizona,
and the return of capital received from Seventh Avenue Joint Venture in a
Property in Camp Hill, Pennsylvania, and in a Property in Vancouver, Washington,
as tenants-in-common , with affiliates of the General Partners. During 1998,
the Partnership sold its Property in Kissimmee, Florida to the tenant and
distributed the majority of the net sales proceeds as a special distribution to
the Limited Partners and made the remaining net sales proceeds available to pay
Partnership liabilities. As a result of the above transactions, as of December
31, 1998, the Partnership owned 17 Properties. The 17 Properties include
interests in two Properties owned by joint ventures in which the Partnership is
a co-venturer and one Property owned with affiliates as tenants-in-common.
Generally, the Properties are leased on a triple-net basis with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities.
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").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger. At a special meeting of the partners that is expected to be held in
the fourth quarter of 1999, Limited Partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests 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.
In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties,
the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also have been granted options to repurchase Properties, generally at
the Property's then fair market value after a specified portion of the lease
term has elapsed. The Partnership has no obligation to sell all or any portion
of a Property at any particular time, except as may be required under property
or joint venture purchase options granted to certain lessees.
2
<PAGE>
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
joint ventures in which the Partnership is a co-venturer provide for initial
lease terms, ranging from five to 20 years (the average being 16 years), and
expire between 2001 and 2018. Generally, the leases are on a triple-net basis,
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $16,000 to $222,800. Generally, the leases provide for percentage
rent, based on sales in excess of a specified amount, to be paid annually. In
addition, certain leases provide for increases in the annual base rent during
the lease term.
Generally, the leases of the Properties provide for two or three five-year
renewal options subject to the same terms and conditions as the initial lease.
Lessees of 14 of the Partnership's 17 Properties also have been granted options
to purchase Properties at the Property's then fair market value, or pursuant to
a formula based on the original cost of the Property, after a specified portion
of the lease term has elapsed. Fair market value will be determined through an
appraisal by an independent appraisal firm. Additionally, certain leases
provide the lessees the option to purchase up to a 49 percent joint venture
interest in the Property, after a specified portion of the lease term has
elapsed, at an option purchase price similar to those described above multiplied
by the percentage interest in the Property with respect to which the option is
being exercised.
The leases also provide that, in the event the Partnership wishes to sell
the Property subject to that lease, the Partnership first must offer the lessee
the right to purchase the Property on the same terms and conditions, and for the
same price, as any offer which the Partnership has received for the sale of the
Property.
In June 1998, the Partnership entered into a lease amendment with the
tenant of the Property in Oklahoma City, Oklahoma, to provide for reduced annual
rents and to provide for a change in the percentage rent calculation.
In July 1998, the Partnership entered into a lease amendment with the
tenant of the Property in Payson, Arizona, to extend the lease term to 20 years.
All other lease terms remained unchanged.
During 1998, the tenant of the Property in Angleton, Texas exercised its
option to extend the lease for an additional five years beginning in February
1999. All other lease terms remained unchanged.
Major Tenants
During 1998, Golden Corral Corporation contributed more than ten percent of
the Partnership's total rental income (including the Partnership's share of the
rental income from two Properties owned by joint ventures and a Property owned
with affiliates as tenants-in-common). As of December 31, 1998, Golden Corral
Corporation was the lessee under leases relating to five restaurants. It is
anticipated that Golden Corral Corporation will continue to contribute ten
percent or more of the Partnership's total rental income in 1999 and subsequent
years. In addition, two Restaurant Chains, Golden Corral Family Steakhouse
Restaurants ("Golden Corral") and Wendy's Old Fashioned Hamburger Restaurants
("Wendy's"), each accounted for more than ten percent of the Partnership's total
rental income in 1998 (including the Partnership's share of the rental income
from two Properties owned by joint ventures and a Property owned with affiliates
as tenants-in-common). In subsequent years, it is anticipated that these two
Restaurant Chains each will continue to account for more than ten percent of the
total rental income to which the Partnership is entitled under the terms of its
leases. Any failure of these lessees or Restaurant Chains could materially
affect the Partnership's income if the Partnership is not able to re-lease the
Properties in a timely manner. As of December 31, 1998, Golden Corral
Corporation leased Properties with an aggregate carrying value in excess of 20
percent of the total assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into two separate joint venture arrangements:
Sand Lake Road Joint Venture and Orange Avenue Joint Venture, each with Pembrook
Properties, an unaffiliated entity, for each joint venture to purchase and hold
one Property. The joint venture arrangements for Sand Lake Road Joint Venture
and Orange Avenue Joint Venture provide for the Partnership and its joint
venture partner to share equally in all costs and benefits associated with the
joint venture. The Partnership has a 50 percent interest in each of Sand Lake
Road Joint
3
<PAGE>
Venture and Orange Avenue Joint Venture. The Partnership and its joint venture
partner are jointly and severally liable for all debts, obligations and other
liabilities of the joint venture.
Each joint venture has an initial term of 20 years, and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer or by an event of dissolution.
Events of dissolution include the bankruptcy, insolvency or termination of any
joint venturer, sale of the Property owned by the joint venture and mutual
agreement of the Partnership and its joint venture partner to dissolve the joint
venture.
The Partnership shares management control for each joint venture with
Pembrook Properties. The joint venture agreements restrict each venturer's
ability to sell, transfer or assign its joint venture interest without first
offering it for sale to the joint venture partner, either upon such terms and
conditions as to which the venturers may agree or, in the event the venturers
cannot agree, on the same terms and conditions as any offer from a third party
to purchase such joint venture interest.
Net cash flow from operations of each joint venture is distributed 50
percent to each joint venture partner. Any liquidation proceeds, after paying
joint venture debts and liabilities and funding reserves for contingent
liabilities, will be distributed first to the joint venture partners with
positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter in proportion to each partner's percentage
interest in the joint venture.
In addition to the above joint venture agreements, in December 1997, the
Partnership entered into an agreement to hold a Property in Vancouver,
Washington, as tenants-in-common, with CNL Income Fund II, Ltd., CNL Income Fund
V, Ltd. and CNL Income Fund VI, Ltd., affiliates of the General Partners. The
agreement provides for the Partnership and the affiliates to share in the
profits and losses of the Property in proportion to each co-tenant's percentage
interest. The Partnership owns a 12.17% interest in this Property. Each of the
affiliates is a limited partnership organized pursuant to the laws of the State
of Florida. The tenancy in common agreement restricts each co-tenant's ability
to sell, transfer, or assign its interest in the tenancy in common's Property
without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Property Management
CNL Fund Advisors, Inc., an affiliate of the General Partners, acts as
manager of the Partnership's Properties pursuant to a property management
agreement with the Partnership. Under this agreement, CNL Fund Advisors, Inc.
is responsible for collecting rental payments, inspecting the Properties and the
tenants' books and records, assisting the Partnership in responding to tenant
inquiries and notices and providing information to the Partnership about the
status of the leases and the Properties. CNL Fund Advisors, Inc. also assists
the General Partners in negotiating the leases. For these services, the
Partnership has agreed to pay CNL Fund Advisors, Inc. an annual fee of one-half
of one percent of Partnership assets (valued at cost) under management, not to
exceed the lesser of one percent of gross rental revenues or competitive fees
for comparable services. Under the property management agreement, the property
management fee is subordinated to receipt by the Limited Partners of an
aggregate, ten percent, noncumulative, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return"), calculated in
accordance with the Partnership's limited partnership agreement (the
"Partnership Agreement"). In any year in which the Limited Partners do not
receive a 10% Preferred Return, no property management fee will be paid.
The property management agreement continues until the Partnership no longer
owns an interest in any Properties unless terminated at an earlier date upon 60
days' prior notice by either party.
4
<PAGE>
Employees
The Partnership has no employees. The officers of CNL Realty Corporation
and the officers and employees of CNL Fund Advisors, Inc. perform certain
services for the Partnership. In addition, the General Partners have available
to them the resources and expertise of the officers and employees of CNL Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 8. Financial Statements and Supplementary Data
5
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 7
Financial Statements:
Balance Sheets 8
Statements of Income 9
Statements of Partners' Capital 10
Statements of Cash Flows 11
Notes to Financial Statements 13
Additional Financial Information regarding Golden Corral 26
</TABLE>
6
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund, Ltd.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund, Ltd. (a Florida limited partnership) at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules listed in the index appearing under item 14(a)(2) present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedules are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except for Note 10 for which the date is March 11, 1999
7
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
December 31,
1998 1997
---------- ------------
<CAPTION>
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation $7,574,188 $8,185,465
Investment in and due from joint ventures 841,379 919,476
Cash and cash equivalents 252,521 184,130
Restricted cash -- 129,257
Receivables, less allowance for doubtful
accounts of $3,092 in 1997 30,959 21,331
Prepaid expenses 5,463 4,989
Lease costs, less accumulated amortization
of $24,375 and $21,875 25,625 28,125
Accrued rental income 30,791 27,305
------------------ ------------------
$8,760,926 $9,500,078
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 736 $ 2,595
Escrowed real estate taxes payable 1,024 734
Distributions payable 266,982 316,221
Due to related parties 129,060 115,741
Rents paid in advance and deposits 36,105 35,737
------------------ ------------------
Total liabilities 433,907 471,028
Partners' capital 8,327,019 9,029,050
------------------ ------------------
$8,760,926 $9,500,078
================== ==================
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------------- ----------------- -----------------
Revenues:
<S> <C> <C> <C>
Rental income from
operating leases $1,015,292 $1,038,443 $1,115,530
Contingent rental income 22,193 22,205 56,409
Interest and other income 21,087 22,210 101,293
1,058,572 1,082,858 1,273,232
----------------- ----------------- -----------------
Expenses:
General operating and
administrative 87,080 86,780 92,462
Professional services 17,110 12,772 13,262
Real estate taxes 3,969 3,929 4,009
State and other taxes 4,450 5,138 5,260
Depreciation and amortization 268,260 208,807 210,206
Transaction costs 7,322 -- --
388,191 317,426 325,199
----------------- ----------------- -----------------
Income Before Equity in Earnings
of Joint Ventures and Gain on Sale
of Land and Buildings 670,381 765,432 948,033
Equity in Earnings of Joint Ventures 95,252 250,142 116,076
Gain on Sale of Land and Buildings 235,804 233,183 19,000
----------------- ----------------- -----------------
Net Income $1,001,437 $1,248,757 $1,083,109
================= ================= =================
Allocation of Net Income:
General partners $ 8,671 $ 11,577 $ 10,641
Limited partners 992,766 1,237,180 1,072,468
----------------- ----------------- -----------------
$1,001,437 $1,248,757 $1,083,109
================= ================= =================
Net Income Per Limited Partner Unit $33.09 $41.24 $35.75
================= ================= =================
Weighted Average Number of
Limited Partner Units Outstanding 30,000 30,000 30,000
================= ================= =================
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------------------- -------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
-------------- -------------- -------------- -------------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $193,400 $106,141 $13,314,525 $(13,429,078) $10,705,104 $(1,663,140) $9,226,952
Distributions to limited
partners ($42.16 per
limited partner unit) -- -- -- (1,264,884) -- -- (1,264,884)
Net income -- 10,641 -- -- 1,072,468 -- 1,083,109
----------- ------------- ------------- ------------- ------------ ---------- ---------
Balance, December 31, 1996 193,400 116,782 13,314,525 (14,693,962) 11,777,572 (1,663,140) 9,045,177
Distributions to limited
partners ($42.16 per
limited partner unit) -- -- -- (1,264,884) -- -- (1,264,884)
Net income -- 11,577 -- -- 1,237,180 -- 1,248,757
---------- ------------ ------------ ------------ ----------- ---------- ---------
Balance, December 31, 1997 193,400 128,359 13,314,525 (15,958,846) 13,014,752 (1,663,140) 9,029,050
Distributions to limited
partners ($44.45 per
limited partner unit) -- -- (369,939) (1,333,529) -- -- (1,703,468)
Net income -- 8,671 -- -- 992,766 -- 1,001,437
--------- ----------- ----------- ------------ ---------- --------- ---------
Balance, December 31, 1998 $193,400 $137,030 $12,944,586 $(17,292,375) $14,007,518 $(1,663,140) $8,327,019
========= ========== ========== ============ ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------------- ----------------- ---------------
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Cash received from tenants $ 1,030,115 $ 1,227,883 $ 1,096,290
Distributions from joint ventures 113,770 152,019 133,296
Cash paid for expenses (131,054) (84,642) (106,546)
Interest received 20,958 21,556 9,648
Net cash provided by operating
activities 1,033,789 1,316,816 1,132,688
----------------- ----------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings 661,300 793,009 20,000
Additions to land and building -- (863,135) --
Return of capital from joint venture -- 472,373 --
Investment in joint venture -- (303,419) --
Decrease (increase) in restricted cash 126,009 (126,009) --
Net cash provided by (used in)
investing activities 787,309 (27,181) 20,000
----------------- ----------------- ---------------
Cash Flows from Financing Activities:
Proceeds from loan from corporate
general partner -- 133,000 83,100
Repayment of loan from corporate
general partner -- (133,000) (83,100)
Distributions to limited partners (1,752,707) (1,264,884) (1,264,884)
Net cash used in financing activities (1,752,707) (1,264,884) (1,264,884)
----------------- ----------------- ---------------
Net Increase (Decrease) in Cash and Cash
Equivalents 68,391 24,751 (112,196)
Cash and Cash Equivalents at Beginning of Year 184,130 159,379 271,575
----------------- ----------------- ---------------
Cash and Cash Equivalents at End of Year $ 252,521 $ 184,130 $ 159,379
================= ================= ===============
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
Year Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------- -------------------
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
<S> <C> <C> <C>
Net income $1,001,437 $1,248,757 $1,083,109
----------------- ------------------- -------------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 206,181 206,307 207,706
Amortization 62,079 2,500 2,500
Equity in earnings of joint ventures,
net of distributions 18,518 (98,123) 17,220
Gain on sale of land and buildings (235,804) (233,183) (19,000)
Decrease (increase) in receivables (6,380) 158,360 (151,105)
Increase in prepaid expenses (474) (524) (650)
Decrease (increase) in accrued
rental income (3,486) (3,706) 1,234
Increase (decrease) in accounts
payable and accrued expenses (1,569) 673 (11,712)
Increase (decrease) in due to related
parties (7,081) 20,729 19,873
Increase (decrease) in rents paid in
advance and deposits 368 15,026 (16,487)
Total adjustments 32,352 68,059 49,579
----------------- ------------------- -------------------
Net Cash Provided by Operating Activities $1,033,789 $1,316,816 $1,132,688
================= =================== ===================
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fee
incurred and unpaid at end of year $ 20,400 $ -- $ --
================= =================== ===================
Distributions declared and unpaid at
December 31 $ 266,982 $ 316,221 $ 316,221
================= =================== ===================
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund, Ltd. (the
-----------------------------------
"Partnership")is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
General Partner. The general partners have responsibility for managing the
day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the acquisition
--------------------------------
of land and buildings at cost, including acquisition and closing costs.
Land and buildings are generally leased to unrelated third parties on a
triple-net basis, whereby the tenant is generally responsible for all
operating expenses relating to the property, including property taxes,
insurance, maintenance and repairs. The leases are accounted for using the
operating method. Under the operating method, land and building leases are
recorded at cost, revenue is recognized as rentals are earned and
depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
Whenever a tenant defaults under the terms of its lease or events or
changes in circumstances indicate that the tenant will not lease the
property through the end of the lease term, the Partnership either reserves
or writes-off the cumulative accrued rental income balance.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, will be removed from the accounts and gains
or losses from sales will be reflected in income. The general partners of
the Partnership review the properties for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable through operations. The general partners determine
whether an impairment in value has occurred by comparing the estimated
future undiscounted cash flows, including the residual value of the
property, with the carrying cost of the individual property. If an
impairment is indicated, the assets are adjusted to their fair
13
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
value. Although the general partners have made their best estimate of
these factors based on current conditions, it is reasonable possible that
changes could occur in the near term which could adversely affect the
general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance
for doubtful accounts, which is netted against receivables, and to decrease
rental or other income or increase bad debt expense for the current period,
although the Partnership continues to pursue collection of such amounts. If
amounts are subsequently determined to be uncollectible, the corresponding
receivable and the allowance for doubtful accounts are decreased
accordingly.
Investment in Joint Ventures - The Partnership's investments in Sand Lake
----------------------------
Road Joint Venture, Orange Avenue Joint Venture, and a property in
Vancouver, Washington, held as tenants-in-common with affiliates, are
accounted for using the equity method since the Partnership shares control
with affiliates which have the same general partners.
Cash and Cash Equivalents - The Partnership considers all highly liquid
-------------------------
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts. The Partnership limits investment of temporary cash investments
to financial institutions with high credit standing; therefore, the
Partnership believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Lease Costs - Lease incentive costs and brokerage and legal fees associated
-----------
with negotiating new leases are amortized over the terms of the
new leases using the straight-line method.
Income Taxes - Under Section 701 of the Internal Revenue Code, all income,
------------
expenses and tax credit items flow through to the partners for tax
purposes. Therefore, no provision for federal income taxes is provided in
the accompanying financial statements. The Partnership is subject to
certain state taxes on its income and property.
14
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment.
Use of Estimates - The general partners of the Partnership have made a
----------------
number ofestimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. The more significant areas requiring the use of
management estimates relate to the allowance for doubtful accounts and
future cash flows associated with long-lived assets. Actual results could
differ from those estimates.
2. Leases:
------
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating
leases. Substantially all leases are for 15 to 20 years and provide for
minimum and contingent rentals. In addition, the tenant generally pays all
property taxes and assessments, fully maintains the interior and exterior
of the building and carries insurance coverage for public liability,
property damage, fire and extended coverage. The lease options generally
allow tenants to renew the leases for two or three successive five-year
periods subject to the same terms and conditions as the initial lease. Most
leases also allow the tenant to purchase the property at fair market value
after a specified portion of the lease has elapsed.
15
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ---------------
<S> <C> <C>
Land $ 3,759,766 $ 3,999,700
Buildings 6,092,049 6,358,678
------------- ---------------
9,851,815 10,358,378
Less accumulated depreciation (2,277,627) (2,172,913)
------------- ---------------
$ 7,574,188 $ 8,185,465
============= ===============
</TABLE>
In August 1997, the Partnership sold its property in Casa Grande, Arizona,
to a third party for $840,000 and received net sales proceeds of $793,009,
resulting in a gain of $233,183 for financial reporting purposes. This
property was originally acquired by the Partnership in December 1986 and
had a cost of approximately $667,300, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $128,400 in excess of its original purchase
price. In October 1997, the Partnership reinvested the majority of the net
sales proceeds in a property located in Camp Hill, Pennsylvania.
During the year ended December 31, 1998, the Partnership sold its property
in Kissimmee, Florida for $680,000 and received net sales proceeds of
$661,300 resulting in a gain of $235,804 for financial reporting purposes.
This property was originally acquired by the Partnership in 1987 and had a
cost of approximately $475,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold this
property for approximately $185,900 in excess of its original purchase
price. In connection with the sale, the Partnership incurred a deferred,
subordinated, real estate disposition fee of $20,400 (See Note 8).
Certain leases provide for escalating guaranteed minimum rents throughout
the lease terms. Income from these scheduled rent increases is recognized
on a straight-line basis over the terms of the leases. For the years ended
December 31, 1998 and 1997, the Partnership recognized $3,486 and $3,706,
respectively, of such income. For the year ended December 31, 1996, rental
payments received exceeded the rental income recognized on a straight-line
basis by $1,234.
16
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 894,752
2000 894,405
2001 870,528
2002 457,415
2003 456,511
Thereafter 4,013,686
-----------
$7,587,297
===========
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during the
initial lease terms. In addition, this table does not include any amounts
for future contingent rentals which may be received on the leases based on
a percentage of the tenant's gross sales.
4. Investment in Joint Ventures:
----------------------------
In August 1997, Seventh Avenue Joint Venture, in which the Partnership
owned a 50 percent interest, sold its property to its tenant for $950,000,
and received net sales proceeds of $944,747, resulting in a gain to the
joint venture of approximately $295,100 for financial reporting purposes.
The property was originally acquired by Seventh Avenue Joint Venture in
June 1986 and had a total cost of approximately $770,000, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
joint venture sold the property for approximately $177,400 in excess of its
original purchase price. During 1997, as a result of the sale of the
property, the joint venture was dissolved in accordance with the joint
venture agreement. As a result, the Partnership received approximately
$472,400, representing its pro-rata share of the net sales proceeds
received by the joint venture.
In December 1997, the Partnership acquired a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners.
The Partnership accounts for its investment in this property using the
equity method since the Partnership shares control with an affiliate, and
amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1998, the Partnership owned a 12.17% interest
in this property.
17
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
4. Investment in Joint Ventures - Continued:
----------------------------------------
As of December 31, 1998, the Partnership had a 50 percent interest in the
profits and losses of Orange Avenue Joint Venture and Sand Lake Road Joint
Venture, and owned a 12.17% interest in a property in Vancouver,
Washington, as tenants-in-common. These joint ventures, and the
Partnership and affiliates, as tenants-in-common, each own and lease one
property to an operator of national fast-food or family-style restaurants.
The following presents the combined, condensed financial information for
the joint ventures and the property held as tenants-in-common with
affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Land and buildings on operating
leases, less accumulated
depreciation $3,261,368 $3,338,774
Cash 1,354 1,636
Prepaid expenses 219 --
Accrued rental income 23,087 --
Liabilities 1,619 1,677
Partners' capital 3,284,409 3,338,733
Revenues 420,677 246,236
Gain on sale of land and building -- 295,080
Net income 340,503 500,285
</TABLE>
The Partnership recognized income totaling $95,252, $250,142 and $116,076
for the years ended December 31, 1998, 1997, and 1996, respectively, from
these joint ventures.
5. Restricted Cash:
---------------
As of December 31, 1997, the remaining net sales proceeds of $126,009 from
the sale of the property in Casa Grande, Arizona, plus accrued interest of
$3,248, were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional property or
use for other Partnership purposes. During 1998, the funds were returned
to the Partnership and used to pay distributions to the limited partners.
18
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
6. Allocations and Distributions:
-----------------------------
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of properties, are allocated 99 percent to
the limited partners and one percent to the general partners.
Distributions of net cash flow are made 99 percent to the limited partners
and one percent to the general partners; provided, however, that the one
percent of net cash flow to be distributed to the general partners is
subordinated to receipt by the limited partners of an aggregate, ten
percent, noncumulative, noncompounded annual return on their adjusted
capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties not in
liquidation of the Partnership, to the extent distributed, will be
distributed first to the limited partners in an amount sufficient to
provide them with their cumulative 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners.
Any gain from the sale of a property not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will
be used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves
that may be deemed necessary for any anticipated or unforeseen liabilities
or obligations of the Partnership, iii) third, to pay all of the
Partnership's liabilities, if any, to the general and limited partners, iv)
fourth, after allocations of net income, gains and/or losses, to distribute
to the partners with positive capital account balances, in proportion to
such balances, up to amounts sufficient to reduce such positive balances to
zero, and v) thereafter, any funds remaining shall then be distributed 95
percent to the limited partners and five percent to the general partners.
19
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
6. Allocations and Distributions - Continued:
-----------------------------------------
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $1,703,468, and during each of the
years ended December 31, 1997 and 1996, the Partnership declared
distributions to the limited partners of $1,264,884. Distributions for the
year ended December 31, 1998, included $586,300 in a special distribution,
as a result of the distribution 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 toward the
limited partners' 10% Preferred Return and the balance of $369,939 was
treated as a return of capital for purposes of calculating the limited
partners' 10% Preferred Return. As a result of the return of capital, and
the returns of capital in prior years, 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
10% Preferred Return is calculated was lowered accordingly. As a result of
the sale of the property during 1998, the Partnership's total revenue was
reduced, while the majority of the Partnership's operating expenses
remained fixed. Therefore, distributions of net cash flow were adjusted
during the quarter ended June 30, 1998. No distributions have been made to
the general partners to date.
20
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
7. Income Taxes:
------------
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ----------------- ----------------
<S> <C> <C> <C>
Net income for financial reporting purposes $1,001,437 $1,248,757 $1,083,109
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes (87,967) (104,279) (108,995)
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes 58,632 (233,183) --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of joint
ventures for tax reporting purposes 49,058 (18,410) (17,987)
Capitalization of transaction costs for tax
reporting purposes 7,322 -- --
Accrued rental income (3,486) (3,706) 1,234
Rents paid in advance 368 15,026 (16,487)
Allowance for doubtful accounts (3,091) 1,679 (120,724)
--------------- ----------------- ----------------
Net income for federal income tax purposes $1,022,273 $ 905,884 $ 820,150
=============== ================= ================
</TABLE>
8. Related Party Transactions:
---------------------------
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL
Fund Advisors, Inc. James M. Seneff, Jr. is director, chairman of the board
of directors and chief executive officer of CNL Fund Advisors, Inc. The
other individual general partner, Robert A. Bourne, serves as treasurer,
director and vice chairman of the board of CNL Fund Advisors, Inc. During
the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors, Inc.
(hereinafter referred to as the "Affiliate") performed certain services for
the Partnership, as described below.
21
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. Related Party Transactions - Continued:
--------------------------------------
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative,
subordinated property management fee of one-half of one percent of the
Partnership assets under management (valued at cost) annually. The
property management fee is limited to one percent of the sum of gross
operating revenues from properties wholly owned by the Partnership and the
Partnership's allocable share of gross operating revenues from joint
ventures or competitive fees for comparable services. In addition, these
fees will be incurred and will be payable only after the limited partners
receive their aggregate, noncumulative 10% Preferred Return. Due to the
fact that these fees are noncumulative, if the limited partners do not
receive their 10% Preferred Return in any particular year, no management
fees will be due or payable for such year. As a result of such threshold,
no management fees were incurred during the years ended December 31, 1998,
1997, and 1996.
The Affiliate is entitled to receive a deferred, subordinated real estate
disposition fee, payable upon the sale of one or more properties based on
the lesser of one-half of a competitive real estate commission or three
percent of the sales price if the Affiliate provides a substantial amount
of services in connection with the sale. However, if the net sales
proceeds are reinvested in a replacement property, no such real estate
disposition fees will be incurred until such replacement property is sold
and the net sales proceeds are distributed. Payment of the real estate
disposition fee is subordinated to receipt by the limited partners of the
10% Preferred Return on a cumulative basis, plus their adjusted capital
contributions. For the year ended December 31, 1998, the Partnership
incurred $20,400 in a deferred, subordinated real estate disposition fee as
a result of the sale of a property (See Note 3). No deferred, subordinated
real estate disposition fees were incurred for the years ended December 31,
1997 and 1996.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $63,981, $57,679 and $67,685
for the years ended December 31, 1998, 1997, and 1996, respectively, for
such services.
22
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. Related Party Transactions - Continued:
--------------------------------------
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Due to CNL Fund Advisors, Inc.
and its affiliates:
<S> <C> <C>
Deferred, subordinated real
estate disposition fee $ 87,150 $ 66,750
Expenditures incurred on
behalf of the Partnership 15,123 17,902
Accounting and
administrative services 26,787 31,089
----------------- -----------------
$129,060 115,741
================= =================
</TABLE>
The deferred, subordinated real estate disposition fees are the result of
the Partnership's sale of one property during 1998 and two properties in
prior years. These fees will not be paid until after the limited partners
have received their cumulative 10% Preferred Return, plus their adjusted
capital contributions, as described above.
9. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental income from individual
lessees, each representing more than ten percent of the Partnership's total
rental income (including the Partner-ship's share of rental income from
joint ventures and the property held as tenants-in-common with an
affiliate), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Golden Corral Corporation $452,653 $452,653 $452,653
Wendy's International, Inc. N/A 164,857 212,322
Restaurant Management
Services, Inc. N/A 128,737 129,633
</TABLE>
23
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Concentration of Credit Risk - Continued:
----------------------------------------
In addition, the following schedule presents total rental income from
individual restaurant chains, each representing more than ten percent of
the Partnership's total rental income (including the Partnership's share of
rental income from joint ventures and the property held as tenant-in-common
with an affiliate), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Golden Corral Family
Steakhouse Restaurants $452,653 $452,653 $452,653
Wendy's Old Fashioned
Hamburger Restaurants 352,330 443,335 507,642
Popeyes Famous Fried
Chicken N/A 128,737 129,633
</TABLE>
The information denoted by N/A indicates that for each period presented,
the tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant
chains could significantly impact the results of operations of the
Partnership if the Partnership is not able to re-lease the properties in a
timely manner.
10. Subsequent Event:
----------------
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
1,157,759 shares of its common stock, par value $0.01 per shares (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, fair value of the Partnership's property portfolio
and other assets was $11,384,042 as of December 31, 1998.
24
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
10. Subsequent Event - Continued:
----------------------------
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, limited partners holding in excess of
50% of the Partnership's outstanding limited partnership interests must
approve the Merger prior to consummation of the transaction. 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.
25
<PAGE>
Additional Financial Information regarding Golden Corral
The attached combined statements of revenues and direct operating expenses
and combined statements of cash flows (the "Golden Corral Restaurant Property
Financial Statements") were prepared from financial information derived from the
audited financials of Golden Corral Corporation, the lessee of five restaurant
properties of the Partnership ("Golden Corral"). The Golden Corral Restaurant
Property Financial Statements depict the operating results and cash flows of the
individual properties owned by the Partnership and not the operations of Golden
Corral. The audited financial statements of Golden Corral are not publicly
available, and Golden Corral does not make any guarantee regarding the future
operating results of the restaurant properties. Golden Corral is able to
consolidate the cash generated from the Partnership's restaurant properties with
the cash generated from other properties not owned by the Partnership. As a
result, cash generated from the Partnership's restaurant properties may be used
by Golden Corral to pay its obligations with respect to other properties in its
portfolio and for normal working capital purposes. THEREFORE, THE CASH
GENERATED FROM THE GOLDEN CORRAL RESTAURANT PROPERTIES OWNED BY THE PARTNERSHIP
IS NOT NECESSARILY INDICATIVE OF GOLDEN CORRAL'S ABILITY TO PAY ITS LEASE
OBLIGATIONS WITH RESPECT TO SUCH PROPERTIES.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders
Golden Corral Corporation and Subsidiaries
Raleigh, North Carolina
We have audited the accompanying combined statements of revenues and direct
operating expenses and cash flows of the five Golden Corral restaurants included
in CNL Income Fund, Ltd. ("Five Golden Corral Restaurants") for the years ended
December 30, 1998 and December 31, 1997. These statements are the
responsibility of Golden Corral 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 of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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.
As described in Note 1, the accompanying financial statements were prepared
solely to comply with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Form 10-K/A of CNL Income Fund, Ltd. and are not
intended to be a complete presentation of the results of operations and cash
flows of the Five Golden Corral Restaurants.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined revenues and direct operating
expenses and cash flows of the Five Golden Corral Restaurants for the years
ended December 30, 1998 and December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Raleigh, North Carolina
November 5, 1999
27
<PAGE>
FIVE GOLDEN CORRAL RESTAURANTS
Combined Statements of Revenues and Direct Operating Expenses
For The Years Ended December 30, 1998 and December 31, 1997
- ------------------------------------------------------------------------------
1998 1997
--------- ---------
Revenues
Net restaurant sales $ - $ 336,612
--------- ---------
Direct Operating Expenses
Cost of sales - 143,912
Labor and labor expense - 105,447
Manager controllables - 63,274
Non-controllables - 121,767
Bonus expense - 2,568
--------- ---------
- 436,968
--------- ---------
Net Loss From Open Units - (100,356)
--------- ---------
Revenue (Expense) From Closed Units
Sublease income 180,600 65,348
Rental expense (357,077) (307,156)
Other (47,479) (92,256)
--------- ---------
Net Loss From Closed Units (223,956) (334,064)
--------- ---------
Net Loss $(223,956) $(434,420)
========= =========
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
28
<PAGE>
FIVE GOLDEN CORRAL RESTAURANTS
Combined Statements of Cash Flows
For The Years Ended December 30, 1998 and December 31, 1997
- ------------------------------------------------------------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(223,956) $(434,420)
(Decrease) Increase In Cash Due To Changes In
Receivables - 17,584
Inventories - 25,959
Accounts payable (3,589) (28,746)
Accrued liabilities (1,676) 23,547
--------- ---------
(229,221) (396,076)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in amounts due to Golden Corral 229,221 379,236
Corporation --------- ---------
229,221 379,236
--------- ---------
NET DECREASE IN CASH - (16,840)
CASH, BEGINNING - 16,840
--------- ---------
CASH, ENDING $ - $ -
========= =========
See accompanying notes to financial statements.
- ------------------------------------------------------------------------------
29
<PAGE>
FIVE GOLDEN CORRAL RESTAURANTS
Notes to Combined Statements of Revenues and Direct Operating Expenses and
Cash Flows
December 30, 1998 and December 31, 1997
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The Five Golden Corral Restaurants are parties to leasing arrangements for
land and building leases with CNL Income Fund, Ltd. These restaurants are
either operated by Golden Corral Corporation or a franchisee of Golden Corral
Corporation and subsidiaries. When restaurants cease operations as Golden
Corral restaurants, the units are subleased to other parties, if possible.
The restaurant locations and status by year are:
1998 1997
---------- ---------------------
Jasper, Alabama Closed Closed
Kent Island, Maryland Closed Closed March 26, 1997
Eunice, Louisiana Closed Closed
Virginia Beach, Virginia Closed Closed March 26, 1997
Salisbury, Maryland Franchised Franchised
The accompanying combined financial statements present the revenues and
direct operating costs and the related cash flows of the Five Golden Corral
Restaurants.
The combined financial statements have been prepared to comply with the rules
and regulations of the Securities and Exchange Commission for the inclusion
in the Form 10-K/A of CNL Income Fund, Ltd. and are not intended to be a
complete presentation of the financial position, results of operations and
cash flows as if the Five Golden Corral Restaurants had operated as a stand-
alone company. The Five Golden Corral Restaurants were not operated as a
stand-alone business within Golden Corral Corporation and the presentation
does not include the changes in reserves for estimated restaurant closing
costs and certain indirect expenses of the Five Golden Corral Restaurants
which were reported by Golden Corral Corporation. Therefore, the accompanying
combined financial statements are not representative of the complete
financial position, results of operations or cash flows of the Five Golden
Corral Restaurants for the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates - The combined statements of the Five Golden Corral
----------------
Restaurants are presented on the accrual basis in conformity with generally
accepted accounting principles, which require management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting period, and of contingent assets
and liabilities at the date of the financial statements. Actual results could
differ from these estimates.
Fiscal Year - The Restaurants use a thirteen four-week period, fifty-
-----------
two/fifty-three week fiscal year with the year ending on the Wednesday
closest to December 31. The years ended December 30, 1998 and December 31,
1997, included fifty-two weeks.
30
<PAGE>
Inventories - Inventories are valued at the lower of first-in, first-out
-----------
cost or market.
Income Taxes - Income taxes have not been provided in the financial
------------
statements as the Five Golden Corral Restaurants are part of Golden Corral
Corporation and Subsidiaries and income taxes were not allocated to the
individual restaurant level.
Royalties - Earnings from royalty fees accrue based on a percentage of the
---------
franchisee's net sales. If future collectibility is deemed uncertain by
management, royalty income is recorded as cash is received.
Estimated Restaurant Closing Costs - Golden Corral Corporation provides for
----------------------------------
rent and other costs in excess of expected income from subleases by charging
expense and establishing reserves for estimated restaurant closing costs and
other costs. The accompanying combined financial statements include only the
actual costs incurred and sublease income recognized by the closed
restaurants. The reserves and changes in the reserves are reported by Golden
Corral Corporation.
Non-controllables - Non-controllables consist of expenses for land and
-----------------
building rent, equipment rent, advertising, general liability insurance,
property taxes and licenses, and administrative services paid by the
restaurant.
3. LEASE ARRANGEMENTS
CNL Income Fund, Ltd. and the Five Golden Corral Restaurants are parties to
various leasing arrangements for restaurant facilities. Leases for
restaurant facilities are for terms of 15 years and generally provide for
minimum rentals plus a percentage of sales in excess of stated amounts. The
Five Golden Corral Restaurants are obligated for the cost of property taxes,
insurance and maintenance.
Lease Obligations - Minimum rental payments due under leases having terms in
-----------------
excess of one year at December 30, 1998 are as follows:
1999 $ 453,000
2000 453,000
2001 434,000
2002 6,000
----------
Total minimum lease commitments $1,346,000
==========
Expense - Rent expense for restaurant facilities is included in non-
-------
controllables or rental expense from closed units and is summarized below:
1998 1997
-------- --------
Minimum rentals on operating leases $357,000 $358,000
Contingent rentals - -
-------- --------
$357,000 $358,000
======== ========
Subleases - Future minimum payments to be received under leases accounted
---------
for as non-cancelable operating subleases for the ensuing years at December
30, 1998 are as follows:
31
<PAGE>
1999 $ 79,000
2000 79,000
2001 79,000
2002 5,000
--------
$242,000
========
4. RELATED PARTY TRANSACTIONS
The following summarizes transactions with related parties:
1998 1997
----- -------
Amounts paid to Golden Corral Corporation
and Subsidiaries for:
Administrative services, included in
non-controllables $ - $16,842
===== =======
Equipment rent, included in non-
controllables $ - $29,183
===== =======
Workers' compensation insurance, included
in labor and labor expense $ - $ 9,214
===== =======
General liability insurance, included in
non-controllables $ - $ 5,700
===== =======
Advertising, included in non-controllables $ - $ 4,750
===== =======
Excess cash generated by the Five Golden Corral Restaurants is transferred to
Golden Corral Corporation. Cash shortfalls by the Five Golden Corral
Restaurants are funded by Golden Corral Corporation.
5. SUBSEQUENT EVENT
The prime lease of the Kent Island, Maryland restaurant was terminated in
October, 1999.
- --------------------------------------------------------------------------------
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 17th day of
December, 1999.
CNL INCOME FUND, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
--------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
--------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
------------------------
JAMES M. SENEFF, JR.
33
<PAGE>
Pursuant to the requirements of 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert A. Bourne President, Treasurer and Director December 17, 1999
- --------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and December 17, 1999
- ------------------------ Director (Principal Executive
James M. Seneff, Jr. Officer)
</TABLE>
34
