UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
(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, 1997
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)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 422-1574
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 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,
1997 is being amended to provide additional disclosure under Item 1. Business,
Item 2. Properties and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Resources.
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, totalled
$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, 1992, the Partnership sold its
Property in San Dimas, California. During the year ended December 31, 1994, the
Partnership sold its Property in Fairfield, California. 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 owns 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. As a result of the above transactions, the Partnership owned
18 Properties as of December 31, 1997, including 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.
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. In general, the General Partners plan to seek the sale of the
remaining Properties commencing seven to 15 years after their acquisition. 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.
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 1999 and 2017. 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
<PAGE>
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. Certain lessees 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. 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 January 1997, 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. The
Partnership does not anticipate that these reduced rents will have a material
effect on operations.
In 1997, 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 the sale of the Property owned and leased by Seventh
Avenue Joint Venture, in a Property located in Camp Hill, Pennsylvania, and in a
Property located in Vancouver, Washington, with affiliates of the General
Partners as tenants-in-common, as described below in "Joint Venture
Arrangements." The lease terms for these Properties are substantially the same
as the Partnership's other leases, as described above in the first three
paragraphs of this section.
Major Tenants
During 1997, three lessees of the Partnership, Golden Corral
Corporation, Wendy's International, Inc. and Restaurant Management Services,
Inc., each 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, 1997, Golden Corral Corporation was the
lessee under leases relating to five restaurants, Wendy's International, Inc.
was the lessee under leases relating to one restaurant and Restaurant Management
Services, Inc. was the lessee under leases relating to two restaurants. It is
anticipated that Golden Corral Corporation and Restaurant Management Services,
Inc. each will continue to contribute ten percent or more of the Partnership's
total rental income in 1998 and subsequent years. In addition, three Restaurant
Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Wendy's
Old Fashioned Hamburger Restaurants ("Wendy's") and Popeyes Famous Fried Chicken
("Popeyes"), each accounted for more than ten percent of the Partnership's total
rental income in 1997 (including the Partnership's share of the rental income
from three Properties owned by joint ventures and a Property owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these three 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.
Joint Venture Arrangements and Tenancy in Common Arrangements
The Partnership had entered into three separate joint venture
arrangements, Sand Lake Road Joint Venture, Orange Avenue Joint Venture and
Seventh Avenue Joint Venture, with Pembrook Properties, an unaffiliated entity,
to purchase and hold three of the Properties through such joint ventures. During
1997, Seventh Avenue Joint Venture was liquidated upon the sale of the Property
held by the joint venture and distributions of the net sales proceeds were made
to each joint venture partner in accordance with the terms of the joint venture
agreement. The joint venture arrangements for Sand Lake Road Joint Venture and
Orange Avenue Joint Venture provide for the Partnership
<PAGE>
and its joint venture partner to share equally in all costs and benefits
associated with the joint venture. The Partnership and its joint venture
partners 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 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., each of which is a limited partnership
organized pursuant to the laws of the State of Florida and each of which is an
affiliate 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 their percentage interests. The Partnership owns a 12.17% interest
in this Property. 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 Income Fund Advisor, Inc., an affiliate of the General Partners,
acted as manager of the Partnership's Properties pursuant to a property
management agreement with the Partnership through September 30, 1995. Under this
agreement, CNL Income Fund Advisors, Inc. was 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 Income Fund Advisors, Inc. also assisted the General Partners in
negotiating the leases. For these services, the Partnership had agreed to pay
CNL Income 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.
<PAGE>
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and its obligations under, the property management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
property management agreement, including the payment of fees, as described
above, remain unchanged.
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.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
At the time the Partnership elects to dispose of its Properties, other
than as a result of the exercise of tenant options to purchase Properties, the
Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
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 2. Properties
As of December 31, 1997, the Partnership owned 18 Properties. Of the 18
Properties, 15 are owned by the Partnership in fee simple, two are owned through
joint venture arrangements and one is owned through a tenancy in common
arrangement with affiliates of the General Partners. See Item 1. Business -
Joint Venture and Tenancy in Common Arrangements. The Partnership is not
permitted to encumber its Properties under the terms of its partnership
agreement. Reference is made to the Schedule of Real Estate and Accumulated
Depreciation filed with this report for a listing of the Properties and their
respective costs, including acquisition fees and certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 16,000
to 95,000 square feet depending upon building size and local demographic
factors. Sites purchased by the Partnership are in locations zoned for
commercial use which have been reviewed for traffic patterns and volume.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
<PAGE>
State Number of Properties
Alabama 1
Arizona 2
Florida 4
Georgia 1
Louisiana 1
Maryland 2
Oklahoma 1
Pennsylvania 1
Texas 3
Virginia 1
Washington 1
------
TOTAL PROPERTIES: 18
======
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes range from approximately
1,900 to 7,400 square feet. All buildings on Properties acquired by the
Partnership are freestanding and surrounded by paved parking areas. Buildings
are suitable for conversion to various uses, although modifications may be
required prior to use for other than restaurant operations. As of December 31,
1997, the Partnership had no plans for renovation of the Properties.
Depreciation expense is computed for buildings and improvements using the
straight line method using depreciable lives of 19, 31.5 and 40 years for
federal income tax purposes. As of December 31, 1997, the aggregate cost of the
Properties owned by the Partnership and joint ventures for federal income tax
purposes was $10,041,912 and $2,816,198, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
Burger King 1
Chevy's Fresh Mex 1
Golden Corral 5
Ground Round 1
Jade Hunan 1
Pizza Hut 2
Popeyes 2
Wendy's 5
------
TOTAL PROPERTIES 18
======
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
As of December 31, 1997, all of the Properties were leased. The
following is a schedule of the average annual rent for each of the five years
ending with 1997:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1997 1996 1995 1994 1993
------------ -------------- ------------ ------------ ------------
<S> <C>
Rental Income (1) $1,183,568 $1,232,983 $1,300,447 $1,360,619 $1,416,483
Properties 18 18 18 18 19
Average Rent per Unit $65,754 $68,499 $72,247 $75,590 $74,552
</TABLE>
(1) Rental income includes the Partnership's share of rental income from the two
Properties owned through joint venture arrangements and the property owned
through a tenancy in common arrangement.
The following is a schedule of lease expirations for leases in place as
of December 31, 1997 for each of the ten years beginning with 1998 and
thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Income Rental Income
- ----------------------- ------------------ ------------------------- --------------
<S> <C>
1998 - - -
1999 1 27,820 2.40%
2000 - - -
2001 6 512,071 43.60%
2002 - - -
2003 1 64,896 5.50%
2004 - - -
2005 - - -
2006 4 249,569 21.20%
2007 1 15,960 1.40%
Thereafter 5 305,363 25.90%
-------- --------------- --------------
Totals 18 1,175,679 100.00%
======== =============== ==============
</TABLE>
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1997 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases five Golden Corral restaurants. The
initial term of each lease is 14 years (expiring 2001) and the average minimum
base annual rent is approximately $90,500 (ranging from approximately $77,600 to
$109,300).
Wendy's International, Inc. leases one Wendy's restaurant. The initial
term of the lease is 17 years (expiring in 2006) and the minimum base annual
rent is approximately $82,100.
In addition, Restaurant Management Services, Inc. leases two Popeyes
restaurants. The initial term of one lease is 15 years (expiring 2001) and the
term of the other lease is 17 years (expiring 2003) and the average minimum base
annual rent is approximately $62,100 (ranging from $59,400 to $64,900).
<PAGE>
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
At the time the Partnership elects to dispose of its Properties, other
than as a result of the exercise of tenant options to purchase Properties, the
Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective properties, is a party to, or
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 13, 1998, there were 1,070 holders of record of the Units.
There is no public trading market for the Units, and it is not anticipated that
a public market for the Units will develop. Limited Partners who wish to sell
their Units may offer the Units for sale pursuant to the Partnership's
distribution reinvestment plan (the "Plan"), and Limited Partners who wish to
have their distributions used to acquire additional Units (to the extent Units
are available for purchase), may do so pursuant to such Plan. The General
Partners have the right to prohibit transfers of Units. As of January 1, 1995,
due primarily to the Partnership's sale of its Property in Fairfield,
California, the price paid for any Unit transferred pursuant to the Plan has
been $422 per Unit. The price to be paid for any Unit transferred other than
pursuant to the Plan is subject to negotiation by the purchaser and the selling
Limited Partner. The Partnership will not redeem or repurchase Units.
<PAGE>
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 1997 and 1996 other than
pursuant to the Plan, net of commissions.
<TABLE>
<CAPTION>
1997 (1) 1996 (1)
--------------------------------- ------------------------------
<S> <C>
High Low Average High Low Average
First Quarter (2) (2) (2) $422 $422 $422
Second Quarter $422 $380 $401 422 422 422
Third Quarter 422 422 422 500 500 500
Fourth Quarter 444 410 427 469 377 422
</TABLE>
(1) A total of 449 and 255 Units were transferred other than pursuant to
the Plan for the years ended December 31, 1997 and 1996, respectively.
(2) No transfer of Units took place during the quarter other than pursuant
to the Plan.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For each of the years ended December 31, 1997 and 1996, the Partnership
declared cash distributions of $1,264,884 to the Limited Partners. Distributions
of $316,221 were declared at the close of each of the Partnership's calendar
quarters during 1997 and 1996 to the Limited Partners. As a result of returns of
capital in prior years, the amount of the Limited Partners' adjusted capital
contributions (which generally is the Limited Partners' capital contributions,
less distributions from the sale of Properties that are considered to be a
return of capital) was decreased; therefore, the amount of the Limited Partners'
adjusted capital contributions on which the 10% Preferred Return is calculated
was lowered to $13,314,525 as of December 31, 1994. No amounts distributed to
partners for the years ended December 31, 1997 and 1996, 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. No distributions have been made to the General Partners to date.
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
<S> <C>
Year ended December 31:
Revenues (1) $ 1,333,000 $ 1,389,308 $ 1,290,567 $ 1,358,871 $ 1,412,327
Net income (2) 1,248,757 1,083,109 962,102 1,208,576 1,039,545
Cash distributions
declared (3) 1,264,884 1,264,884 1,264,883 2,279,123 1,417,622
Net income per Unit (2) 41.24 35.75 31.75 39.91 34.31
Cash distributions declared
per Unit (3) 42.16 42.16 42.16 75.97 47.25
At December 31:
Total assets $ 9,500,078 $ 9,479,777 $ 9,668,878 $10,857,414 $10,930,600
Partners' capital 9,029,050 9,045,177 9,226,952 9,529,733 10,480,280
</TABLE>
(1) Revenues include equity in earnings of joint ventures. Equity in
earnings includes $295,080 from gain on sale of land and building by
Seventh Avenue Joint Venture.
(2) Net income for the years ended December 31, 1997, 1996 and 1994,
includes $233,183, $19,000 and $182,384, respectively, from gains on
sale of land and buildings.
<PAGE>
(3) Distributions for the year ended December 31, 1994, include $861,500 as
a result of the distribution of a portion of the net sales proceeds
from the sale of a Property.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership 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
restaurant Properties were to be constructed, which are leased primarily to
operators of selected national and regional fast-food Restaurant Chains. The
leases are triple-net leases, with the lessees generally responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1997, the Partnership owned 18 Properties, either directly or indirectly
through joint venture arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended
December 31, 1997, 1996 and 1995, was cash from operations (which includes cash
received from tenants, distributions from joint ventures and interest received,
less cash paid for expenses). Cash from operations was $1,316,816, $1,132,688
and $1,182,514 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in cash from operations during 1997, as compared to
1996, and the decrease during 1996, as compared to 1995, is primarily a result
of changes in the Partnership's working capital during each of the respective
years. Cash from operations during the years ended December 31, 1997, 1996 and
1995, was also affected by the following.
In August 1996, the Partnership entered into a lease amendment with the
tenant of the Property in Mesquite, Texas, to provide for lower initial base
rent with scheduled rent increases retroactively effective March 1996. In
anticipation of entering into this lease amendment, the Partnership accepted a
promissory note in March 1996, in the amount of $156,308, for past due rental
and other amounts, and real estate taxes previously paid by the Partnership on
behalf of the tenant. Payments were due in 60 monthly installments of $3,492,
including interest at a rate of 11 percent per annum, and collections commenced
on June 1, 1996. Receivables at December 31, 1996, included $150,787 of such
amounts, including accrued interest of $5,657 and late fees of $1,222. During
1997, the Partnership collected the full amount of the promissory note.
Other sources and uses of capital included the following during the
years ended December 31, 1997, 1996 and 1995.
In June 1996, the Partnership sold a small, undeveloped portion of the
land relating to its Property in Mesquite, Texas. In connection therewith, the
Partnership received net sales proceeds of $20,000 and recognized a gain for
financial reporting purposes of $19,000. Proceeds from the sale were used for
operating activities of the Partnership.
During 1996 and 1997, the Partnership entered into various promissory
notes with the corporate General Partner for loans totalling $83,100 and
$133,000, respectively, in connection with the operations of the Partnership.
The loans were uncollateralized, non-interest bearing and due on demand. As of
December 31, 1997, the Partnership had repaid the loans in full to the corporate
General Partner.
In August 1997, the Partnership sold its Property in Casa Grande,
Arizona, to a third party for $840,000 and received net sales proceeds (net of
$2,691 which represents prorated rent returned to the tenant) 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 in
Camp Hill, Pennsylvania, as described below. As of December 31, 1997, the
remaining net sales proceeds of $126,009, plus accrued interest of $3,248, were
being held in an interest-bearing escrow account. The Partnership intends to use
the remaining net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the Limited Partners. The General Partners
believe that the transaction, or a portion thereof, relating to the sale of the
Property in Casa Grande, Arizona, and the reinvestment of the majority of the
net sales proceeds in a Property in Camp Hill, Pennsylvania, will be structured
to qualify as a like-kind exchange transaction for federal income tax purposes.
However, the Partnership will distribute amounts sufficient to enable the
Limited Partners to pay federal and state income taxes, if any, (at a level
reasonably assumed by the General Partners) resulting from the sale.
In addition, 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 (net of $2,678 which represents
prorated rent returned to the tenant) 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 October 1997, the
Partnership reinvested a portion of the return of capital in a Ground Round
Property in Camp Hill, Pennsylvania, as described below. In December 1997, the
Partnership reinvested the remaining return of capital in a Property located in
Vancouver, Washington, as tenants- in-common with affiliates of the General
Partners. The Partnership anticipates that it will distribute amounts sufficient
to enable the Limited Partners to pay federal and state income taxes, if any (at
a level reasonably assumed by the General Partners), resulting from the sale.
None of the Properties owned by the Partnership or any joint venture in
which the Partnership owns an interest is or may be encumbered. Subject to
certain restrictions on borrowings from the General Partners, however, the
Partnership may borrow, in the discretion of the General Partners, for the
purpose of maintaining the operations of the Partnership. The Partnership will
not encumber any of the Properties in connection with any borrowings or
advances. The Partnership will not borrow for the purpose of returning capital
to the Limited Partners. The Partnership also will not borrow under
circumstances which would make the Limited Partners liable to creditors of the
Partnership. Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments such as
demand deposit accounts at commercial banks, CDs 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 partners. At December
31, 1997, the Partnership had $184,130 invested in such short-term investments
as compared to $159,379 at December 31, 1996. As of December 31, 1997, the
average interest rate earned on the rental income deposited in demand deposit
accounts at commercial banks was approximately four percent annually. The funds
remaining at December 31, 1997, will be used for the payment of 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 generally 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.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because the leases for the Partnership's Properties are
generally on a triple-net basis, it is not anticipated that a permanent reserve
for maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
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, in which event such contributions will be
returned to the General Partners from distributions of net sales proceeds at the
same time that their initial capital contributions of $1,000 are returned.
During 1997, 1996 and 1995, affiliates of the General Partners incurred
on behalf of the Partnership $33,962, $40,510 and $50,300, respectively, for
certain operating expenses. As of December 31, 1997 and 1996, the Partnership
owed $48,991 and $28,262, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, as of December 31, 1997 and
1996, the Partnership also owed affiliates $66,750 in real estate disposition
fees due as a result of services rendered in connection with the sale of two
Properties in previous years. The payment of such fees is deferred until the
Limited Partners have received the sum of their cumulative 10% Preferred Return
and their adjusted capital contributions.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations, proceeds from the sale of Properties as described above, and to a
lesser extent loans received from the General Partners, the Partnership declared
distributions to Limited Partners of $1,264,884 for each of the years ended
December 31, 1997 and 1996, and $1,264,883 for the year ended December 31, 1995.
This represents distributions of $42.16 per Unit for each of the years ended
December 31, 1997, 1996, and 1995. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, 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.
Amounts payable to other parties, including distributions payable,
increased to $319,550 at December 31, 1997, from $318,877 at December 31, 1996.
Liabilities at December 31, 1997, to the extent they exceed cash and cash
equivalents at December 31, 1997, will be paid from future cash from operations,
proceeds from the sale of Properties as described above, or, in the event the
General Partners elect to make additional contributions or loans to the
Partnership, from future General Partner contributions or loans.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During the years ended December 31, 1995 and 1996, the Partnership
owned and leased 15 wholly owned Properties and during the year ended December
31, 1997, the Partnership owned and leased 16 wholly owned Properties (including
one Property in Casa Grande, Arizona, which was sold in August 1997). During the
years ended December 31, 1997, 1996 and 1995, the Partnership was also a
co-venturer in three separate joint ventures that each owned and leased one
Property (including one Property owned and leased by Seventh Avenue Joint
Venture, which was sold in August 1997). In addition, during 1997, the
Partnership owned and leased one Property, with an affiliate of the General
Partners, as tenants-in-common. As of December 31, 1997, the Partnership owned,
either directly or through joint venture arrangements, 18 Properties which are,
in general, subject to long-term, triple
net leases. The leases of the Properties provide for minimum base annual rental
amounts (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. In addition, certain leases provide for increases
in the annual base rent during the lease terms. For further description of the
Partnership's leases and Properties, see Item 1. Business - Leases and Item 2.
Properties, respectively.
<PAGE>
During the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $1,038,443, $1,115,530 and $1,129,406, respectively, in base
rental income from the Partnership's wholly owned Properties described above.
The decrease in rental income during the years ended December 31, 1997 and 1996,
each as compared to the previous year, is partially attributable to a decrease
of approximately $5,800 and $66,000, respectively, due to the fact that
effective February 1, 1996, the Partnership ceased receiving rental amounts from
the former tenant of three Properties. The rental payments from this former
tenant represented the difference between (i) the payments due under the
original leases entered into between the Partnership and the former tenant and
(ii) the payments due under the current leases on the Properties between the
Partnership and the new tenants (two of which were re-leased to the corporate
franchisor). In August 1997, the Partnership sold one of the three Properties, a
Property in Casa Grande, Arizona, and as a result of the sale, rental income
decreased by approximately $27,700 during 1997. The decrease in rental income
during 1997 was partially offset by an increase in rental income of
approximately $17,700 resulting from the Partnership reinvesting the majority of
these net sales proceeds in a Property in Camp Hill, Pennsylvania, in October
1997.
In addition, the decrease in rental income during 1996, as compared to
1995, is partially attributable to a decrease of approximately $7,000 during
1996, due to the fact that during 1996, the Partnership wrote off as
uncollectible rental income amounts relating to the Property in Oklahoma City,
Oklahoma. Effective January 1, 1997, the Partnership entered into a lease
amendment with the tenant of this Property to provide for lower base rental
income. The Partnership does not anticipate that these reduced rents will have a
material adverse effect on operating results.
The decrease in rental income during 1997, as compared to 1996, is also
partially attributable to, and the decrease during 1996, as compared to 1995, is
partially offset by, the fact that during 1996, the Partnership recognized as
income approximately $62,000 due under the promissory note with the tenant of
the Property in Mesquite, Texas, for which the Partnership had previously
established an allowance for doubtful accounts as the result of collection being
doubtful, as described above in " Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, the
Partnership also earned $22,205, $56,409 and $35,176, respectively, in
contingent rental income. The decrease in contingent rental income during 1997,
as compared to 1996, and the increase during 1996, as compared to 1995, is
attributable to the fact that during 1996, the Partnership recognized
approximately $27,800 in contingent rental income due under the promissory note
with the tenant of the Property in Mesquite, Texas, for which the Partnership
had previously established an allowance for doubtful accounts as the result of
collection being doubtful, as described above in "Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, the
Partnership also earned $22,210, $101,293 and $13,011, respectively, in interest
and other income. The decrease in interest and other income during 1997, as
compared to 1996, and the increase during 1996, as compared to 1995, is
primarily attributable to the fact that during 1996, the Partnership recognized
approximately $82,600 in interest and other income due under the promissory note
with the tenant of the Property in Mesquite, Texas, for which the Partnership
had previously established an allowance for doubtful accounts due to collection
being doubtful, as described above in "Capital Resources."
In addition, during the years ended December 31, 1997, 1996 and 1995,
the Partnership earned $250,142, $116,076 and $112,974, respectively,
attributable to net income earned by the three joint ventures in which the
Partnership is a co-venturer (including one Property owned and leased by Seventh
Avenue Joint Venture, which was sold in August 1997). The increase in net income
earned by joint ventures is primarily attributable to the fact that in August
1997, Seventh Avenue Joint Venture, in which the Partnership owns a 50 percent
interest, recognized a gain of approximately $295,100 for financial reporting
purposes, as a result of the sale of its Property, as described above in "
Capital Resources." The increase in net income earned by joint ventures during
1997, was partially offset by a decrease of $31,300 in base rental income earned
by the joint venture due to the sale of the Property in August 1997.
During at least one of the years ended December 31, 1997, 1996 and
1995, three of the Partnership's lessees, Golden Corral Corporation, Wendy's
International, Inc. and Restaurant Management Services, Inc., each contributed
more than ten percent of the Partnership's total rental income (including the
Partnership's share of the rental income from three Properties owned by joint
ventures and one Property owned with an affiliate as tenants-in-common). As of
December 31, 1997, Golden Corral Corporation was the lessee under leases
relating to five restaurants, Wendy's International, Inc. was the lessee under
leases relating to one restaurant and Restaurant Management Services, Inc. was
the lessee under leases relating to two restaurants. It is anticipated that
Golden Corral Corporation and Restaurant Management Services, Inc. each will
continue to contribute ten percent or more of the Partnership's total rental
income during 1998 and subsequent years. In addition, during at least one of the
years ended December 31, 1997, 1996 or 1995, three Restaurant Chains, Golden
Corral, Wendy's and Popeyes, each accounted for more than ten percent of the
Partnership's total rental income in 1997 (including the Partnership's share of
the rental income from three Properties owned by joint ventures and one Property
owned with an affiliate as tenants-in-common). In subsequent years, it is
anticipated that these three 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.
Operating expenses, including depreciation and amortization expense,
were $317,426, $325,199 and $328,465 for the years ended December 31, 1997, 1996
and 1995, respectively. The decrease in operating expenses during 1997, as
compared to 1996, is primarily attributable to a decrease in accounting and
administrative expenses associated with operating the Partnership and its
Properties.
As a result of the sale of the Property in Casa Grande, Arizona, as
described above in "Capital Resources," the Partnership recognized a gain of
$233,183 during 1997, for financial reporting purposes. In 1996, the Partnership
sold a portion of land related to the Property in Mesquite, Texas, as described
above in "Capital Resources," and recognized a gain of $19,000 for financial
reporting purposes. No Properties were sold during the year ended December 31,
1995.
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on their computer package software.
The hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the General Partners do not expect this matter to materially impact
how the Partnership conducts business nor their current or future results of
operations or financial position.
The Partnership's leases as of December 31, 1997, are, in general,
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Management expects that increases in restaurant
sales volumes due to inflation and real sales growth should result in an
increase in rental income (for certain Properties) over time. Continued
inflation also may cause capital appreciation of the Partnership's Properties.
Inflation and changing prices, however, also may have an adverse impact on the
sales of the restaurants and on potential capital appreciation of the
Properties.
<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 21st day of
July, 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.
<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>
/s/ Robert A. Bourne President, Treasurer and Director July 21, 1999
- ------------------------ (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director July 21, 1999
- ------------------------ (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
