UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(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 0-16850
CNL INCOME FUND III, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2809460
(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>
PART I
Item 1. Business
CNL Income Fund III, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on June 1, 1987. 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 August 10, 1987, the Partnership offered
for sale up to $25,000,000 in limited partnership interests (the "Units")
(50,000 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
April 29, 1988, as of which date the maximum offering proceeds of $25,000,000
had been received from investors who were admitted to the Partnership as limited
partners (the "Limited Partners").
The Partnership was organized primarily 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 $22,125,102, and were used to acquire 32 Properties, including
interests in two Properties owned by joint ventures in which the Partnership is
a co-venturer. During January 1997, the Partnership sold its Properties in
Chicago, Illinois; Bradenton, Florida; Kissimmee, Florida; Roswell, Georgia and
Mason City, Iowa. The Partnership reinvested a portion of these net sales
proceeds in a Property in Fayetteville, North Carolina. In addition, the
Partnership reinvested a portion of the net sales proceeds in a Property in
Englewood, Colorado and a Property in Miami, Florida, as tenants-in-common, with
affiliates of the General Partners. The Partnership intends to reinvest the
remaining net sales proceeds in additional Properties. As a result of the above
transactions, the Partnership currently owns 30 Properties, including interests
in two Properties owned by joint ventures in which the Partnership is a
co-venturer and two Properties owned with affiliates as tenants-in-common. In
January 1998, the Partnership reinvested the remaining net sales proceeds from
the 1997 sales of Properties in a Property in Overland Park, Kansas, as
tenants-in-common with affiliates of the General Partners. In addition, during
January and February 1998, the Partnership sold its Properties in Fernandina
Beach, Daytona Beach and Punta Gorda, Florida. The Partnership intends to use
the remaining net sales proceeds for other Partnership purposes. 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 have been granted options to purchase Properties, generally at a
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 some of
the 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
terms ranging from 15 to 20 years (the average being 18 years), and expire
between 2002 and 2017. Generally, leases are on a triple-net basis, with the
lessees generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties generally provide for
minimum base annual rental payments (payable in monthly installments) ranging
from approximately $23,000 to $191,900. All of the leases provide for percentage
rent, based on sales in excess of a specified amount, to be paid annually. In
addition, some leases provide for increases in the annual base rent during the
lease term.
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<PAGE>
The leases of the Properties provide for two or four 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 each 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 lessee an option to purchase up to a 49
percent 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
option is being exercised.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership must first
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 February 1995, the tenant of the Po Folks Property in Hagerstown,
Maryland, defaulted under the terms of its lease. The Partnership is currently
seeking either a replacement tenant or purchaser for the Po Folks Property.
In June 1997, the Partnership reinvested the majority of the net sales
proceeds from the sale of the Property in Bradenton, Florida, in a Property
located in Fayetteville, North Carolina. In addition, during 1997, the
Partnership reinvested a portion of the net sales proceeds from the sale of the
Properties located in Kissimmee, Florida and Roswell, Georgia in a Property
located in Englewood, Colorado and a Property in Miami, Florida, respectively,
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.
In January 1998, the Partnership reinvested a portion of the net sales
proceeds from the sale of the Properties in Kissimmee, Florida, and Mason City,
Iowa, in an IHOP Property located in Overland Park, Kansas, with an affiliate of
the General Partners, as tenants-in-common, as described below in "Joint Venture
Arrangements." The lease terms for this Property 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, one lessee of the Partnership and its consolidated joint
venture, Golden Corral Corporation, contributed more than ten percent of the
Partnership's total rental income (including rental income from the
Partnership's consolidated joint venture and the Partnership's share of rental
income from one Property owned by an unconsolidated joint venture and two
Properties owned with affiliates as tenants-in-common). As of December 31, 1997,
Golden Corral Corporation was the lessee under leases relating to six
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, this lessee will continue to contribute more than ten
percent of the Partnership's total rental income in 1998 and subsequent years.
In addition, five Restaurant Chains, Golden Corral Family Steakhouse Restaurants
("Golden Corral"), Denny's, Pizza Hut, KFC and Taco Bell, each accounted for
more than ten percent of the Partnership's total rental income in 1997
(including rental income from the Partnership's consolidated joint venture and
the Partnership's share of the rental income from one Property owned by an
unconsolidated joint venture and two Properties owned with affiliates as
tenants-in-common). In subsequent years, it is anticipated that these five
Restaurant Chains each will continue to account for more than ten percent of
total rental income to which the Partnership is entitled under the terms of the
leases. Any failure of Golden Corral Corporation or any of these Restaurant
Chains could materially affect the Partnership's income. As of December 31,
1997, no single tenant or group of affiliated tenants lease Properties with an
aggregate carrying value, excluding acquisition fees and certain acquisition
expenses, in excess of 20 percent of the total assets of the Partnership.
Joint Venture Arrangements
The Partnership has entered into a joint venture arrangement,
Tuscawilla Joint Venture, with three unaffiliated entities to purchase and hold
one Property. In addition, the Partnership has entered into a joint venture
arrangement, Titusville Joint Venture, with an affiliate of the General Partners
to purchase and hold one Property. The joint venture arrangements provide for
the Partnership and its joint venture partners to share in all costs and
benefits associated with the joint venture in accordance with their respective
percentage interests in the joint venture.
2
<PAGE>
The Partnership and its joint venture partners are also jointly and severally
liable for all debts, obligations and other liabilities of the joint venture.
Each joint venture has an initial term of approximately 20 years
(generally the same term as the initial term of the lease for the Property in
which the joint venture invested) and, after the expiration of the initial term,
continues in existence from year to year unless terminated at the option of any
joint venture partner 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 has management control of Tuscawilla Joint Venture and
shares management control equally with an affiliate of the General Partners for
Titusville 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 its joint venture partners, 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 Tuscawilla Joint Venture and
Titusville Joint Venture is distributed 69.07% and 73.4%, respectively, to the
Partnership and the balance is distributed to each other joint venture partner
in accordance with its respective percentage interest in the joint venture. 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 joint venture partner's percentage interest in the joint venture.
In addition to the above joint venture arrangements, in 1997, the
Partnership entered into separate agreements to hold a Property in Englewood,
Colorado and a Property in Miami, Florida, as tenants-in-common with affiliates
of the General Partners. The agreements provide for the Partnership and the
affiliates to share in the profits and losses of the Properties in proportion to
each co-venturer's percentage interest. The Partnership owns a 32.77% and 9.84%
interest in the Property in Englewood, Colorado and the Property in Miami,
Florida, respectively.
In addition, in January 1998, the Partnership entered into an agreement
to hold an IHOP Property as tenants-in-common with an affiliate of the General
Partners. The agreement provides for the Partnership and the affiliate to share
in the profits and losses of the Property in proportion to each co-venturer's
percentage interest. The Partnership owns a 25.84 percent interest in this
Property.
Property Management
CNL Income Fund Advisors, 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 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 have not received the a 10% Preferred
Return, no property management fee will be paid.
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and it 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.
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<PAGE>
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, either directly or
through joint venture arrangements, 30 Properties located in 17 states.
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 11,800
to 94,500 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.
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 8,900 square feet. Generally, 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.
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.
Leases with Major Tenant. The terms of each of the leases with the
Partnership's major tenant 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 six Golden Corral restaurants pursuant
to leases, each with an initial term of 15 years (expiring in 2002) and an
average minimum base annual rent of approximately $72,000 (ranging from
approximately $48,000 to $110,000).
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The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
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 2,050 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. The price paid for any
Unit transferred pursuant to the Plan has been $475 per Unit. The price to be
paid for any Units 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.
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)
---------------------------------- ----------------------
High Low Average High Low Average
<S> <C>
First Quarter $500 $500 $500 $500 $370 $453
Second Quarter 409 409 409 475 360 439
Third Quarter 475 410 445 475 425 458
Fourth Quarter 475 437 471 475 390 432
</TABLE>
(1) A total of 613 and 679 Units were transferred other than pursuant to
the Plan for the years ended December 31, 1997 and 1996, respectively.
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 $2,376,000 to the Limited Partners. Distributions
of $594,000 were declared at the close of each of the Partnership's calendar
quarters during 1997 and 1996 to the Limited Partners. The General Partners
expect to distribute some or all of the net sales proceeds from the sales of the
Properties in Fernandina Beach and Daytona Beach, Florida, to the Limited
Partners. 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. The reduced number of Properties for which
the Partnership receives rental payments, as well as ongoing operations, is
expected to reduce the Partnership's revenues. The decrease in Partnership
revenues, combined with the fact that a significant portion
5
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of the Partnership's expenses are fixed in nature, is expected to result in a
decrease in cash distributions to the Limited Partners during 1998. 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,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- ---------
<S> <C>
Year ended December 31:
Revenues (1) $ 2,023,495 $ 2,452,797 $ 2,358,235 $ 2,511,833 $ 2,477,000
Net income (2) 2,391,835 1,814,657 1,482,515 1,858,605 1,856,462
Cash distributions declared 2,376,000 2,376,000 2,376,000 2,376,000 2,376,000
Net income per Unit (2) 47.47 35.93 29.37 36.80 36.76
Cash distributions declared
per Unit (2) 47.52 47.52 47.52 47.52 47.52
At December 31:
Total assets $18,479,002 $18,608,907 $19,065,305 $19,945,765 $20,411,131
Partners' capital 17,611,136 17,595,301 18,156,644 19,050,129 19,567,524
</TABLE>
(1) Revenues include equity in earnings of the unconsolidated joint venture
and minority interest in income and losses of the consolidated joint
venture.
(2) Net income for the years ended December 31, 1997 and 1995, includes a
provision for loss on land and building of $32,819 and $207,844,
respectively. Net income for the year ended December 31, 1997, includes
gain on sale of land and buildings of $1,027,590.
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 June 1, 1987, 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 30 Properties, either directly or indirectly through joint
venture arrangements.
Liquidity and 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 $2,021,689, $2,091,754
and $2,203,437 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in cash from operations during 1997 and 1996, each as
compared to the previous year, is primarily a result of changes in income and
expenses as described in "Results of Operations" below and changes in the
Partnership's working capital during each of the
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respective years. Cash from operations was also affected by the following
transactions during the years ended December 31, 1997, 1996 and 1995.
In February 1995, the tenant of the Po Folks Property in Hagerstown,
Maryland, ceased operations of the restaurant business located on such Property
and discontinued payment of rental amounts as provided in its lease agreement.
Due to the uncertainty of the collectibility of the past due rental amounts, the
Partnership established an allowance for doubtful accounts relating to the
amount due from the former tenant. At December 31, 1995, the balance in the
allowance for doubtful accounts for this Property was $259,242; therefore, no
amount was included in receivables at December 31, 1995, relating to this
Property. In addition, at December 31, 1995, the balance in the allowance for
doubtful accounts for the Denny's Property in Hagerstown, Maryland, (which was
leased to the same tenant of the Po Folks Property) for past due rental amounts
was $76,948. In September 1996, the Partnership agreed to accept $175,000 in the
form of promissory notes from the new tenant of the Denny's Property, as full
satisfaction of past due rental amounts and past due real estate taxes from the
former tenant of the Denny's and Po Folks Properties. In connection therewith,
during 1996, the Partnership recognized approximately $118,700 in base rental
income for amounts which the Partnership had previously established an allowance
for doubtful accounts, and wrote off the remaining balances in the allowance for
doubtful accounts. During 1996, the Partnership accepted a three year promissory
note for $25,000, which bears interest at ten percent per annum and for which
collections commenced in October 1996. Receivables at December 31, 1997, include
approximately $16,300 relating to this promissory note. However, due to the
uncertainty of the collectibility of the remaining $150,000 to be received from
the new tenant of the Denny's Property, the Partnership established an allowance
for doubtful accounts of $150,000 during the year ended December 31, 1997. The
Partnership is currently seeking either a replacement tenant or purchaser for
the Po Folks Property.
Other sources and uses of capital included the following during the
years ended December 31, 1997, 1996 and 1995.
In January 1996, the Partnership entered into a promissory note with
the corporate general partner for a loan in the amount of $86,200 in connection
with the operations of the Partnership. The loan was uncollateralized, bore
interest at a rate of prime plus 0.25% per annum and was due on demand. The
Partnership repaid the loan in full, along with approximately $660 in interest,
to the corporate general partner. In addition, during 1996, the Partnership
entered into various promissory notes with the corporate general partners for
loans totalling $575,200 in connection with the operations of the Partnership.
The loans were uncollateralized, non-interest bearing and due on demand. The
Partnership had repaid the loans in full to the corporate general partner as of
December 31, 1996. In addition, during 1997, the Partnership entered into
various promissory notes with the corporate General Partner for loans totalling
$117,000 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 January 1997, the Partnership sold its Property in Chicago,
Illinois, to a third party, for $505,000 and received net sales proceeds of
$496,418, resulting in a gain of $3,827 for financial reporting purposes. The
Partnership used $452,000 of the nets sales proceeds to pay liabilities of the
Partnership, including quarterly distributions to the Limited Partners. The
balance of the funds was used to pay past due real estate taxes on this Property
incurred by the Partnership as a result of the former tenant declaring
bankruptcy. 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 March 1997, the Partnership sold its Property in Bradenton, Florida,
to the tenant, for $1,332,154 and received net sales proceeds (net of $4,330
which represents real estate tax amounts due from tenant) of $1,305,671,
resulting in a gain of $361,368 for financial reporting purposes. This Property
was originally acquired by the Partnership in June 1988 and had a cost of
approximately $1,080,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $229,500 in excess of its original purchase price. In June 1997,
the Partnership reinvested approximately $1,276,000 of the net sales proceeds
received in a Property in Fayetteville, North Carolina. The Partnership intends
to use the remaining net sales proceeds for other Partnership purposes. The
General Partners believe that the transaction, or a portion thereof, relating to
the sale of the Property in Bradenton, Florida, and the reinvestment of the
proceeds in a Property in Fayetteville, North Carolina, will qualify as a
like-kind exchange transaction for federal income tax purposes. However, the
Partnership
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<PAGE>
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 April 1997, the Partnership sold its Property in Kissimmee, Florida,
to a third party for $692,400 and received net sales proceeds of $673,159,
resulting in a gain of $271,929 for financial reporting purposes. This Property
was originally acquired by the Partnership in March 1988 and had a cost of
approximately $474,800, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$196,400 in excess of its original purchase price. In July 1997, the Partnership
reinvested approximately $511,700 of these net sales proceeds in a Property
located in Englewood, Colorado, as tenants-in-common with an affiliate of the
General Partners. In connection therewith, the Partnership and the affiliate
entered into an agreement whereby each co-venturer will share in the profits and
losses of the Property in proportion to each co-venturer's percentage interest.
As of December 31, 1997, the Partnership owned a 32.77% interest in the
Property. In January 1998, the Partnership reinvested the remaining net sales
proceeds in an IHOP Property in Overland Park, Kansas, with affiliates of the
General Partners, as tenants-in-common. The General Partners believe that the
transaction, or a portion thereof, relating to the sale of the Property in
Kissimmee, Florida, and the reinvestment of a portion of the proceeds in an IHOP
Property in Englewood, Colorado, will 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 April 1996, the Partnership received $51,400 as partial settlement
in a right of way taking relating to a parcel of land of the Property in Plant
City, Florida. In April 1997, the Partnership received the remaining proceeds of
$73,600 finalizing the sale of the land parcel. In connection therewith, the
Partnership recognized a gain of $94,320 for financial reporting purposes.
In addition, in June 1997, the Partnership sold its Property in
Roswell, Georgia, to a third party for $985,000 and received net sales proceeds
of $942,981, resulting in a gain of $237,608 for financial reporting purposes.
This Property was originally acquired by the Partnership in June 1988 and had a
cost of approximately $775,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $167,800 in excess of its original purchase price. In connection
therewith, the Partnership received $257,981 in cash and accepted the remaining
sales proceeds in the form of a promissory note in the principal sum of
$685,000, collateralized by a mortgage on the Property. The promissory note
bears interest at a rate of nine percent per annum and is being collected in 36
monthly installments of $6,163, including interest, with a balloon payment of
$642,798 due in July 2000. In December 1997, the Partnership reinvested a
portion of the net sales proceeds in a Property located in Miami, Florida, as
tenants-in-common with an affiliate of the General Partners. In connection
therewith, the Partnership and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the Property in
proportion to each co-venturer's percentage interest. As of December 31, 1997,
the Partnership owned a 9.84 percent interest in the Property. 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 October 1997, the Partnership sold its Property in Mason City, Iowa,
to the tenant for $218,790 and received net sales proceeds (net of $511 which
represents prorated rent returned to the tenant) of $216,528, resulting in a
gain of $58,538 for financial reporting purposes. This Property was originally
acquired by the Partnership in March 1988 and had a cost of approximately
$190,300, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the Property for approximately $26,700 in excess
of its original purchase price. In January 1998, the Partnership reinvested the
net sales proceeds in a Property in Overland Park, Kansas, with affiliates of
the General Partners, as tenants-in-common. The General Partners believe that
the transaction, or a portion thereof, relating to the sale of the Property in
Mason City, Iowa, and the reinvestment of the proceeds in a Property in Overland
Park, Kansas, with affiliates as tenants-in-common will 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 January 1998, the Partnership sold its Property in Fernandina Beach,
Florida, to the tenant, for $730,000 and received net sales proceeds (net of
$3,018 which represents prorated rent collected at closing) of $724,672,
8
<PAGE>
resulting in a gain of approximately $264,000 for financial reporting purposes.
In addition, in January 1998, the Partnership sold its Property in Daytona
Beach, Florida, to the tenant, for $1,050,000 and received net sales proceeds
(net of $1,975 which represents prorated rent returned to the tenant) of
$1,007,001, resulting in a gain of approximately $299,300 for financial
reporting purposes. The Partnership intends to distribute these net sales
proceeds to the Limited Partners.
In February 1998, the Partnership also sold its Property in Punta
Gorda, Florida, to a third party, for $675,000 and received net sales proceeds
(including $28,330 which represents prorated rent collected at closing) of
$665,973, resulting in a gain of approximately $73,500 for financial reporting
purposes. The Partnership anticipates that it will to reinvest the net sales
proceeds in an additional Property.
None of the Properties owned by the Partnership or the joint ventures
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 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 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
$493,118 invested in such short-term investments as compared to $57,751 at
December 31, 1996. The increase in cash and cash equivalents is primarily
attributable to the fact that during 1997, the Partnership used net sales
proceeds from the sales of Properties to pay a portion of the liabilities of the
Partnership, including quarterly distributions to the Limited Partners. During
1996, the Partnership used cash generated from operations to pay liabilities of
the Partnership. The funds remaining at December 31, 1997, will be used for the
payment of distributions and other liabilities.
During 1997, 1996 and 1995, affiliates of the General Partners incurred
on behalf of the Partnership $71,681, $108,900 and $149,252, respectively, for
certain operating expenses. At December 31, 1997 and 1996, the Partnership owed
$82,239 and $102,859, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, during the year ended
December 31, 1997, the Partnership incurred $15,150 in real estate disposition
fees due to an affiliate as a result of services provided in connection with the
sale of the Property in Chicago, Illinois. The payment of such fees is deferred
until the Limited Partners have received the sum of their 10% Preferred Return
and their adjusted capital contributions. Amounts payable to other parties,
including distributions payable, decreased to $611,116 at December 31, 1997,
from $681,010 at December 31, 1996. The decrease in amounts payable to other
parties was primarily attributable to a decrease in accrued and escrowed real
estate taxes at December 31, 1997. Total 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 sales of Properties as
described above, and in the event the General Partners elect to make additional
contributions or loans to the Partnership, from future General Partner
contributions or loans.
Based primarily on current and anticipated cash from operations, the
Partnership declared distributions to the Limited Partners of $2,376,000 for
each of the years ended December 31, 1997, 1996 and 1995. This represents
distributions of $47.52 per unit for each of the years ended December 31, 1997,
1996 and 1995. The General Partners expect to distribute some or all of the net
sales proceeds from the sales of the Properties in Fernandina Beach and Daytona
Beach, Florida, to the Limited Partners. 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. The reduced
number of Properties for which the Partnership receives rental payments, as well
as ongoing operations, is expected to reduce the Partnership's revenues. The
decrease in Partnership revenues, combined with the fact that a significant
portion of the Partnership's expenses are fixed in nature, is expected to result
in a decrease in cash distributions to the Limited Partners during 1998. No
amounts distributed to the Limited Partners for the years ended December 31,
1997, 1996 or 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.
9
<PAGE>
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.
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.
Results of Operations
During the years ended December 31, 1995 and 1996, the Partnership
owned and leased 30 wholly owned Properties and during 1997, the Partnership
owned and leased 31 wholly owned Properties (including five Properties, one in
each of Chicago, Illinois; Bradenton, Florida; Kissimmee, Florida; Roswell,
Georgia and Mason City, Iowa, which were sold during the year ended December 31,
1997). In addition, during the years ended December 31, 1997, 1996 and 1995, the
Partnership was a co-venturer in two separate joint ventures that each owned and
leased one Property and during 1997, the Partnership owned and leased two
Properties, with affiliates of the General Partners, as tenants-in-common. As of
December 31, 1997, the Partnership owned, either directly or through joint
venture arrangements, 30 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
$23,000 to $191,900. All of the leases provide for percentage rent based on
sales in excess of a specified amount. In addition, some leases provide for
increases in the annual base rent during the lease term. For further description
of the Partnership's leases and Properties, see Item 1. Business - Leases and
Item 2. Properties, respectively.
During the years ended December 31, 1997, 1996 and 1995, the
Partnership and its consolidated joint venture, Tuscawilla Joint Venture, earned
$1,930,486, $2,273,850 and $2,188,000, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease in
rental and earned income during 1997, as compared to 1996, is partially
attributable to a decrease of approximately $219,700 as a result of the sales of
the Properties in Chicago, Illinois (in January 1997), Bradenton, Florida (in
March 1997), Kissimmee, Florida (in April 1997), Roswell, Georgia (in June
1997), and Mason City, Iowa (in October 1997), as described above in "Liquidity
and Capital Resources." During 1997, the decrease in rental income was partially
offset by an increase of approximately $86,200 due to the reinvestment of a
portion of these net sales proceeds in a Property in Fayetteville, North
Carolina, in June 1997, as described above in "Liquidity and Capital Resources."
The decrease in rental and earned income during 1997, as compared to
1996, and the increase during 1996, as compared to 1995, is partially
attributable to the fact that during 1996, the Partnership entered into a new
lease with a new tenant for the Denny's Property in Hagerstown, Maryland, and in
connection therewith, recognized as income approximately $118,700 for which the
Partnership had previously established an allowance for doubtful accounts
relating to the Denny's and Po Folks Properties in Hagerstown, Maryland, as
described above in "Liquidity and Capital Resources." The decrease in 1997, as
compared to 1996, is also partially attributable to the fact that during 1997,
the Partnership established an allowance for doubtful accounts of approximately
$77,100 for past due amounts for these Properties due to the uncertainty of the
collectibility of these amounts. The General Partners intend to pursue
collection of past due amounts relating to this Property and will recognize any
such amounts as income if collected.
10
<PAGE>
Rental and earned income during 1997 and 1996, continued to remain at
reduced amounts due to the fact that the Partnership is not receiving any rental
income relating to the Po Folks Property in Hagerstown, Maryland. The General
Partners are currently seeking a buyer or a new tenant for this Property.
In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is partially attributable to the Partnership increasing its
allowance for doubtful accounts by approximately $15,400 for rental amounts
relating to the Property in Canton Township, Michigan, due to financial
difficulties the tenant is experiencing. The General Partners intend to pursue
collection of past due amounts relating to this Property and will recognize any
such amounts as income if collected. No such allowance was established during
1996 and 1995.
The increase in rental and earned income during 1996, as compared to
1995, is partially offset by a decrease in rental income of approximately
$31,000 due to the fact that in September 1996, the tenant of the Property in
Chicago, Illinois, ceased operations of the restaurant business located on such
Property and the Partnership ceased recording rental revenue relating to such
Property. The tenant filed for bankruptcy and in January 1997, the Partnership
sold this Property to an unrelated third party, as described above in "Liquidity
and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, the
Partnership also earned $157,648, $157,993 and $143,039, respectively, in
contingent rental income. The increase in contingent rental income during 1996,
as compared to 1995, is primarily attributable to an increase in gross sales of
certain restaurant Properties requiring the payment of contingent rent.
In addition, during 1997, 1996 and 1995, the Partnership earned
$100,816, $26,496 and $22,386, respectively, in interest and other income. The
increase in interest and other income during 1997, was partially attributable to
the interest earned on the net sales proceeds relating to the sales of the
Properties in Chicago, Illinois; Bradenton, Florida; Kissimmee, Florida;
Roswell, Georgia and Mason City, Iowa temporarily invested in short-term highly
liquid investments pending reinvestment of such amounts in additional Properties
or the use of such amounts for other Partnership purposes. In addition, interest
and other income increased by approximately $33,700 during 1997, as a result of
the interest earned on the mortgage note receivable accepted in connection with
the sale of the Property in Roswell, Georgia, in June 1997. The increase in
interest and other income during 1997, was also attributable to the Partnership
recognizing $15,000 in other income due to the fact that the purchase and sale
agreement between the Partnership and a third party for the Po Folks Property
located in Hagerstown, Maryland, was terminated. Based on the agreement, all
deposits received in connection with the purchase and sale agreement were
retained as other income by the Partnership due to the termination of the
agreement.
The Partnership recognized a loss of $148,170 during the year ended
December 31, 1997 and income of $11,740 and $22,015 for the years ended December
31, 1996 and 1995, respectively, attributable to net income and net loss earned
by unconsolidated joint ventures in which the Partnership is a co-venturer. The
decrease in net income earned by joint ventures is partially attributable to the
fact that, during July 1997, the operator of the Property owned by Titusville
Joint Venture vacated the Property and ceased operations. In conjunction
therewith, Titusville Joint Venture (in which the Partnership owns a 73.4%
interest in the profits and losses of the joint venture) established an
allowance for doubtful accounts of approximately $27,000 during 1997. No such
allowance was established during 1996. In addition, the joint venture recorded
real estate tax expenses of approximately $16,600 during 1997. No such real
estate taxes were incurred during 1996. The joint venture intends to pursue
collection of these amounts from the former tenant and will recognize such
amounts as income if collected. In addition, during 1997, the joint venture
established an allowance for loss on land and building for its Property in
Titusville, Florida, for approximately $147,000. The allowance represents the
difference between the Property's carrying value at December 31, 1997, and the
estimated net realizable value of the Property. In addition, the joint venture
wrote off unamortized lease costs of $23,500 in 1997 due to the tenant vacating
the Property. Titusville Joint Venture is currently seeking either a replacement
tenant or purchaser for this Property. The decrease during 1997, as compared to
1996, was partially offset by an increase in net income earned by joint ventures
due to the fact that in July 1997, the Partnership reinvested the majority of
the net sales proceeds it received from the sale of the Property in Kissimmee,
Florida, in an IHOP Property located in Englewood, Colorado, as
tenants-in-common with an affiliate of the General Partners. The decrease in net
income earned during 1996, as compared to 1995, is primarily attributable to the
receipt by Titusville Joint Venture of bankruptcy proceeds relating to the
former tenant during 1995. These amounts had previously been written off;
therefore, they were recognized as income when received, during 1995.
11
<PAGE>
During the years ended December 31, 1997, 1996 and 1995, one lessee of
the Partnership and its consolidated joint venture, Golden Corral Corporation,
contributed more than ten percent of the Partnership's total rental income
(including rental income from the Partnership's consolidated joint venture and
the Partnership's share of the rental income from one Property owned by an
unconsolidated joint venture and two Properties owned with affiliates as
tenants-in-common). As of December 31, 1997, Golden Corral Corporation was the
lessee under leases relating to six restaurants. It is anticipated that, based
on the minimum rental payments required by the leases, this lessee will continue
to contribute more than ten percent 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, six Restaurant Chains, Golden Corral,
Denny's, Perkins, Pizza Hut, KFC and Taco Bell, each accounted for more than ten
percent of the Partnership's total rental income (including rental income from
the Partnership's consolidated joint venture and the Partnership's share of the
rental income from one Property owned by an unconsolidated joint venture and two
Properties owned with affiliates as tenants-in-common). In subsequent years, it
is anticipated that Golden Corral, Denny's, Pizza Hut, KFC and Taco Bell each
will continue to account for more than ten percent of total rental income to
which the Partnership is entitled under the terms of the leases. Any failure of
Golden Corral Corporation or any of these Restaurant Chains could materially
affect the Partnership's income.
Operating expenses, including depreciation and amortization expense,
were $626,431, $638,140 and $667,876 for the years ended December 31, 1997, 1996
and 1995, respectively. The decrease in operating expenses during 1997, as
compared to 1996, was partially attributable to a decrease of approximately
$56,600 in depreciation expense as a result of the sales of Properties in 1997,
as described above in "Liquidity and Capital Resources." In addition, the
decrease during 1996, as compared to 1995, is partially attributable to a
decrease in depreciation expense relating to the Po Folks Property in
Hagerstown, Maryland, due to the Partnership establishing an allowance for loss
on land and building which represented the difference between the Property's
carrying value at December 31, 1995, and the estimated net realizable value of
the Property. This allowance reduced the depreciable basis of the Property.
The decrease in operating expenses during 1997, as compared to 1996, is
partially attributable to, and the decrease during 1996, as compared to 1995, is
partially offset by, the fact that during 1996, the Partnership recorded
approximately $15,000, relating to legal fees associated with the tenant of the
Property in Chicago, Illinois, filing bankruptcy. The Partnership sold this
Property in January 1997, as described above in "Liquidity and Capital
Resources." The decrease in operating expenses during 1997, as compared to 1996,
is also attributable to a decrease in accounting and administrative expenses
associated with operating the Partnership and its Properties.
The decrease in operating expenses during 1997, as compared to 1996, is
partially offset by an increase in operating expenses due to the fact that
during 1997 the Partnership recognized real estate tax expense of approximately
$40,200 and bad debt expense of approximately $32,400, relating to the Denny's
and Po Folks Properties in Hagerstown, Maryland. These amounts relate to prior
year amounts due from the former tenant that the current tenant of this Property
had agreed to pay, as described above in "Liquidity and Capital Resources."
However, the Partnership recorded these amounts as expenses during 1997, due to
the fact that payment of these amounts by the current tenant now appears
doubtful. The General Partners intend to pursue collection of past due amounts
relating to this Property and will recognize any such amounts as income if
collected. The decrease in operating expenses during 1996, as compared to 1995,
was partially attributable to the fact that during 1996, the Partnership did not
record real estate tax expense relating to the Denny's Property and Po Folks
Property in Hagerstown, Maryland, as described above. The Partnership recorded
such expenses during 1995. As a result of the former tenant of the Po Folks
Property in Hagerstown, Maryland, defaulting under the terms of its lease in
February 1995, the Partnership expects to continue to incur real estate tax
expense and insurance expense until the Property is sold or leased to a new
tenant.
In addition, the decrease in operating expenses during 1996, as
compared to 1995, is partially offset by an increase in accounting and
administrative expenses associated with operating the Partnership and its
Properties and an increase in insurance expense as a result of the General
Partners' obtaining contingent liability and property coverage for the
Partnership beginning in May 1995.
As a result of the sales of the five Properties during 1997, and the
sale of the parcel of land in Plant City, Florida, as described above in
"Liquidity and Capital Resources," the Partnership recognized gains on sale of
land and buildings totalling $1,027,590 during the year ended December 31, 1997.
No Properties were sold during 1996 or 1995. In addition, during the years ended
December 31, 1997 and 1995, the Partnership recorded an allowance
12
<PAGE>
for loss on land and building of $32,819 and $207,844, respectively, relating to
the Po Folks Property in Hagerstown, Maryland. The allowance represented the
difference between the carrying value of the Property at December 31, 1997 and
1995, and the net realizable value of the Property based on anticipated sales
prices at December 31, 1997 and 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 its current or future results of
operations or financial position.
The Partnership's leases as of December 31, 1997, are triple-net leases
and, in general, 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.
Item 8. Financial Statements and Supplementary Data
13
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Accountants 15
Financial Statements:
Balance Sheets 16
Statements of Income 17
Statements of Partners' Capital 18
Statements of Cash Flows 19
Notes to Financial Statements 21
14
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund III, Ltd.
We have audited the financial statements and the financial statement schedules
of CNL Income Fund III, Ltd. (a Florida limited partnership) listed in Item
14(a) of this Form 10-K. 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 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CNL Income Fund III, Ltd. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
/s/ Coopers & Lybrand, L.L.P.
- -------------------------------
Orlando, Florida
January 31, 1998
15
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
ASSETS 1997 1996
------ ----------- --------
Land and buildings on operating
leases, less accumulated
depreciation and allowance
for loss on land and
building $14,635,583 $16,483,532
Net investment in direct
financing leases 926,862 938,918
Investment in joint ventures 1,179,762 643,912
Mortgage note receivable 681,687 -
Cash and cash equivalents 493,118 57,751
Restricted cash 251,879 -
Receivables, less allowance for
doubtful accounts of $154,469
and $70,142 102,420 321,831
Prepaid expenses 14,361 6,898
Lease costs, less accumulated
amortization of $2,762 and
$2,162 9,238 9,838
Accrued rental income, less
allowance for doubtful accounts
of $15,384 in 1997 154,738 114,738
Other assets 29,354 31,489
----------- -----------
$18,479,002 $18,608,907
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 5,219 $ 14,183
Accrued and escrowed real
estate taxes payable 11,897 72,827
Distributions payable 594,000 594,000
Due to related parties 97,388 102,859
Rents paid in advance and deposits 20,745 88,325
----------- -----------
Total liabilities 729,249 872,194
Minority interest 138,617 141,412
Partners' capital 17,611,136 17,595,301
----------- -----------
$18,479,002 $18,608,907
=========== ===========
See accompanying notes to financial statements.
16
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- -------
<S> <C>
Revenues:
Rental income from operating
leases $1,859,911 $2,184,460 $2,115,798
Earned income from direct
financing leases 70,575 89,390 72,202
Contingent rental income 157,648 157,993 143,039
Interest and other income 100,816 26,496 22,386
---------- ---------- ----------
2,188,950 2,458,339 2,353,425
---------- ---------- ----------
Expenses:
General operating and admini-
strative 140,886 147,840 131,071
Professional services 27,314 50,064 28,758
Bad debt expense 32,360 924 11,418
Real estate taxes 47,165 1,973 50,815
State and other taxes 9,924 11,973 11,322
Depreciation and amortization 368,782 425,366 434,492
---------- ---------- ----------
626,431 638,140 667,876
---------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings (Loss)
of Unconsolidated Joint Ventures,
Gain on Sale of Land and
Buildings and Provision for
Loss on Land and Building 1,562,519 1,820,199 1,685,549
Minority Interest in Income of
Consolidated Joint Ventures (17,285) (17,282) (17,205)
Equity in Earnings (Loss) of
Unconsolidated Joint Venture (148,170) 11,740 22,015
Gain on Sale of Land and Buildings 1,027,590 - -
Provision for Loss on Land and
Building (32,819) - (207,844)
---------- ---------- ----------
Net Income $2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Allocation of Net Income:
General partners $ 18,306 $ 18,147 $ 13,906
Limited partners 2,373,529 1,796,510 1,468,609
---------- ---------- ----------
$2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Net Income Per Limited Partner
Unit $ 47.47 $ 35.93 $ 29.37
========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- --------
<S> <C>
Balance, December 31, 1994 $161,500 $127,752 $25,000,000 $(16,021,640) $12,647,415 $(2,864,898) $19,050,129
Distributions to limited
partners ($47.52 per
limited partner unit) - - - (2,376,000) - - (2,376,000)
Net income - 13,906 - - 1,468,609 - 1,482,515
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31, 1995 161,500 141,658 25,000,000 (18,397,640) 14,116,024 (2,864,898) 18,156,644
Distributions to limited
partners ($47.52 per
limited partner unit) - - - (2,376,000) - - (2,376,000)
Net income - 18,147 - - 1,796,510 - 1,814,657
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31, 1996 161,500 159,805 25,000,000 (20,773,640) 15,912,534 (2,864,898) 17,595,301
Distributions to limited
partners ($47.52 per
limited partner unit) - - - (2,376,000) - - (2,376,000)
Net income - 18,306 - - 2,373,529 - 2,391,835
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31, 1997 $161,500 $178,111 $25,000,000 $(23,149,640) $18,286,063 $(2,864,898) $17,611,136
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ----------- --------
<S> <C>
Increase (Decrease) in Cash and
Cash Equivalents:
Cash Flows From Operating
Activities:
Cash received from
tenants $ 2,268,568 $ 2,226,794 $ 2,340,729
Distributions from
unconsolidated joint
ventures 19,647 31,670 47,499
Cash paid for expenses (325,067) (175,148) (198,797)
Interest received 58,541 8,438 14,006
----------- ----------- -----------
Net cash provided
by operating
activities 2,021,689 2,091,754 2,203,437
----------- ----------- -----------
Cash Flows From Investing
Activities:
Proceeds from sale of
land and buildings 3,023,357 - -
Deposit received on sale
of land parcel - 51,400 -
Additions to land and
buildings (1,272,960) - -
Investment in joint
ventures (703,667) - -
Collections on note
receivable 6,270 - -
Increase in restricted
cash (245,377) - -
Decrease (increase) in
other assets 2,135 (2,135) -
----------- ----------- ----------
Net cash provided
by investing
activities 809,758 49,265 -
----------- ----------- ----------
Cash Flows From Financing
Activities:
Proceeds from loans from
corporate general partner 117,000 661,400 -
Repayment of loans from
corporate general partner (117,000) (661,400) -
Distributions to holder
of minority interest (20,080) (20,082) (19,997)
Distributions to
limited partners (2,376,000) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in
financing
activities (2,396,080) (2,396,082) (2,395,997)
----------- ----------- -----------
Net Increase (Decrease) in
Cash and Cash Equivalents 435,367 (255,063) (192,560)
Cash and Cash Equivalents at
Beginning of Year 57,751 312,814 505,374
----------- ----------- -----------
Cash and Cash Equivalents at
End of Year $ 493,118 $ 57,751 $ 312,814
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ----------- --------
<S> <C>
Reconciliation of Net Income
to Net Cash Provided by
Operating Activities:
Net income $ 2,391,835 $ 1,814,657 $ 1,482,515
----------- ----------- -----------
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 368,182 424,766 433,892
Amortization 600 600 600
Minority interest in
income of consolidated
joint venture 17,285 17,282 17,205
Equity in earnings of
unconsolidated joint
ventures, net of
distributions 167,817 19,930 25,484
Gain on sale of land
and buildings (1,027,590) - -
Provision for loss on
land and building 32,819 - 207,844
Decrease (increase) in
receivables 214,793 (215,193) 9,339
Decrease in net investment
in direct financing
leases 12,056 7,331 5,358
Increase in prepaid
expenses (7,463) (1,297) (1,778)
Decrease (increase) in
accrued rental income (40,000) (32,667) 7,161
Decrease in accounts
payable and accrued
expenses (71,844) (4,732) (21,689)
Increase (decrease) in
due to related parties (20,621) 48,944 51,578
Increase (decrease) in
rents paid in advance
and deposits (16,180) 12,133 (14,072)
----------- ----------- -----------
Total adjustments (370,146) 277,097 720,922
----------- ----------- -----------
Net Cash Provided by Operating
Activities $ 2,021,689 $ 2,091,754 $ 2,203,437
=========== =========== ===========
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Mortgage note accepted as
consideration in sale of
land and building $ 685,000 $ - $ -
=========== =========== ==========
Deferred real estate dis-
position fee incurred and
unpaid at December 31 $ 15,150 $ - $ -
=========== =========== ==========
Distributions declared and
unpaid at December 31 $ 594,000 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund III, 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 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 either the direct financing or the operating methods. Such
methods are described below:
Direct financing method - The leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset) (Note 4). Unearned income is deferred and
amortized to income over the lease terms so as to produce a
constant periodic rate of return on the Partnership's net
investment in the leases.
Operating method - Land and building leases accounted for
using the operating method 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
21
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
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.
When the properties are sold, the related cost and accumulated
depreciation for operating leases and the net investment for direct
financing leases, 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 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. Although the general partners have
made their best estimate of these factors based on current conditions,
it is reasonably possible that changes could occur in the near term
which could adversely affect the general partners' estimate of net cash
flows expected to be generated from its properties and the need for
asset impairment write-downs. If an impairment is indicated, the assets
are adjusted to their fair value.
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 allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 69.07%
interest in Tuscawilla Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partners'
proportionate share of the
22
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been
eliminated.
The Partnership's investment in Titusville Joint Venture and a property
in each of Englewood, Colorado and Miami, Florida, held as
tenants-in-common with affiliates, is 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 - Brokerage fees associated with negotiating a new lease
are amortized over the term of the new lease 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.
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.
23
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
Use of Estimates - The general partners of the Partnership have made a
number of estimates 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 generally are classified as
operating leases, however, a few of the leases have been classified as
direct financing leases. For the leases classified as direct financing
leases, the building portions of the property leases are accounted for
as direct financing leases while the land portion of these leases are
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
four 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.
24
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at
December 31:
1997 1996
----------- -------
Land $ 7,325,960 $ 7,835,279
Buildings 10,891,910 12,467,020
----------- -----------
18,217,870 20,302,299
Less accumulated
depreciation (3,341,624) (3,610,923)
----------- -----------
14,876,246 16,691,376
Less allowance for loss
on land and building (240,663) (207,844)
----------- -----------
$14,635,583 $16,483,532
=========== ===========
In 1995, the Partnership recorded an allowance for loss on land and
building in the amount of $207,844 for financial reporting purposes for
the Po Folks property in Hagerstown, Maryland. In addition, during
1997, the Partnership increased the allowance for loss on land and
building by an additional $32,819 for such property. The allowance
represents the difference between (i) the property's carrying value at
December 31, 1997 and 1995, and (ii) the estimated net realizable value
of the property based on the anticipated sales price relating to this
property as of such dates.
In January 1997, the Partnership sold its property in Chicago,
Illinois, to a third party, for $505,000 and received net sales
proceeds of $496,418, resulting in a gain of $3,827 for financial
reporting purposes. The Partnership used $452,000 of the net sales
proceeds to pay liabilities of the Partnership, including quarterly
distributions to the limited partners. The balance of the funds were
used to pay past due real estate taxes relating to this property
incurred by the Partnership as a result of the former tenant declaring
bankruptcy.
In March 1997, the Partnership sold its property in Bradenton, Florida,
to the tenant, for $1,332,154 and received net sales proceeds (net of
$4,330 which represents real estate tax amounts due from tenant) of
$1,305,671, resulting in a gain of $361,368 for financial reporting
purposes. This property was originally acquired by the Partnership in
June 1988 and had a cost of approximately $1,080,500, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $229,500 in
25
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases - Continued:
excess of its original purchase price. In June 1997, the Partnership
reinvested approximately $1,276,000 of the net sales proceeds received
in a property in Fayetteville, North Carolina.
In April 1997, the Partnership sold its property in Kissimmee, Florida,
to a third party, for $692,400 and received net sales proceeds of
$673,159, resulting in a gain of $271,929 for financial reporting
purposes. This property was originally acquired by the Partnership in
March 1988 and had a cost of approximately $474,800, excluding
acquisition fees and miscellaneous acquisition expense; therefore, the
Partnership sold the property for approximately $196,400 in excess of
its original purchase price. In July 1997, the Partnership reinvested
approximately $511,700 of these net sales proceeds in a property
located in Englewood, Colorado, as tenants-in-common with an affiliate
of the general partners (see Note 5).
In April 1996, the Partnership received $51,400 as partial settlement
in a right of way taking relating to a parcel of land of the property
in Plant City, Florida. In April 1997, the Partnership received the
remaining proceeds of $73,600 finalizing the sale of the land parcel.
In connection therewith, the Partnership recognized a gain of $94,320
for financial reporting purposes.
In addition, in June 1997, the Partnership sold its property in
Roswell, Georgia, to a third party for $985,000 and received net sales
proceeds of $942,981, resulting in a gain of $237,608 for financial
reporting purposes. This property was originally acquired by the
Partnership in June 1988 and had a cost of approximately $775,200,
excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the property for approximately $167,800
in excess of its original purchase price. In connection therewith, the
Partnership received $257,981 in cash and accepted the remaining sales
proceeds in the form of a promissory note in the principal sum of
$685,000 (see Note 6). In addition, in December 1997, the Partnership
reinvested approximately $192,000 of the net sales proceeds in a
property located in Miami, Florida, as tenants-in-common, with an
affiliate of the general partners (see Note 5).
26
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases - Continued:
In October 1997, the Partnership sold its property in Mason City, Iowa,
to the tenant for $218,790 and received net sales proceeds (net of $511
which represents prorated rent returned to the tenant) of $216,528,
resulting in a gain of $58,538 for financial reporting purposes. This
property was originally acquired by the Partnership in March 1988 and
had a cost of approximately $190,300, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $26,700 in excess of its original purchase
price.
Some 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, 1997, 1996 and 1995, the Partnership
recognized $40,000, $32,667 and $27,669, respectively, of such rental
income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
1998 $ 1,534,701
1999 1,547,630
2000 1,547,630
2001 1,552,155
2002 1,529,200
Thereafter 8,374,163
-----------
$16,085,479
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 term. 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 tenants' gross sales.
27
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
4. Net Investment in Direct Financing Leases:
The following lists the components of net investment in direct
financing leases at December 31:
1997 1996
----------- --------
Minimum lease payments
receivable $ 2,191,519 $ 2,340,192
Estimated residual value 239,432 239,432
Less unearned income (1,504,089) (1,640,706)
----------- -----------
Net investment in direct
financing leases $ 926,862 $ 938,918
=========== ===========
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 1997:
1998 $ 148,672
1999 148,672
2000 148,672
2001 148,672
2002 148,672
Thereafter 1,448,159
----------
$2,191,519
The above table does not include future minimum lease payments for
renewal periods or for contingent rental payments that may become due
in future periods (see Note 3).
5. Investment in Joint Ventures:
The Partnership has a 73.4% interest in the profits and losses of
Titusville Joint Venture which is accounted for using the equity
method. The remaining interest in the Titusville Joint Venture is held
by an affiliate of the Partnership which has the same general partners.
In July 1997, the Partnership acquired a property in Englewood
Colorado, as tenants-in-common with an affiliate 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, 1997, the Partnership
owned a 32.77% interest in this property.
28
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
5. Investment in Joint Ventures - Continued:
In addition, in December 1997, the Partnership acquired a property in
Miami, Florida, 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
affiliates, and amounts relating to its investment are included in
investment in joint ventures. As of December 31, 1997, the Partnership
owned a 9.84% interest in this property.
Titusville Joint Venture and the Partnership and affiliates, as
tenants-in-common in two separate tenancy-in-common arrangements, each
own and lease one property to operators of national fast-food or
family-style restaurants. The following presents the joint venture's
condensed financial information at December 31:
1997 1996
-------- ------
Land and building on
operating leases, less
accumulated depreciation
and allowance for loss
on land and building $3,152,962 $822,072
Net investment in direct
financing leases 1,003,680 -
Cash 16,481 9,677
Receivables - 11,233
Accrued rental income 11,621 17,700
Other assets 1,480 29,631
Liabilities 18,722 9,665
Partners' capital 4,167,502 880,648
Revenues 82,837 51,778
Net income (loss) (157,912) 15,995
The Partnership recognized a loss totalling $148,170 for the year ended
December 31, 1997 and income of $11,740 and $22,015 for the years ended
December 31, 1996 and 1995, respectively, from these joint ventures.
29
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
6. Mortgage Note Receivable:
In connection with the sale of the property in Roswell, Georgia, in
June 1997, the Partnership accepted a promissory note in the principal
sum of $685,000 collateralized by a mortgage on the property. The
promissory note bears interest at a rate of nine percent per annum and
is being collected in 36 monthly installments of $6,163, including
interest, with a balloon payment of $642,798 due in July 2000.
The mortgage note receivable consisted of the following at December 31:
1997 1996
--------- -------
Principal balance $678,730 $ -
Accrued interest
receivable 2,957 -
-------- -------
$681,687 $ -
======== =======
The general partners believe that the estimated fair value of the
mortgage note receivable at December 31, 1997, approximates the
outstanding principal amount based on estimated current rates at which
similar loans would be made to borrowers with similar credit and for
similar maturities.
7. Receivables:
During 1996, the Partnership terminated its lease with the former
tenant of its properties in Hagerstown, Maryland. In connection
therewith, the Partnership wrote off approximately $238,300 included in
receivables relating to both the Denny's and Po Folks properties in
Hagerstown, Maryland, and the related allowance for doubtful accounts.
In October 1996, the Partnership entered into a lease agreement with a
new tenant to operate the Denny's restaurant located on the
Partnership's property and accepted a promissory note from the current
tenant whereby $25,000, which had been included in receivables for past
due rents from the former tenant, was converted to a loan receivable
held by the Partnership to facilitate the asset purchase agreement
between the former and current tenants. The promissory note bears
interest of ten percent per annum and is being collected in 36 equal
monthly installments of $807 and commenced in October 1996. Receivables
at December 31, 1997 and 1996, include $16,318 and $23,240,
respectively, including accrued interest of $164 and $50, respectively,
relating to the promissory note.
30
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
8. Restricted Cash:
As of December 31, 1997, net sales proceeds of $245,377 from the sale
of the property in Bradenton, Florida and Mason City, Iowa, plus
accrued interest of $6,502, were being held in interest-bearing escrow
accounts pending the release of funds by the escrow agent to acquire
additional properties on behalf of the Partnership.
9. 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, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of
$2,376,000. No distributions have been made to the general partners to
date.
31
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
10. 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>
1997 1996 1995
---------- ---------- -------
<S> <C>
Net income for financial
reporting purposes $2,391,835 $1,814,657 $1,482,515
Depreciation for tax
reporting purposes
in excess of depreciation
for financial reporting
purposes (21,782) (9,754) (628)
Allowance for loss on
land and building 32,819 - 207,844
Direct financing leases
recorded as operating
leases for tax reporting
purposes 12,056 7,330 5,358
Gain on sale of land for
tax reporting purposes - 20,724 -
Gain on sale of land and
buildings for financial
reporting purposes in
excess of gain on sale
for tax reporting
purposes (689,281) - -
Equity in earnings of joint
ventures for tax reporting
purposes in excess of (less
than) equity in earnings of
joint ventures for
financial reporting
purposes 140,707 (1,329) (1,769)
Allowance for doubtful
accounts 84,326 (283,135) 42,770
Accrued rental income (40,000) (32,667) 7,161
Rents paid in advance (16,680) 12,133 (14,572)
Minority interest in
timing differences
of consolidated joint
venture (133) (162) (106)
---------- ---------- ----------
Net income for federal
income tax purposes $1,893,867 $1,527,797 $1,728,573
========== ========== ==========
</TABLE>
32
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
11. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Group, Inc., the parent company of
CNL Securities Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr.
is director and chief executive officer of CNL Securities Corp. and 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, is director and president of CNL Securities
Corp., is director, vice chairman of the board of directors and
treasurer of CNL Fund Advisors, Inc. and served as president of CNL
Fund Advisors, Inc through October 1997.
During the years ended December 31, 1997, 1996 and 1995, certain
Affiliates 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 Affiliates an annual,
noncumulative, subordinated 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 property management fees
will be due or payable for such year. As a result of such threshold, no
property management fees were incurred during the years ended December
31, 1997, 1996 and 1995.
Certain Affiliates are also 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- percent of the sales
price if the Affiliates provide a substantial amount of services in
connection with the sales. 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. The payment of the real estate
disposition fee is subordinated to receipt by the limited partners of
their aggregate 10% Preferred Return, plus their adjusted capital
contributions. During the year ended
33
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
11. Related Party Transactions - Continued:
December 31, 1997, the Partnership incurred $15,150 in deferred,
subordinated real estate disposition fees as a result of the
Partnership's sale of the Property in Chicago, Illinois. No deferred,
subordinated real estate disposition fees were incurred for the years
ended December 31, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $87,056, $85,906 and $78,597
for the years ended December 31, 1997, 1996 and 1995, respectively, for
such services.
The due to related parties consisted of the following at December 31:
1997 1996
-------- ------
Due to Affiliates:
Expenditures incurred on
behalf of the Partnership $ 38,492 $ 56,942
Accounting and administrative
services 43,746 45,917
Deferred, subordinated real
estate disposition fee 15,150 -
-------- -------
$ 97,388 $102,859
======== ========
12. Concentration of Credit Risk:
For the years ended December 31, 1997, 1996 and 1995, rental income
from Golden Corral Corporation was $474,553, $490,196 and $470,952,
respectively, representing more than ten percent of the Partnership's
total rental and earned income (including the Partnership's share of
rental and earned income from the joint venture and the properties held
as tenants-in-common with affiliates).
34
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
12. Concentration of Credit Risk - Continued:
In addition, the following schedule presents total rental and earned
income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental and earned income
(including the Partnership's share of rental and earned income from the
joint venture and the properties held as tenants-in-common with
affiliates) for at least one of the years ended December 31:
1997 1996 1995
-------- -------- ------
Golden Corral
Family Steakhouse
Restaurants $474,553 $490,196 $470,952
KFC 261,415 254,646 279,075
Pizza Hut 255,055 292,795 289,161
Taco Bell 250,140 254,395 260,119
Denny's 229,537 355,123 254,043
Perkins 154,819 276,114 276,114
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. However, the general partners believe that the risk
of such a default is reduced due to the essential or important nature
of these properties for the on-going operations of the lessees.
13. Subsequent Event:
In January 1998, the Partnership sold its property in Fernandina Beach,
Florida, to the tenant, for $730,000 and received net sales proceeds
(net of $3,018 which represents prorated rent collected at closing) of
$724,672, resulting in a gain of approximately $264,000 for financial
reporting purposes.
In addition, in January 1998, the Partnership sold its property in
Daytona Beach, Florida to the tenant, for $1,050,000 and received net
sales proceeds (net of $1,975 which represents prorated rent returned
to the tenant) of $1,007,001, resulting in a gain of approximately
$299,300 for financial reporting purposes.
35
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
13. Subsequent Event - Continued:
In January 1998, the Partnership used the net sales proceeds from the
sale of the property in Kissimmee, Florida, to acquire a property in
Overland Park, Kansas, as tenants-in-common with affiliates of the
general partners. In connection therewith, the Partnership contributed
approximately $415,600 for a 25.84% interest in such property.
36
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL Fund Advisors, Inc., CNL Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 51, is a principal stockholder of CNL Group,
Inc., a diversified real estate company, and has served as its Chairman of the
Board of Directors, director and Chief Executive Officer since its formation in
1980. CNL Group, Inc. is the parent company of CNL Securities Corp., CNL
Investment Company, CNL Fund Advisors, Inc., CNL Real Estate Advisors, Inc. and
prior to its merger with CNL Fund Advisors, Inc., effective January 1, 1996, CNL
Income Fund Advisors, Inc. Mr. Seneff is Chief Executive Officer, and has been a
director and registered principal of CNL Securities Corp., which served as the
managing dealer in the Partnership's offering of Units, since its formation in
1979. Mr. Seneff also has held the position of President and a director of CNL
Management Company, a registered investment advisor, since its formation in
1976, has served as Chief Executive Officer and Chairman of the Board of CNL
Investment Company, and Chief Executive Officer and Chairman of the Board of
Commercial Net Lease Realty, Inc. since 1992, has served as the Chairman of the
Board and the Chief Executive Officer of CNL Realty Advisors, Inc. since its
inception in 1991 through December 31, 1997, at which time CNL Realty Advisors,
Inc. merged with Commercial Net Lease Realty, Inc., served as Chairman of the
Board and Chief Executive Officer of CNL Income Fund Advisors, Inc. since its
inception in 1994 through December 31, 1995, has served as a director, Chairman
of the Board and Chief Executive Officer of CNL Fund Advisors, Inc. since its
inception in 1994, and has held the position of Chief Executive Officer and a
director of CNL Institutional Advisors, Inc., a registered investment advisor,
since its inception in 1990. In addition, Mr. Seneff has served as a director,
Chairman of the Board and Chief Executive Officer of CNL American Properties
Fund, Inc. since 1994, and has served as a director, Chairman of the Board and
Chief Executive Officer of CNL American Realty Fund, Inc. since 1996 and of CNL
Real Estate Advisors, Inc. since January 1997. Mr. Seneff previously served on
the Florida State Commission on Ethics and is a former member and past Chairman
of the State of Florida Investment Advisory Council, which recommends to the
Florida Board of Administration investments for various Florida employee
retirement funds. The Florida Board of Administration, Florida's principal
investment advisory and money management agency, oversees the investment of more
than $60 billion of retirement funds. Since 1971, Mr. Seneff has been active in
the acquisition, development and management of real estate projects and,
directly or through an affiliated entity, has served as a general partner or
joint venturer in over 100 real estate ventures involved in the financing,
acquisition, construction and rental of office buildings, apartment complexes,
restaurants, hotels and other real estate. Included in these real estate
ventures are approximately 65 privately offered real estate limited partnerships
in which Mr. Seneff, directly or through an affiliated entity, serves or has
served as a general partner. Also included are CNL Income Fund, Ltd., CNL Income
Fund II, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income
Fund VI, Ltd., CNL Income Fund VII, Ltd., CNL Income Fund VIII, Ltd., CNL Income
Fund IX, Ltd., CNL Income Fund X, Ltd., CNL Income Fund XI, Ltd., CNL Income
Fund XII, Ltd., CNL Income Fund XIII, Ltd., CNL Income Fund XIV, Ltd., CNL
Income Fund XV, Ltd., CNL Income Fund XVI, Ltd., CNL Income Fund XVII, Ltd. and
CNL Income Fund XVIII, Ltd. (the "CNL Income Fund Partnerships"), public real
estate limited partnerships with investment objectives similar to those of the
Partnership, in which Mr. Seneff serves as a general partner. Mr. Seneff
received his degree in Business Administration from Florida State University in
1968.
37
<PAGE>
Robert A. Bourne, age 50, is President and Treasurer of CNL Group,
Inc., President, a director and a registered principal of CNL Securities Corp.,
President and a director of CNL Investment Company, and prior to its merger with
CNL Fund Advisors, Inc., effective January 1, 1996, CNL Income Fund Advisors,
Inc., and Chief Investment Officer, Vice Chairman of the Board of Directors, a
director and Treasurer of CNL Institutional Advisors, Inc., a registered
investment advisor. Mr. Bourne served as President of CNL Institutional
Advisors, Inc. from the date of its inception through June 30, 1997 and served
as President of CNL Fund Advisors, Inc. from the date of its inception through
October 1997. Mr. Bourne currently serves as Vice Chairman of the Board of
Directors and as Treasurer of CNL Fund Advisors, Inc. Mr. Bourne also has served
as a director since 1992, as President from July 1992 to February 1996, as
Secretary and Treasurer from February 1996 through December 1997, and since
February 1996, served as Vice Chairman of the Board of Directors of Commercial
Net Lease Realty, Inc. In addition, Mr. Bourne has served as a director since
its inception in 1991, as President from 1991 to February 1996, as Secretary
from February 1996 to July 1996, and since February 1996, served as Treasurer
and Vice Chairman of CNL Realty Advisors, Inc. through December 31, 1997, at
which time CNL Realty Advisors, Inc. merged with Commercial Net Lease Realty,
Inc. In addition, Mr. Bourne has served as President and a director of CNL
American Properties Fund, Inc. since 1994, and has served as President and a
director of CNL American Realty Fund, Inc. since 1996 and of CNL Real Estate
Advisors, Inc. since January 1997. Upon graduation from Florida State University
in 1970, where he received a B.A. in Accounting, with honors, Mr. Bourne worked
as a certified public accountant and, from September 1971 through December 1978,
was employed by Coopers & Lybrand, Certified Public Accountants, where he held
the position of tax manager beginning in 1975. From January 1979 until June
1982, Mr. Bourne was a partner in the accounting firm of Cross & Bourne and from
July 1982 through January 1987, he was a partner in the accounting firm of
Bourne & Rose, P.A., Certified Public Accountants. Mr. Bourne, who joined CNL
Securities Corp. in 1979, has participated as a general partner or joint
venturer in over 100 real estate ventures involved in the financing,
acquisition, construction and rental of office buildings, apartment complexes,
restaurants, hotels and other real estate. Included in these real estate
ventures are approximately 64 privately offered real estate limited partnerships
in which Mr. Bourne, directly or through an affiliated entity, serves or has
served as a general partner. Also included are the CNL Income Fund Partnerships,
public real estate limited partnerships with investment objectives similar to
those of the Partnership, in which Mr. Bourne serves as a general partner.
CNL Realty Corporation is a corporation organized on November 26, 1985,
under the laws of the State of Florida. Its sole directors and shareholders are
James M. Seneff, Jr. and Robert A. Bourne, the individual General Partners. CNL
Realty Corporation was organized to serve as the corporate general partner of
real estate limited partnerships, such as the Partnership, organized by one or
both of the individual General Partners. CNL Realty Corporation currently serves
as the corporate general partner of the CNL Income Fund Partnerships.
CNL Fund Advisors, Inc. provides certain management services in
connection with the Partnership and its Properties. CNL Fund Advisors, Inc. is a
corporation organized in 1994 under the laws of the State of Florida, and its
principal office is located at 400 East South Street, Orlando, Florida 32801.
CNL Fund Advisors, Inc. is a wholly owned subsidiary of CNL Group, Inc., a
diversified real estate company, and was organized to perform property
acquisition, property management and other services.
CNL Group, Inc., which is the parent company of CNL Fund Advisors,
Inc., was organized in 1980 under the laws of the State of Florida. CNL Group,
Inc. is a diversified real estate company which provides a wide range of real
estate, development and financial services to companies in the United States
through the activities of its subsidiaries. These activities are primarily
focused on the franchised restaurant and hospitality industries. James M.
Seneff, Jr., an individual General Partner of the Partnership, is the Chairman
of the Board, Chief Executive Officer, and a director of CNL Group, Inc. Mr.
Seneff and his wife own all of the outstanding shares of CNL Group, Inc.
The following persons serve as operating officers of CNL Group, Inc. or
its affiliates or subsidiaries in the discretion of the Boards of Directors of
those companies, but, except as specifically indicated, do not serve as members
of the Boards of Directors of those entities. The Boards of Directors have the
responsibility for creating and implementing the policies of CNL Group, Inc. and
its affiliated companies.
38
<PAGE>
Curtis B. McWilliams, age 42, joined CNL Fund Advisors, Inc. in April
1997 and currently serves as President of CNL Fund Advisors, Inc. and as
Executive Vice President of CNL American Properties Fund, Inc. In addition, Mr.
McWilliams serves as Executive Vice President of CNL Group, Inc. and as
President of CNL Financial Services, Inc. and certain other subsidiaries of CNL
Group, Inc. From September 1983 through March 1997, Mr. McWilliams was employed
by Merrill Lynch. From January 1991 to August 1996, Mr. McWilliams was a
managing director in the corporate banking group of Merrill Lynch's investment
banking division. During this time, he was a senior relationship manager with
Merrill Lynch and as such was responsible for a number of the firm's larger
clients. From February 1990 to February 1993, he also served as co-head of one
of the Industrial Banking Groups within Merrill Lynch's investment banking
division and had administrative responsibility for a group of bankers and client
relationships, including the firm's transportation group. From September 1996 to
March 1997, Mr. McWilliams served as Chairman of Merrill Lynch's Private
Advisory Services. Mr. McWilliams received a B.S.E. in Chemical Engineering from
Princeton University in 1977 and a Masters of Business Administration with a
concentration in finance from the University of Chicago in 1983.
John T. Walker, age 39, is the Chief Operating Officer and Executive
Vice President of CNL Fund Advisors, Inc. and CNL American Properties Fund, Inc.
and serves as Executive Vice President of CNL American Realty Fund, Inc. and CNL
Real Estate Advisors, Inc. Mr. Walker joined CNL Fund Advisors, Inc. in
September 1994, as Senior Vice President, responsible for Research and
Development. From May 1992 to May 1994, he was Executive Vice President for
Finance and Administration and Chief Financial Officer of Z Music, Inc., a cable
television network which was subsequently acquired by Gaylord Entertainment,
where he was responsible for overall financial and administrative management and
planning. From January 1990 through April 1992, Mr. Walker was Chief Financial
Officer of the First Baptist Church in Orlando, Florida. From April 1984 through
December 1989, he was a partner in the accounting firm of Chastang, Ferrell &
Walker, P.A., where he was the partner in charge of audit and consulting
services, and from 1981 to 1984, Mr. Walker was a Senior Consultant/Audit Senior
at Price Waterhouse. Mr. Walker is a Cum Laude graduate of Wake Forest
University with a B.S. in Accountancy and is a certified public accountant.
Lynn E. Rose, age 49, a certified public accountant, has served as
Chief Financial Officer of CNL Group, Inc. since December 1993, has served as
Secretary of CNL Group, Inc. since 1987, and served as Controller of CNL Group,
Inc. from 1987 until December 1993. In addition, Ms. Rose has served as Chief
Financial Officer and Secretary of CNL Securities Corp. since July 1994. She has
served as Chief Operating Officer, Vice President and Secretary of CNL Corporate
Services, Inc. since November 1994. Ms. Rose also has served as Chief Financial
Officer and Secretary of CNL Institutional Advisors, Inc. since its inception in
1990, served as a director and Secretary of CNL Realty Advisors, Inc. since its
inception in 1991 through December 31, 1997, at which time CNL Realty Advisors,
Inc. merged with Commercial Net Lease Realty, Inc., Treasurer of CNL Realty
Advisors, Inc. from 1991 to February 1996, Secretary and Treasurer of Commercial
Net Lease Realty, Inc. from 1992 to February 1996, Secretary of CNL Income Fund
Advisors, Inc. since its inception in 1994 to December 1995, and a director,
Secretary and Treasurer of CNL Fund Advisors, Inc. since 1994 and has served as
a director, Secretary and Treasurer of CNL Real Estate Advisors, Inc. since
January 1997. Ms. Rose also has served as Secretary and Treasurer of CNL
American Properties Fund, Inc. since 1994, and has served as Secretary and
Treasurer of CNL American Realty Fund, Inc. since 1996. Ms. Rose also currently
serves as Secretary for approximately 50 additional corporations. Ms. Rose
oversees the management information services, administration, legal compliance,
accounting, tenant compliance, and reporting for over 300 corporations,
partnerships, and joint ventures. Prior to joining CNL, Ms. Rose was a partner
with Robert A. Bourne in the accounting firm of Bourne & Rose, P.A., Certified
Public Accountants. Ms. Rose holds a B.A. in Sociology from the University of
Central Florida. She was licensed as a certified public accountant in 1979.
39
<PAGE>
Jeanne A. Wall, age 39, has served as Chief Operating Officer of CNL
Investment Company and of CNL Securities Corp. since November 1994 and has
served as Executive Vice President of CNL Investment Company since January 1991.
In 1984, Ms. Wall joined CNL Securities Corp. In 1985, Ms. Wall became Vice
President of CNL Securities Corp., in 1987, she became Senior Vice President and
in July 1997, she became Executive Vice President of CNL Securities Corp. In
this capacity, Ms. Wall serves as national marketing and sales director and
oversees the national marketing plan for the CNL investment programs. In
addition, Ms. Wall oversees product development, partnership administration and
investor services for programs offered through participating brokers, and
corporate communications for CNL Group, Inc. and Affiliates. Ms. Wall also has
served as Senior Vice President of CNL Institutional Advisors, Inc., a
registered investment advisor, from 1990 to 1993, as Vice President of CNL
Realty Advisors, Inc. since its inception in 1991 through 1997, as Vice
President of Commercial Net Lease Realty, Inc. from 1992 through 1997, as
Executive Vice President of CNL Fund Advisors, Inc. since 1994, and as Executive
Vice President of CNL American Properties Fund, Inc. since 1994. In addition,
Ms. Wall has served as Executive Vice President of CNL Real Estate Advisors,
Inc. since January 1997 and as Executive Vice President of CNL American Realty
Fund, Inc. since 1996. Ms. Wall holds a B.A. in Business Administration from
Linfield College and is a registered principal of CNL Securities Corp. Ms. Wall
currently serves as a trustee on the board of the Investment Program Association
and on the Direct Participation Program committee for the National Association
of Securities Dealers (NASD).
Steven D. Shackelford, age 34, has served as Chief Financial Officer of
CNL Fund Advisors, Inc. since September 1996 and as Chief Financial Officer of
CNL American Properties Fund, Inc. since January 1997. Mr. Shackelford joined
CNL Fund Advisors, Inc. in September 1996. From March 1995 to July 1996, he was
a senior manager in the national office of Price Waterhouse where he was
responsible for advising foreign clients seeking to raise capital and a public
listing in the United States. From August 1992 to March 1995, he served as a
manager in the Price Waterhouse, Paris, France office serving several
multinational clients. Mr. Shackelford was an audit staff and audit senior from
1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr. Shackelford
received a B.A. in Accounting, with honors, and a Masters of Business
Administration from Florida State University and is a certified public
accountant.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 13, 1998, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 13, 1998, the beneficial
ownership interests of the General Partners in the Registrant.
<TABLE>
<CAPTION>
Title of Class Name of Partner Percent of Class
<S> <C>
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
----
100%
</TABLE>
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above. There are no arrangements
which at a subsequent date may result in a change in control of the Registrant.
40
<PAGE>
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of
computation and amounts of compensation, fees and distributions paid or payable
by the Partnership to the General Partners and their affiliates for the year
ended December 31, 1997, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
<TABLE>
<CAPTION>
==========================================================================================================================
Type of Amount Incurred
Compensation Method of For the Year
and Recipient Computation Ended December 31, 1997
<S> <C>
Reimbursement to affiliates for Operating expenses are reimbursed Operating expenses incurred on
operating expenses at the lower of cost or 90 percent behalf of the Partnership: $71,681
of the prevailing rate at which
comparable services could have Accounting and administrative
been obtained in the same services: $87,056
geographic area. If the General
Partners or their affiliates loan
funds to the Partnership, the
General Partners or their affiliates
will be reimbursed for the interest
and fees charged to them by
unaffiliated lenders for such loans.
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.
Annual, subordinated property One-half of one percent per year $ - 0 -
management fee to affiliates of Partnership assets under
management (valued at cost),
subordinated to certain minimum returns
to the Limited Partners. The property
management fee will not exceed the
lesser of one percent of gross
operating revenues or competitive fees
for comparable services. 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.
==========================================================================================================================
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================================
Type of Amount Incurred
Compensation Method of For the Year
and Recipient Computation Ended December 31, 1997
<S> <C>
Deferred, subordinated real estate A deferred, subordinated real $15,150
disposition fee payable to estate disposition fee, payable
affiliates upon sale of one or more
Properties, in an amount equal to the
lesser of (i) one-half of a competitive
real estate commission, or (ii) three
percent of the sales price of such
Property or Properties. Payment of such
fee shall be made only if affiliates of
the General Partners provide a
substantial amount of services in
connection with the sale of a Property
or Properties and shall be subordinated
to certain minimum returns to the
Limited Partners. However, if the net
sales proceeds are reinvested in a
replacement property, no such real
estate disposition fee will be incurred
until such replacement property is sold
and the net sales proceeds are
distributed.
General Partners' deferred, sub- A deferred, subordinated share $ - 0 -
ordinated share of Partnership net equal to one percent of
cash flow Partnership distributions of net
cash flow, subordinated to certain
minimum returns to the Limited
Partners.
General Partners' deferred, sub- A deferred, subordinated share $ - 0 -
ordinated share of Partnership net equal to five percent of
sales proceeds from a sale or Partnership distributions of such
sales net sales proceeds, subordinated to
certain minimum returns to the
Limited Partners.
==========================================================================================================================
</TABLE>
42
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Accountants
Balance Sheets at December 31, 1997 and 1996
Statements of Income for the years ended December 31, 1997,
1996 and 1995
Statements of Partners' Capital for the years ended December
31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1997, 1996 and 1995
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1997
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 1997
Schedule IV - Mortgage Loans on Real Estate at December 31,
1997
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or
notes thereto.
3. Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 5, 1993, and incorporated herein by
reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 5, 1993, and incorporated herein by
reference.)
43
<PAGE>
10.1 Property Management Agreement (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange Commission on
April 5, 1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc. (Included
as Exhibit 10.2 to Form 10-K filed with the Securities and
Exchange Commission on March 30, 1995, and incorporated herein
by reference.)
10.3 Assignment of Property Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated herein
by reference.)
10.4 Promissory Note, dated January 16, 1996, among the Registrant
and CNL Realty Corporation relating to a $86,200 loan.
(Included as Exhibit 10.4 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996, and
incorporated herein by reference.)
27 Financial Data Schedule (Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period from
October 1, 1997 through December 31, 1997.
44
<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 30th day of
March, 1998.
CNL INCOME FUND III, 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 March 30, 1998
- ------------------------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 30, 1998
- ----------------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
==========================================================================================================================
</TABLE>
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions Deductions
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
- ---- ----------- ---------- ---------- ----------- ----------- --------- --------
<S> <C>
1995 Allowance for
doubtful
accounts (a) $310,507 $10,681 $138,933(b) $ 53,946(c) $ 18,068 $388,107
======== ======= ======== ======== ======== ========
1996 Allowance for
doubtful
accounts (a) $388,107 $ 924 $ 62,167(b) $273,165(c) $107,891 $ 70,142
======== ======= ======== ======== ======== ========
1997 Allowance for
doubtful
accounts (a) $ 70,142 $72,572 $ 97,281(b) $ 70,142(c) $ - $169,853
======== ======= ======== ======== ======== ========
</TABLE>
(a) Deducted from receivables and accrued rental income on the balance
sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
F-1
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
<S> <C>
Properties the Partnership has
Invested in Under Operating
Leases:
Burger King Restaurant:
Kansas City, Missouri - $ 236,055 $ 573,739 $ - $ -
Darryl's Restaurant:
Fayetteville, North Carolina - 688,672 584,290 - -
Denny's Restaurants:
Hagerstown, Maryland - 332,665 - - -
Hazard, Kentucky - 196,801 - 489,749 -
Daytona Beach, Florida - 153,159 369,125 446,200 -
Golden Corral Family
Steakhouse Restaurants:
Altus, Oklahoma - 149,756 449,269 - -
Hastings, Nebraska - 110,800 332,400 23,636 -
Wichita, Kansas (f) - 147,349 442,045 - -
Stockbridge, Georgia - 384,644 685,511 - -
Washington, Illinois - 221,680 517,833 - -
Schererville, Indiana (f) - 211,690 531,801 - -
KFC Restaurants:
Calallen, Texas - 219,432 - 332,043 -
Katy, Texas - 266,768 - 279,486 -
Burnsville, Minnesota - 196,159 - 437,895 -
Page, Arizona - 328,729 - 270,755 -
Perkins Restaurant:
Flagstaff, Arizona - 372,546 - 669,471 -
Pizza Hut Restaurants:
Jacksboro, Texas - 54,274 147,337 - -
Seminole, Texas - 183,284 134,531 - -
Winter Springs, Florida - 268,128 270,372 - -
Austin, Texas - 301,778 372,137 - -
Po Folks Restaurant:
Hagerstown, Maryland (h) - 579,990 - 638,320 -
Popeyes Famous Fried
Chicken Restaurant:
Plant City, Florida - 244,451 - 360,342 -
Red Oaks Steakhouse Restaurant:
Canton Township, Michigan (g) - 296,945 - - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period (c) in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
---------- ------------ ----------- ------------ --------- -------- ----------
<S> <C>
$ 236,055 $ 573,739 $ 809,794 $ 192,840 1984 12/87 (b)
688,672 584,290 1,272,962 10,805 1984 06/97 (b)
332,665 (e) 332,665 - 1988 12/87 (d)
196,801 489,749 686,550 139,442 1988 02/88 (b)
153,159 815,325 968,484 257,054 1988 06/88 (b)
149,756 449,269 599,025 153,500 1987 10/87 (b)
110,800 356,036 466,836 121,055 1987 10/87 (b)
147,349 442,045 589,394 149,804 1987 11/87 (b)
384,644 685,511 1,070,155 230,408 1987 11/87 (b)
221,680 517,833 739,513 175,488 1987 12/87 (b)
211,690 531,801 743,491 180,221 1987 12/87 (b)
219,432 332,043 551,475 105,147 1988 12/87 (b)
266,768 279,486 546,254 90,445 1988 02/88 (b)
196,159 437,895 634,054 136,234 1988 02/88 (b)
328,729 270,755 599,484 86,867 1988 02/88 (b)
372,546 669,471 1,042,017 206,420 1988 06/88 (b)
54,274 147,337 201,611 49,522 1983 12/87 (b)
183,284 134,531 317,815 45,218 1977 12/87 (b)
268,128 270,372 538,500 90,499 1987 01/88 (b)
301,778 372,137 673,915 122,495 1987 02/88 (b)
579,990 638,320 1,218,310 194,169 1988 12/87 (b)
244,451 360,342 604,793 116,611 1988 11/87 (b)
296,945 (e) 296,945 - 1988 02/88 (d)
</TABLE>
F-2
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
<S> <C>
Taco Bell Restaurants:
Fernandina Beach, Florida - 190,348 - 395,955 -
Bishop, California - 363,965 - 272,151 -
Longwood, Florida - 346,831 - 394,086 -
Wendy's Old Fashioned
Hamburger Restaurant:
Punta Gorda, Florida - 279,061 471,431 - -
---------- ---------- ---------- -------
$7,325,960 $5,881,821 $5,010,089 $ -
========== ========== ========== =======
Property of Joint Venture
in Which the Partnership
has a 73.4% Interest and has
Invested in Under an Operating
Lease:
Po Folks Restaurant:
Titusville, Florida (i) - $ 271,350 $ - $ 750,985 $ -
========== ========== ========== =======
Property of Joint Venture in Which
the Partnership has a 32.77% Interest
and has Invested in Under an Operating
Lease:
IHOP Restaurant:
Englewood, Colorado - $ 552,590 $ - $ - $ -
========== ========== ========== =======
Property of Joint Venture in Which the
Partnership has a 9.84% Interest and has
Invested in Under an Operating Lease:
Chevy's Fresh Mex Restaurant:
Miami, Florida - $ 976,357 $ 974,016 $ - $ -
========== ========== ========== =======
Properties the Partnership has
Invested in Under Direct
Financing Leases:
Denny's Restaurant:
Hagerstown, Maryland - $ - $ - $ 549,754 $ -
Mountain Jack's Restaurant:
Canton Township, Michigan - - - 668,909 -
---------- ---------- ---------- -------
$ - $ - $1,218,663 $ -
========== ========== ========== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period (c) (h) (i) in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
---------- ------------ ----------- ------------ --------- -------- ----------
<S> <C>
190,348 395,955 586,303 128,136 1988 12/87 (b)
363,965 272,151 636,116 83,535 1988 05/88 (b)
346,831 394,086 740,917 119,875 1988 06/88 (b)
279,061 471,431 750,492 155,834 1987 02/88 (b)
---------- ----------- ----------- ----------
$7,325,960 $10,891,910 $18,217,870 $3,341,624
========== =========== =========== ==========
$ 271,350 $ 750,985 $ 1,022,335 $ 225,207 1988 12/88 (b)
========== =========== =========== ==========
$ 552,590 (e) $ 552,590 - 1996 07/97 (d)
========== ===========
$ 976,357 $ 974,016 $ 1,950,373 $ 89 1995 12/97 (b)
========== =========== =========== ==========
- (e) (e) (d) 1988 12/87 (d)
- (e) (e) (d) 1988 02/88 (d)
</TABLE>
F-3
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent
Initial Cost To Acquisition
Buildings
Encum- and Improve- Carrying
brances Land Improvements ments Costs
<S> <C>
Property of Joint Venture in
Which the Partnership has a
32.77% Interest and has Invested
in Under Direct Financing Lease:
IHOP Restaurant:
Englewood, Colorado - $ - $1,008,839 $ - $ -
========== ========== ========== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Life
on Which
Gross Amount at Which Carried Depreciation
at Close of Period (c) in Latest
Buildings Date Income
and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
---------- ------------ ----------- ------------ --------- -------- ----------
<S> <C>
- (f) (f) (d) 1996 07/97 (d)
</TABLE>
F-4
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(a) Transactions in real estate and accumulated depreciation during 1997,
1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
Accumulated
Cost (h)(i) Depreciation
<S> <C>
Properties the Partnership
has Invested in Under
Operating Leases:
Balance, December 31, 1994 $20,852,053 $ 2,900,784
Depreciation expense - 433,892
----------- -----------
Balance, December 31, 1995 20,852,053 3,334,676
Reclassified to direct
financing lease (549,754) -
Depreciation - 276,247
----------- -----------
Balance, December 31, 1996 20,302,299 3,610,923
Acquisition 1,272,962 -
Disposition (3,357,391) (637,481)
Depreciation - 368,182
----------- -----------
Balance, December 31, 1997 $18,217,870 $ 3,341,624
=========== ===========
Property of Joint Venture in
Which the Partnership has a
73.4% Interest and has Invested
in Under an Operating Lease:
Balance, December 31, 1994 $ 1,022,335 $ 150,197
Depreciation expense - 25,033
----------- -----------
Balance, December 31, 1995 1,022,335 175,230
Depreciation expense - 25,033
----------- -----------
Balance, December 31, 1996 1,022,335 200,263
Depreciation expense - 24,944
----------- -----------
Balance, December 31, 1997 $ 1,022,335 $ 225,207
=========== ===========
Property in Which the Partnership
has a 32.77% Interest as Tenants-in-
Common and has Invested in Under
an Operating Lease:
Balance, December 31, 1996 $ - $ -
Acquisition 552,590 -
Depreciation expense (d) - -
----------- ----------
Balance, December 31, 1997 $ 552,590 $ -
=========== ==========
</TABLE>
F-5
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Cost (h)(i) Depreciation
<S> <C>
Property in Which the Partnership
has a 9.84% Interest as Tenants-in-
Common and has Invested in Under
an Operating Lease:
Balance, December 31, 1996 $ - $ -
Acquisition 1,950,373 -
Depreciation expense - 89
----------- -----------
Balance, December 31, 1997 $ 1,950,373 $ 89
=========== ===========
</TABLE>
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 1997, the aggregate cost of the Properties owned
by the Partnership, its consolidated joint venture and the
unconsolidated joint venture for federal income tax purposes was
$19,121,915 and $1,726,015, respectively. All of the leases are
treated as operating leases for federal income tax purposes.
(d) For financial reporting purposes, the portion of the lease relating
to the building has been recorded as a direct financing lease. The
cost of the building has been included in net investment in direct
financing lease; therefore, depreciation is not applicable.
(e) For financial reporting purposes, certain components of the lease
relating to land and building have been recorded as a direct
financing lease. Accordingly, costs relating to these components of
this lease are not shown.
(f) The tenant of this property, Golden Corral Corporation, has subleased
this property to a local, independent restaurant. Golden Corral
Corporation continues to be responsible for complying with all the
terms of the lease agreement and is continuing to pay rent on this
property to the Partnership.
(g) The restaurant in Canton Township, Michigan, was converted from a
Ponderosa Steakhouse restaurant to a Mountain Jack's restaurant in
September 1993.
(h) For financial reporting purposes, the undepreciated cost of the Po
Folks Property in Hagerstown, Maryland, was written down to net
realizable value due to an impairment in value. The Partnership
recognized the impairment by recording an allowance for loss on land
and building in the amount of $32,819 and $207,844 at December 31,
1997 and 1995, respectively. The impairments were based on an
anticipated sales price previously agreed upon by the general
partners relating to this Property. The cost of the Property
presented on this schedule is the gross amount at which the Property
was carried at December 31, 1997, excluding the allowance for loss on
land and building.
F-6
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
December 31, 1997
(i) For financial reporting purposes, the undepreciated cost of the
Property in Titusville, Florida, was written down to net realizable
value due to an impairment in value. The Partnership recognized the
impairment by recording an allowance for loss on land and building in
the amount of $147,039 at December 31, 1997. The impairment at
December 31, 1997, represents the difference between the Property's
carrying value and the General Partners' estimate of the net
realizable value of the Property based on an anticipated sales price
of this Property to an interested and unrelated third party. The cost
of the Property presented on this schedule is the gross amount at
which the Property was carried at December 31, 1997, excluding the
allowance for loss on land and building.
F-7
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount
of Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
- -------------------------- -------- -------------- -------- ----- ---------- ---------- -----------
<S> <C>
Burger King - Roswell, GA
First Mortgage 9.00% July, 2000 (1) $ - $ 685,000 $ 681,687 $ -
----- ---------- ---------- ----------
Total $ - $ 685,000 $ 681,687 (2) $ -
===== ========== ========== ==========
</TABLE>
(1) Monthly payments of principal and interest at an annual rate of 9.00%,
with a balloon payment at maturity of $642,798.
(2) The tax carrying value of the note is approximately $694,884.
(3) The changes in the carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C>
Balance at beginning of period $ - $ - $ -
New mortgage loans 685,000 - -
Interest earned 33,665 - -
Collection of principal and
interest (36,978) - -
---------- --------- ---------
Balance at end of period $ 681,687 $ - $ -
========== ========= =========
</TABLE>
F-7
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit Number Page
3.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 5, 1993, and incorporated herein by
reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on April 5, 1993, and incorporated herein by
reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1 to
Form 10-K filed with the Securities and Exchange Commission on
April 5, 1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc. (Included
as Exhibit 10.2 to Form 10-K filed with the Securities and
Exchange Commission on March 30, 1995, and incorporated herein
by reference.)
10.3 Assignment of Property Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated herein
by reference.)
10.4 Promissory Note, dated January 16, 1996, among the Registrant
and CNL Realty Corporation relating to a $86,200 loan.
(Included as Exhibit 10.4 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996, and
incorporated herein by reference.)
27 Financial Data Schedule (filed herewith.)
i
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund III, Ltd. at December 31, 1997, and its statement of
income for the year then ended and is qualified in its entirety by reference to
the Form 10K of CNL Income Fund III, Ltd. for the year ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 744,997<F1>
<SECURITIES> 0
<RECEIVABLES> 256,889
<ALLOWANCES> 154,469
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 17,977,207
<DEPRECIATION> 3,341,624
<TOTAL-ASSETS> 18,479,002
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,611,136
<TOTAL-LIABILITY-AND-EQUITY> 18,479,002
<SALES> 0
<TOTAL-REVENUES> 2,188,950
<CGS> 0
<TOTAL-COSTS> 594,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 32,360
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,391,835
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,391,835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,391,835
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Total cash includes $251,879 in restricted cash.
<F2>Due to the nature of its industry, CNL Income Fund III, Ltd. has an
unclassified balance sheet; therefore no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
