UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(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>
The Form 10-K of CNL Income Fund III, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
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 owned 30 Properties as of December 31, 1997. The
30 Properties include 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 net sales proceeds to acquire an additional Property, to make
a special distributions to the limited partners and to pay liabilities of the
Partnership. 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.
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
2
<PAGE>
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
3
<PAGE>
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 leased Properties with an aggregate carrying value in excess
of 20 percent of the total assets of the Partnership.
Joint Venture Arrangements and Tenancy in Common 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 CNL Income Fund IV, Ltd., a limited
partnership organized pursuant to the laws of the State of Florida, and 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. The
Partnership has a 69.07% interest in Tuscawilla Joint Venture and a 73.4%
interest in Titusville Joint Venture. 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.
4
<PAGE>
In addition to the above joint venture arrangements, in 1997, the
Partnership entered into an agreement to hold a Property in Englewood, Colorado
, as tenants-in-common , with CNL Income Fund IX, Ltd., an affiliate of the
General Partners; and entered into an agreement to hold a Property in Miami,
Florida, as tenants-in-common, with CNL Income Fund VII, Ltd., CNL Income Fund
X, Ltd. and CNL Income Fund XIII, Ltd., 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 CNL Income Fund II, Ltd.
and CNL Income Fund VI, Ltd., affiliates of the General Partners. The agreement
provides for the Partnership and the affiliates to share in the profits and
losses of the Property in proportion to each co-venturer's percentage interest.
The Partnership owns a 25.84 percent interest in this Property.
The affiliates are limited partnerships organized pursuant to the laws
of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Property Management
CNL 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
5
<PAGE>
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.
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.
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 30 Properties. Of the 30
Properties, 26 are owned by the Partnership in fee simple, two are owned through
joint venture arrangements and two are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation filed with this report for a listing of
the Properties and their respective costs, including acquisition fees and
certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 11,800
to 94,500 square feet depending uponbuilding 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.
7
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
State Number of Properties
Arizona 2
California 1
Colorado 1
Florida 8
Georgia 1
Illinois 1
Indiana 1
Kansas 1
Kentucky 1
Maryland 2
Michigan 1
Minnesota 1
Missouri 1
North Carolina 1
Nebraska 1
Oklahoma 1
Texas 5
------
TOTAL PROPERTIES: 30
======
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. As of
December 31, 1997, the Partnership had no plans for renovation of the
Properties. Depreciation expense is computed for buildings and improvements
using the straight line method using depreciable lives of 31.5 and 40 years for
federal income tax purposes. As of December 31, 1997, the aggregate cost basis
of the Properties owned by the Partnership and joint ventures (including
Properties owned through tenancy in common arrangements) for federal income tax
purposes was $19,121,915 and $1,726,015, respectively.
8
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
Burger King 1
Chevy's Fresh Mex 1
Darryl's 1
Denny's 3
Golden Corral 6
IHOP 1
KFC 4
Perkins 1
Pizza Hut 4
Po Folks 2
Popeyes 1
Red Oaks Steakhouse 1
Taco Bell 3
Wendy's 1
------
TOTAL PROPERTIES 30
======
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 1997, 1996, 1995, 1994, and 1993, the Properties were
93%, 94%, 97%, 100%, and 100% occupied, respectively. The following is a
schedule of the average annual rent for each of the five years ended December
31:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1997 (2) 1996 1995 1994 1993
------------ ---------- ---------- ------------ ----------
<S> <C>
Rental Revenues (1) $2,116,623 $2,469,718 $2,368,914 $2,516,395 $2,416,168
Properties (2) 28 31 31 32 32
Average Rent per Unit $75,594 $79,668 $76,416 $78,637 $75,505
</TABLE>
(1) Rental revenues include the Partnership's share of rental revenues from the
two Properties owned through joint venture arrangements and the two
properties owned through tenancy in common arrangements. Rental revenues
have been adjusted, as applicable, for any amounts for which the Partnership
has established an allowance for doubtful accounts.
11
<PAGE>
(2) Excludes Properties that were vacant at December 31 and which did not
generate any rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as of
December 31, 1997 for each of the ten years beginning with 1998 and thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
<S> <C>
1998 - - -
1999 - - -
2000 - - -
2001 - - -
2002 6 432,016 22.01%
2003 - - -
2004 - - -
2005 - - -
2006 1 87,849 4.47%
2007 7 383,097 19.51%
Thereafter 14 1,060,272 54.01%
-------- -------------- --------------
Totals (1) 28 1,963,234 100.00%
======== ============== ==============
</TABLE>
(1) Excludes Properties that were vacant at December 31, 1997.
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).
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.
12
<PAGE>
PART II
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 and tenancy in common arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended December
31, 1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $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 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
13
<PAGE>
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
14
<PAGE>
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 and will make the remaining proceeds available to
pay liabilities of the Partnership, including distributions to limited partners.
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 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.
15
<PAGE>
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,
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
16
<PAGE>
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
the majority of the net sales proceeds to the Limited Partners and intends to
use the remaining net sales proceeds to pay liabilities of the Partnership.
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 reinvest the net sales
proceeds in an additional Property.
None of the Properties owned by the Partnership, or the joint ventures
or the tenancy in common arrangements 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 and net sales
proceeds from the sales of Properties, pending reinvestment in an additional
Property, distribution to the Limited Partners or use for the payment of
Partnership liabilities, are invested in money market accounts or other
short-term, highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day maturity
date, pending the Partnership's use of such funds to pay Partnership expenses or
to make distributions to the partners. At December 31, 1997, the Partnership had
$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. As of December 31, 1997, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately four percent annually. The funds remaining at December 31, 1997,
will be used for the payment of distributions and other liabilities.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash and
generally leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The General Partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
Due to low operating expenses and ongoing cash flow, the General Partners
do not believe that working capital reserves are necessary at this time. In
addition, because the leases for the Partnership's Properties are generally on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated 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 distributions to the Limited Partners for 1997, 1996 and
1995, were also based on loans received from the General Partners of $117,000,
$575,200 and $86,200, respectively, all of which were subsequently repaid, as
described above in "Capital Resources." 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.
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.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
19
<PAGE>
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 "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 "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
"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.
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 "Capital
Resources."
22
<PAGE>
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
23
<PAGE>
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.
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,
24
<PAGE>
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 "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 "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 "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 "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 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.
26
<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 29th day of
July, 1999.
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 July 29, 1999
- -------------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Oficer and Director July 29, 1999
- -------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
