<PAGE>
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, 1998
-------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to
Commission file number 0-16850
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
incorporation or organization) Identification No.)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No _____
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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 50,000 units of
limited partnership interest (the "Units") on Form S-11 under the Securities Act
of 1933, as amended. Since no established market for such Units exists, there
is no market for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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The Form 10-K of CNL Income Fund X, Ltd. for the year ended
December 31, 1998 is being amended to revise the disclosure under Item 1.
Business, Item 2. Properties, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations and Item 8. Financial Statements
and Supplementary Data.
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 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 these net sales proceeds in three Properties, one each in Englewood,
Colorado, Miami, Florida, and Overland Park, Kansas, as tenants-in-common, with
affiliates of the General Partners during 1997 and 1998. During 1998, the
Partnership sold its Properties in Daytona Beach, Fernandina Beach, and Punta
Gorda, Florida; Hagerstown, Maryland, and Hazard Kentucky. The Partnership
reinvested a portion of the net sales proceeds in a joint venture arrangement,
RTO Joint Venture, with an affiliate of the General Partners to purchase,
construct and hold one property. In January 1999, the Partnership reinvested a
portion of the remaining net sales proceeds from the 1998 sales in a Property in
Montgomery, Alabama. The Partnership intends to use the remaining net sales
proceeds to invest in an additional Property, to pay liabilities of the
Partnership, and to make a special distribution to the Limited Partners. As a
result of the above transactions, as of December 31, 1998, the Partnership owned
27 Properties. This number excludes the Property purchased in January 1999. The
27 Properties include interests in three Properties owned by joint ventures in
which the Partnership is a co-venturer and three Properties owned with
affiliates as tenants-in-common. Generally, the Properties are leased on a
triple-net basis with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger. At a special meeting of the partners that is expected to be held in
the fourth quarter of 1999, Limited Partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. If the Limited Partners at the special
meeting approve the Merger, APF will own the Properties and other assets of the
Partnership.
In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties, the
General Partners will consider factors such as potential capital appreciation,
net cash flow and federal income tax considerations. Certain lessees have been
granted options to purchase Properties, generally at the Property's then fair
market value after a specified portion of the lease term has elapsed. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under Property or joint venture
purchase options granted to certain lessees.
2
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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 2018. Generally, leases are on a triple-net basis, with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties generally provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $23,000 to $191,900. The majority 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. Fair
market value will be determined through an appraisal by an independent firm.
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 that described above,
multiplied by the percentage interest in the Property with respect to which the
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 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." In addition, in May 1998, the Partnership contributed the net
sales proceeds from the sale of the Property in Punta Gorda, Florida, in a joint
venture arrangement, RTO Joint Venture, with an affiliate of the General
Partners, 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 September 1998, the Partnership entered into a new lease agreement with
a new tenant, for the Golden Corral Property located in Stockbridge, Georgia.
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.
In January 1999, the Partnership reinvested a portion of the net sales
proceeds from the sales of the Properties in Hagerstown, Maryland and Hazard,
Kentucky, in a Property located in Montgomery, Alabama. 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 1998, 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 two unconsolidated joint ventures and three
Properties owned with affiliates as tenants-in-common). As of December 31,
1998, Golden Corral Corporation was the lessee under leases relating to five
restaurants. It is anticipated that, 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 1999 and subsequent years.
In addition, three Restaurant Chains, Golden Corral Family Steakhouse
Restaurants ("Golden Corral"), Pizza Hut, and KFC, each accounted for more than
ten percent of the Partnership's total rental income in 1998 (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of the rental income from two Properties owned by two unconsolidated joint
ventures and three Properties owned with affiliates as tenants-in-common). In
subsequent years, it is anticipated that these three Restaurant Chains each will
continue to account for more than ten percent of total rental income to which
the partnership is entitled under the terms of the leases. Any failure of
3
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Golden Corral Corporation or any of these Restaurant Chains could materially
affect the Partnership's income. As of December 31, 1998, no single tenant or
group of affiliated tenants lease Properties with an aggregate carrying value in
excess of 20 percent of the total assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into a joint venture arrangement, Tuscawilla
Joint Venture, with three unaffiliated entities to purchase and hold one
Property. In addition, the Partnership has entered into two separate joint
venture arrangements: Titusville Joint Venture with CNL Income Fund IV, Ltd.,
an affiliate of the General Partners, to purchase and hold one Property; and RTO
Joint Venture with CNL Income Fund V, Ltd., an affiliate of the General
Partners, to purchase, construct and hold one Property. Construction was
completed and rent commenced in December 1998. The affiliates are limited
partnerships organized pursuant to the laws of the State of Florida.
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%, a 73.4%, and a 46.88% interest in
Tuscawilla Joint Venture, Titusville Joint Venture, and RTO Joint Venture,
respectively. 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 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 affiliates of the General Partners for
Titusville Joint Venture and RTO 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 ventures may agree or, in
the event the ventures 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, Titusville Joint
Venture and RTO Joint Venture is distributed 69.07%, 73.4% and 46.88%,
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, the Partnership has
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-tenant's percentage interest.
The Partnership owns a 33 percent 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 affiliate to share in the profits and
losses of the Property in proportion to each co-tenant's percentage interest.
The Partnership owns a 25.87% interest in this Property.
Each of the affiliates is a limited Partnership organized pursuant to the
laws of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
4
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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 Funds Advisors, Inc., an affiliate of the General Partners, acts as
manager of the Partnership's Properties pursuant to a property management
agreement with the Partnership. Under this agreement, CNL Fund Advisors, Inc.
is responsible for collecting rental payments, inspecting the Properties and the
tenants' books and records, assisting the Partnership in responding to tenant
inquiries and notices and providing information to the Partnership about the
status of the leases and the Properties. CNL Fund Advisors, Inc. also assists
the General Partners in negotiating the leases. For these services, the
Partnership has agreed to pay CNL Fund Advisors, Inc. an annual fee of one-half
of one percent of Partnership assets (valued at cost) under management, not to
exceed the lesser of one percent of gross rental revenues or competitive fees
for comparable services. Under the 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 10% Preferred Return, no property management fee will be paid.
The property management agreement continues until the Partnership no longer
owns an interest in any Properties unless terminated at an earlier date upon 60
days' prior notice by either party.
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, 1998, the Partnership owned 27 Properties. Of the 27
Properties, 21 are owned by the Partnership in fee simple, three are owned
through joint venture arrangements and three 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 for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses. This schedule was filed with the Partnership's Form 10-K for the year
ended December 31, 1998.
Description of Properties
Land. The Partnership's Property sites range from approximately 11,800 to
74,600 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.
5
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The following table lists the Properties owned by the Partnership as of
December 31, 1998 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with the Partnership's Form 10-K for the year ended December
31, 1998.
<TABLE>
<CAPTION>
State Number of Properties
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<S> <C>
Arizona 2
California 1
Colorado 1
Florida 6
Georgia 1
Illinois 1
Indiana 1
Kansas 2
Maryland 1
Michigan 1
Minnesota 1
Missouri 1
North Carolina 1
Nebraska 1
Oklahoma 1
Texas 5
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TOTAL PROPERTIES: 27
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</TABLE>
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes range from approximately
1,900 to 7,900 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, 1998, 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, 1998, the aggregate cost of the
Properties owned by the Partnership and its consolidated joint venture, and the
unconsolidated joint ventures (including the Properties owned through tenancy in
common arrangements for federal income tax purposes was $14,523,276 and
$8,123,842, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 1998 by Restaurant Chain.
<TABLE>
<CAPTION>
Restaurant Chain Number of Properties
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<S> <C>
Burger King 1
Chevy's Fresh Mex 1
Darryl's 1
Denny's 1
Golden Corral 6
IHOP 2
KFC 4
Perkins 1
Pizza Hut 4
Popeyes 1
Red Oak Steakhouse 1
Ruby Tuesday 1
Taco Bell 2
Other 1
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TOTAL PROPERTIES: 27
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</TABLE>
6
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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, 1998, 1997, 1996, 1995, and 1994, the Properties were 96%,
93%, 94%, 97%, 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:
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Rental Revenues (1) $1,798,973 $2,116,623 $2,469,718 $2,368,914 $2,516,395
Properties (2) 26 28 31 31 32
Average Rent per Unit $ 69,191 $ 75,594 $ 79,668 $ 76,416 $ 78,637
</TABLE>
(1) Rental income includes the Partnership's share of rental income from the
Properties owned through joint venture arrangements and the Properties
owned through a tenancy in common arrangement. Rental revenues have been
adjusted, as applicable, for any amounts for which the Partnership has
established an allowance for doubtful accounts.
(2) Excludes Properties that were vacant at December 31, and that did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as of
December 31, 1998 for each of the ten years beginning with 1999 and thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
---------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
1999 -- -- --
2000 -- -- --
2001 -- -- --
2002 6 432,016 24.18%
2003 -- -- --
2004 -- -- --
2005 -- -- --
2006 1 87,849 4.92%
2007 5 227,608 12.74%
2008 6 494,670 27.69%
Thereafter 8 544,272 30.47%
---------- ----------------- -----------------
Totals (1) 26 1,786,415 100.00%
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</TABLE>
(1) Excludes one Property which was vacant at December 31, 1998.
7
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Leases with Major Tenant. The terms of each of the leases with the
Partnership's major tenant as of December 31, 1998 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases five Golden Corral restaurants pursuant to
leases, each with an initial term of 15 years (expiring in 2002) and an average
minimum base annual rent of approximately $64,400 (ranging from approximately
$48,000 to $76,400).
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.
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 generally are
triple-net leases, with the lessees generally responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of December 31, 1998,
the Partnership owned 27 Properties, either directly or indirectly through joint
venture or tenancy in common arrangements.
Capital Resources
During the years ended December 31, 1998, 1997 and 1996, the Partnership
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures and interest received, less cash paid for
expenses) of $1,821,296, $2,021,689, and $2,091,754. The decrease in cash from
operations during 1998 and 1997, 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.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
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. As of December
31, 1996, the interest rate was 8.50%. The Partnership repaid the loan in full,
along with approximately $660 in interest, to the corporate General Partner. In
addition, during 1996 and 1997, the Partnership entered into various promissory
notes with the corporate general partner for loans totalling $575,200 and
$117,000, respectively, 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, 1997.
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 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 distributed 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.
8
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In March 1997, the Partnership sold its Property in Bradenton, Florida, to
the tenant, for $1,332,154 and received net sales proceeds 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 expense; 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 made the remaining
proceeds available to pay liabilities of the Partnership, including
distributions to Limited Partners. 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, qualified as a
like-kind exchange transaction for federal income tax purposes. The Partnership
distributed 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
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. 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 33 percent 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 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,
qualified as a like-kind exchange transaction for federal income tax purposes.
The Partnership distributed 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. During 1998, the
Partnership collected the full amount of the outstanding mortgage note
receivable balance of $678,730. 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, 1998,
the Partnership owned a 9.84% interest in the Property. The Partnership used
the remaining net sales proceeds for other Partnership purposes. The
Partnership distributed 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 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 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, qualified as a like-kind exchange transaction
for federal income tax purposes. The Partnership distributed amounts sufficient
to enable
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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 of $724,172
resulting in a gain of $242,129 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 sale proceeds of $1,006,501,
resulting in a gain of $267,759 for financial reporting purposes. These
properties were originally acquired by the Partnership in May 1988 and August
1988, respectively, and had a total cost of approximately $1,464,200, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the Properties for approximately $266,500 in excess of their
original purchase price. In connection with the sale of these Properties, the
Partnership incurred deferred, subordinated, real estate disposition fees of
$53,400. The Partnership distributed $1,477,747 of the net sales proceeds as a
special distribution to the Limited Partners and made the remaining proceeds
available to pay liabilities of the Partnership. The Partnership distributed
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 these sales.
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 of
$665,973, resulting in a gain of $73,485 for financial reporting purposes. In
May 1998, the Partnership contributed the net sales proceeds in a joint venture
arrangement as described below. The Partnership distributed 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).
As described above, in May 1998, the Partnership entered into a joint
venture, RTO Joint Venture, with an affiliate of the General Partners, to
construct and hold one restaurant Property. As of December 31, 1998, the
Partnership had contributed $676,952 to purchase land and pay for construction
relating to the joint venture. Construction was completed and rent commenced in
December 1998. The Partnership holds a 46.88% interest in the profits and
losses of the joint venture.
In June 1998, the Partnership sold its Property in Hagerstown, Maryland, to
a third party, for $825,000 and received net sales proceeds of $789,639,
resulting in gain of $13,213 for financial reporting purposes. In January 1999,
the Partnership reinvested the majority of the net sales proceeds in a Property
in Montgomery, Alabama. The Partnership intends to use the remaining net sales
proceeds to pay distributions to the Limited Partners and for other Partnership
purposes. The Partnership distributed 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).
In September 1998, the Partnership entered into a new lease agreement for
the Golden Corral Property in Stockbridge, Georgia. In connection therewith,
the Partnership funded $150,000 in renovation costs.
In December 1998, the Partnership sold its Property in Hazard, Kentucky, to
a third party for $435,000 and received net sales proceeds of $432,625,
resulting in a loss of $99,265 for financial reporting purposes. In January
1999, the Partnership reinvested the net sales proceeds in a Property in
Montgomery, Alabama.
None of the Properties owned by the Partnership, or the joint ventures or
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 sale of Properties, pending reinvestment in additional
Properties, 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, 1998, the Partnership had
$2,047,140 invested in such short-term investments as compared to $493,118 at
December 31, 1997. The increase in cash and cash equivalents is primarily
attributable to the fact that cash and cash equivalents at December 31, 1998,
included the remaining net sales proceeds relating to
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the sale of several Properties pending reinvestment in additional Properties,
and the note receivable as described above. As of December 31, 1998, the average
interest rate earned on the rental income deposited in demand deposit accounts
at commercial banks was approximately two percent annually. The funds remaining
at December 31, 1998, will be used for investment in an additional Property and
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 and, for 1998 and
1997, a portion of the sales proceeds received from the sale of Properties
during 1998 and 1997, the Partnership declared distributions to the Limited
Partners of $3,477,747 for the year ended December 31, 1998 and $2,376,000 for
each of the years ended December 31, 1997 and 1996. This represents
distributions of $69.55 per unit for the year ended December 31, 1998 and $47.52
per unit for each of the years ended December 31, 1997 and 1996. The
distributions to the Limited Partners for 1997 and 1996 were also based on loans
received from the General Partners of $117,000 and $575,000, respectively, all
of which were subsequently repaid, as described above in "Capital Resources."
Distributions for 1998 included $1,477,747 as a result of the distribution of
net sales proceeds from the sale of the Properties in Fernandina Beach and
Daytona Beach, Florida. This special distribution was effectively a return of a
portion of the Limited Partners' investment, although, in accordance with the
Partnership agreement, it was applied to the Limited Partner's unpaid cumulative
10% Preferred Return. The reduced number of Properties for which the Partnership
receives rental payments, as well as ongoing operations, reduced the
Partnership's revenues in 1998 and is expected to reduce the Partnership's
revenues in subsequent years. The decrease in Partnership revenues, combined
with the fact that a significant portion of the Partnership's expenses are fixed
in nature, resulted 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, 1998, 1997, or 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. The Partnership intends
to continue to make distributions of cash available for distribution to the
Limited Partners on a quarterly basis.
During 1998, 1997, and 1996, affiliates of the General Partners incurred on
behalf of the Partnership $95,798, $71,681, and $108,900, respectively, for
certain operating expenses. At December 31, 1998 and 1997, the Partnership owed
$84,337 and $82,238, respectively, to affiliates for such amounts and accounting
and administrative services. In addition, during the year ended December 31,
1998 and 1997, the Partnership incurred $53,400 and $15,150, respectively, in
real estate disposition fees due to an affiliate as a result of services
provided in connection with the sale of the Properties in Chicago, Illinois;
Daytona Beach and Fernandina Beach, Florida. The payment of such fees is
deferred until the Limited Partners have received the sum of their cumulative
10% Preferred Return and their adjusted capital contributions. Other
liabilities, including distributions payable, decreased to $542,868 at December
31, 1998, from $631,861 at December 31, 1997. The decrease in amounts payable to
other parties was primarily attributable to a decrease in distributions payable
to the Limited Partners at December 31, 1998. The General Partners believe that
the Partnership has sufficient cash on hand to meet its current working capital
needs.
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Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During the year ended December 31, 1996, the Partnership and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 30 wholly
owned Properties and during 1997, the Partnership and its consolidated joint
venture, Tuscawilla Joint Venture, owned and leased 32 wholly owned Properties
(including five Properties which were sold during 1997). During 1998, the
Partnership owned and leased 27 wholly owned Properties (including five
Properties which were sold during 1998). In addition, during the years ended
December 31, 1996, 1997 and 1998, the Partnership was a co-venturer in two
separate joint ventures that each owned and leased one Property and during 1997
and 1998, the Partnership owned and leased two Properties, with affiliates of
the General Partners, as tenants-in-common. During 1998, the Partnership and
its consolidated joint venture, Tuscawilla Joint Venture, owned and leased one
additional Property, with affiliates of the General Partners, as tenants-in-
common and was a co-venturer in a joint venture that owned and leased one
Property. As of December 31, 1998, the Partnership owned, either directly or
through joint venture arrangements, 27 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. The majority 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, 1998, 1997, and 1996, the Partnership
and its consolidated joint venture, Tuscawilla Joint Venture, earned $1,554,852,
$1,930,486, and $2,273,850, respectively, in rental income from operating leases
and earned income from direct financing leases. The decrease in rental and
earned income during 1998 and 1997, each as compared to the previous year, is
partially attributable to a decrease of approximately $350,300 and $219,700,
respectively, as a result of the sales of Properties during 1998 and 1997, as
described above in "Capital Resources." During 1998 and 1997, the decrease in
rental income was partially offset by an increase of approximately $69,100 and
$86,200, respectively, due to the reinvestment of a portion of these net sales
proceeds during 1997, in a rental Property in Fayetteville, North Carolina, as
described above in "Capital Resources."
The decrease in rental and earned income during 1997, as compared to 1996,
is partially attributable to the fact that during 1997, 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. During 1997, the Partnership established an allowance for doubtful
accounts for these amounts due to the uncertainty of the collectibility of these
amounts. The General Partners are pursuing collection of past due amounts
relating to this Property and will recognize any such amounts as income if
collected.
Rental and earned income during 1998, 1997, and 1996, remained at reduced
levels due to the fact that the Partnership did not receive any rental income
relating to the Po Folks Property in Hagerstown, Maryland. In June 1998, the
Partnership sold the Property to a third party, as described above in "Capital
Resources." In January 1999, the Partnership reinvested the majority of the net
sales proceeds in a Property in Montgomery, Alabama and intends to use the
remaining net sales proceeds for other Partnership purposes.
In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is partially attributable to the fact that, during 1998 and
1997, the Partnership increased its allowance for doubtful accounts by
approximately $74,400 and $15,400, respectively, for accrued rental income
amounts previously recorded (due to the fact that future scheduled rent
increases are recognized on a straight-line basis over the term of the lease in
accordance with generally accepted accounting principles) relating to the
Property in Canton Township, Michigan, due to financial difficulties the tenant
was experiencing. During 1998, the tenant vacated the Property and ceased
operations and the Partnership wrote off all such accrued rental income amounts
and is currently seeking either a replacement tenant or purchaser for this
Property.
The decrease during 1998, as compared to 1997, is also partially
attributable to the fact that during 1998, the Partnership terminated the lease
with the tenant of the Property in Hazard, Kentucky, and wrote off
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approximately $29,500 of accrued rental income recognized since inception
relating to the straight lining of future scheduled rent increases, in
accordance with generally accepted accounting principles. In addition, the
decrease during 1998 is partially attributable to the Partnership reserving
approximately $41,400 in accrued rental income (non-cash accounting adjustment
relating to the straight-lining of future scheduled rent increases over the term
of the lease in accordance with generally accepted accounting principles).
During the years ended December 31, 1998, 1997, and 1996, the Partnership
also earned $98,915, $157,648, and $157,993, respectively, in contingent rental
income. The decrease in contingent rental income during 1998, as compared to
1997, is primarily attributable to the sales of Properties during 1998 and 1997,
for which the leases required the payment of contingent rental income.
In addition, during 1998, 1997, and 1996, the Partnership earned $127,064,
100,816, and $26,496, respectively, in interest and other income. The increase
in interest and other income during 1998 and 1997, was partially attributable to
the interest earned on the net sales proceeds relating to the sales of
Properties during 1998 and 1997, 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, the 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 income of $22,708, a loss of $148,170, and
income of $11,740 for the years ended December 31, 1998, 1997, and 1996,
respectively, attributable to net income and net loss earned by unconsolidated
joint ventures in which the Partnership is a co-venturer. The loss during 1997
was due to the fact that during 1997, the operator of the Property owned by
Titusville Joint Venture vacated the Property and ceased operations. In
conjunction therewith, during 1997, Titusville Joint Venture (in which the
Partnership owns a 73.4% interest) established an allowance for doubtful
accounts of approximately $27,000 for past due rental amounts. No such
allowance was established during 1996. During 1998, the joint venture wrote off
all uncollected balances and ceased collection efforts. The joint venture wrote
off unamortized lease costs of $23,500 in 1997 due to the tenant vacating the
Property. In addition, during 1997, the joint venture established an allowance
for loss on land and building for its Property in Titusville, Florida, of
approximately $147,000. During 1998, the joint venture increased the allowance
for loss on land and building by approximately $125,300 for financial reporting
purposes. The allowance represents the difference between the Property's
carrying value at December 31, 1998 and the current estimate of the net
realizable value at December 31, 1998 for the Property. Titusville Joint Venture
is currently seeking either a replacement tenant or purchaser for this Property.
The increase in income earned from joint ventures during 1998, is partially
attributable to, and the decrease during 1997, as compared to 1996, is partially
offset by, an increase in net income earned by joint ventures due to the fact
that the Partnership reinvested a portion of the net sales proceeds it received
from the 1997 and 1998 sales of several Properties, in three Properties with
affiliates of the general partners as tenants-in-common and one Property through
a joint venture arrangement with an affiliate of the general partners in 1997
and 1998.
During the year ended December 31, 1998, 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 Properties owned by unconsolidated joint ventures and
Properties owned with affiliates as tenants-in-common). As of December 31,
1998, Golden Corral Corporation was the lessee under leases relating to five
restaurants. It is anticipated that, 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 1999. In addition,
during the year ended December 31, 1998, three Restaurant Chains, Golden Corral,
Pizza Hut, and KFC, 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 Properties owned by unconsolidated joint ventures and
Properties owned with affiliates as tenants-in-common). It is anticipated that
Golden Corral, Pizza Hut, and KFC 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, if the
Partnership is not able to re-lease these Properties in a timely manner.
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Operating expenses, including depreciation and amortization expense, were
$520,871, $626,431, and $638,140 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998, as
compared to 1997, and 1997, as compared to 1996, was partially attributable to a
decrease in depreciation expense as a result of the sales of Properties in 1998
and 1997, as described above in "Capital Resources."
The decrease in operating expenses during 1998, as compared to 1997, is
partially attributable to, and the decrease during 1997, as compared to 1996, is
partially offset by, an increase in operating expenses during 1997, due to the
fact that 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 was 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. In June
1998, the Partnership sold the Po Folks Property to a third party if the
Partnership is unable to re-lease these Properties in a timely manner.
The decrease during 1998, as compared to 1997, is partially offset by the
fact that the Partnership incurred $14,227 in transaction costs related to the
General Partners retaining financial and legal advisors to assist them in
evaluating and negotiating the proposed Merger with APF, as described below. If
the Limited Partners reject the Merger, the Partnership will bear the portion of
the transaction costs based upon the percentage of "For" votes and the General
Partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
As a result of the Properties sales during 1998 and 1997, and the sale of
parcel of land in Plant City, Florida, as described above in "Capital
Resources," the Partnership recognized gains on sale of land and buildings
totalling $497,321 and $1,027,590 during the years ended December 31, 1998 and
1997, respectively. No Properties were sold during 1996. In addition, during
the years ended December 31, 1998 and 1997, the Partnership recorded an
allowance for loss on land and building and impairment in carrying value of net
investment in direct financing lease of $25,821 and $32,819, respectively,
relating to the Denny's and Po Folks Properties in Hagerstown, Maryland. The
allowance represents the difference between the carrying value of the Properties
at December 31, 1998 and 1997, and the net realizable value of the Properties
based on the current estimated net realizable value of each Property at December
31, 1998 and 1997, respectively.
The Partnership's leases as of December 31, 1998, 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.
Proposed Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF. As consideration for the Merger, APF has agreed to issue
2,082,901 APF Shares. In order to assist the General Partners in evaluating the
proposed merger consideration, the General Partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $20,535,734 as of December 31, 1998. The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former Limited Partners. At a special meeting of the Limited
Partners that is expected to be held in the fourth quarter of 1999, Limited
Partners holding in excess of 50% of the Partnership's outstanding limited
partnership interests must approve the Merger prior to consummation of the
transaction. If the Limited Partners at the special meeting approve the Merger,
APF will own the Properties and other assets of the Partnership. The General
Partners intend to recommend that the Limited
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Partners of the Partnership approve the Merger. In connection with their
recommendation, the General Partners will solicit the consent of the Limited
Partners at the special meeting.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000. The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to the
failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information technology
systems. The General Partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership. The information technology
system of the General Partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers. The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the General Partners and their affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the year 2000 problem. The Y2K
Team consists of the General Partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the systems used by the Partnership
could have a potential year 2000 problem.
The information system of the General Partners' affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the non-
information technology systems providers of the affiliates.
In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year 2000
compliant or will be year 2000 compliant prior to the year 2000. Although the
Y2K Team continues to receive positive responses from the companies with which
the Partnership has third party relationships regarding their year 2000
compliance, the General Partners cannot be assured that the third parties have
adequately considered the impact of the year 2000.
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In addition, the Y2K Team has requested documentation from the
Partnership's tenants. The Y2K Team is in the process of evaluating the
responses and expects to complete this process by October 31, 1999. The
Partnership has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades of the hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the General Partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the General Partners and their affiliates. The General
Partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The General Partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems. Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information or non-
information technology systems used by the Partnership is not expected to have a
material impact on the results of operations of the Partnership. Even if such
systems failed, the payment of rent under the Partnership's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of the General Partners and their affiliates before the year
2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Partnership, the Y2K Team will
develop a contingency plan if deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership. This could result in the
inability of the Partnership to accurately identify its Limited Partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the General Partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which the General
Partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant. The General Partners and their affiliates would have to allocate
resources to internally perform the functions of the transfer agent. The
General Partners do not anticipate that the additional cost of these resources
would have a material impact on the results of operations of the Partnership.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such financial institutions may be temporarily
unavailable. The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the General
Partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues. The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis. The General
Partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.
16
<PAGE>
Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses. The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000. The General Partners cannot be assured
that the tenants have addressed all possible year 2000 issues. The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.
The General Partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The General
Partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the General Partners will
assess the remedies available to the Partnership under its lease agreements.
Item 8. Financial Statements and Supplementary Data
17
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 19
Financial Statements:
Balance Sheets 20
Statements of Income 21
Statements of Partners' Capital 22
Statements of Cash Flows 23
Notes to Financial Statements 25
</TABLE>
18
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund III, Ltd.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund III, Ltd. (a Florida limited partnership) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the index appearing under item 14(a)(2)
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related financial statements. These financial
statements and financial statement schedules are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 14, 1999, except for Note 13 for which the date is March 11, 1999
19
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------- -----------------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land and building $11,418,836 $14,635,583
Net investment in direct financing leases, less
allowance for impairment in carrying value 887,071 926,862
Investment in joint ventures 2,157,147 1,179,762
Mortgage note receivable -- 681,687
Cash and cash equivalents 2,047,140 493,118
Restricted cash -- 251,879
Receivables, less allowance for doubtful
accounts of $153,598 and $154,469 89,519 102,420
Prepaid expenses 6,751 14,361
Lease costs, less accumulated amortization
of $12,000 and $2,762 -- 9,238
Accrued rental income, less allowance for
doubtful accounts of $41,380 and $15,384 65,914 154,738
Other assets 29,354 29,354
------------------ -----------------
$16,701,732 $18,479,002
================== =================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Accounts payable $ 2,072 $ 5,219
Accrued and escrowed real estate taxes payable 15,217 11,897
Distributions payable 500,000 594,000
Due to related parties 152,887 97,388
Rents paid in advance and deposits 25,579 20,745
------------------ -----------------
Total Liabilities 695,755 729,249
Minority interest 135,705 138,617
Partners' capital 15,870,272 17,611,136
------------------ -----------------
$16,701,732 $18,479,002
================== =================
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases $1,523,980 $1,859,911 $2,184,460
Adjustments to accrued rental income (103,830) -- --
Earned income from direct financing leases 134,702 70,575 89,390
Contingent rental income 98,915 157,648 157,993
Interest and other income 127,064 100,816 26,496
---------------- ---------------- ----------------
1,780,831 2,188,950 2,458,339
---------------- ---------------- ----------------
Expenses:
General operating and administrative 137,245 140,886 147,840
Professional services 36,591 27,314 50,064
Bad debt expense -- 32,360 924
Real estate taxes 11,966 47,165 1,973
State and other taxes 12,249 9,924 11,973
Depreciation and amortization 308,593 368,782 425,366
Transaction costs 14,227 -- --
---------------- ---------------- ----------------
520,871 626,431 638,140
---------------- ---------------- ----------------
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 and Impairment in Carrying Value of
Net Investment in Direct Financing Lease 1,259,960 1,562,519 1,820,199
Minority Interest in Income of Consolidated Joint Venture (17,285) (17,285) (17,282)
Equity in Earnings (Loss) of Unconsolidated Joint Ventures 22,708 (148,170) 11,740
Gain on Sale of Land and Buildings 497,321 1,027,590 --
Provision for Loss on Land and Building and Impairment in
Carrying Value of Net Investment in Direct Financing
Lease (25,821) (32,819) --
---------------- ---------------- ----------------
Net Income $1,736,883 $2,391,835 $1,814,657
================ ================ ================
Allocation of Net Income:
General partners $ 15,027 $ 18,306 $ 18,147
Limited partners 1,721,856 2,373,529 1,796,510
---------------- ---------------- ----------------
$1,736,883 $2,391,835 $1,814,657
================ ================ ================
Net Income Per Limited Partner Unit $ 34.44 $ 47.47 $ 35.93
================ ================ ================
Weighted Average Number of Limited Partner Units
Outstanding 50,000 50,000 50,000
================ ================ ================
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------------------- -----------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ------------- ------------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $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) 7,611,136
Distributions to limited
partners ($69.55 per
limited partner unit) -- -- -- (3,477,747) -- -- (3,477,747)
Net income -- 15,027 -- -- 1,721,856 -- 1,736,883
---------- --------- ------------ ------------ ----------- ----------- -----------
Balance, December 31, 1998 $161,500 $193,138 $25,000,000 $(26,627,387) $20,007,919 $(2,864,898) $15,870,272
========== ========= ============ ============ =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants $ 1,768,910 $ 2,268,568 $ 2,226,794
Distributions from unconsolidated joint
ventures 142,001 19,647 31,670
Cash paid for expenses (202,117) (325,067) (175,148)
Interest received 112,502 58,541 8,438
--------------- --------------- ---------------
Net cash provided by operating
activities 1,821,296 2,021,689 2,091,754
--------------- --------------- ---------------
Cash Flows From Investing Activities:
Proceeds from sale of land and buildings 3,647,241 3,023,357 --
Deposit received on sale of land parcel -- -- 51,400
Additions to land and buildings (150,000) (1,272,960) --
Investment in joint ventures (1,096,678) (703,667) --
Collections on mortgage note receivable 678,730 6,270 --
Decrease (increase) in restricted cash 245,377 (245,377) --
Decrease (increase) in other assets -- 2,135 (2,135)
--------------- --------------- ---------------
Net cash provided by investing activities 3,324,670 809,758 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 (20,197) (20,080) (20,082)
Distributions to limited partners (3,571,747) (2,376,000) (2,376,000)
--------------- --------------- ---------------
Net cash used in financing activities (3,591,944) (2,396,080) (2,396,082)
--------------- --------------- ---------------
Net Increase (Decrease) in Cash and Cash
Equivalents 1,554,022 435,367 (255,063)
Cash and Cash Equivalents at Beginning of Year 493,118 57,751 312,814
--------------- --------------- ---------------
Cash and Cash Equivalents at End of Year $ 2,047,140 $ 493,118 $ 57,751
=============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Net income $1,736,883 $ 2,391,835 $1,814,657
----------- ----------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense -- 32,360 924
Depreciation 299,355 368,182 424,766
Amortization 9,238 600 600
Minority interest in income of consolidated
joint venture 17,285 17,285 17,282
Equity in earnings of unconsolidated joint
ventures, net of distributions 119,293 167,817 19,930
Gain on sale of land and buildings (497,321) (1,027,590) --
Provision for loss on land and building and
impairment in carrying value of net
investment in direct financing lease 25,821 32,819 --
Decrease (increase) in receivables (7,936) 182,433 (216,117)
Decrease in net investment in direct
financing leases 13,970 12,056 7,331
Decrease (increase) in prepaid expenses 7,610 (7,463) (1,297)
Decrease (increase) in accrued rental income 88,824 (40,000) (32,667)
Increase (decrease) in accounts payable and
accrued expenses 173 (71,844) (4,732)
Increase (decrease) in due to related parties 2,099 (20,621) 48,944
Increase (decrease) in rents paid in advance
and deposits 6,002 (16,180) 12,133
----------- ----------- ----------
Total adjustments 84,413 (370,146) 277,097
----------- ----------- ----------
Net Cash Provided by Operating Activities $1,821,296 $ 2,021,689 $2,091,754
=========== =========== ==========
Supplemental Schedule on Non-Cash Investing and
Financing Activities
Mortgage note accepted as consideration in
sale of land and building $ -- $ 685,000 $ --
=========== =========== ==========
Deferred real estate disposition fee incurred and
unpaid at end of year $ 53,400 $ 15,150 $ --
=========== =========== ==========
Distributions declared and unpaid at end of year $ 500,000 $ 594,000 $ 594,000
=========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
--------------------------------
Organization and Nature of Business - CNL Income Fund 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 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.
25
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
--------------------------------------------
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date. Whenever a tenant defaults under the terms of its
lease, or events or changes in circumstance indicate that the tenant
will not lease the property through the end of the lease term, the
Partnership either reserves or writes-off the cumulative accrued
rental income balance.
When the properties are sold, the related cost and accumulated depreciation
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. If an impairment is
indicated, the assets are adjusted to their fair value. 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.
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 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, RTO Joint
Venture, and a property in each of Englewood, Colorado, Miami, Florida, and
Overland Park, Kansas held as tenants-in-common with affiliates, is
accounted for using the equity method since the Partnership shares control
with affiliates of the general partners.
26
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
--------------------------------------------
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 experience 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.
Lease costs are written off during the period in which a lease is
terminated.
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.
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.
Reclassification - Certain items in the prior year's financial statements
----------------
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
27
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
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 five 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.
3. Land and Buildings on Operating Leases:
---------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Land $ 5,926,601 $ 7,325,960
Buildings 8,231,130 10,891,910
------------------ -----------------
14,157,731 18,217,870
Less accumulated depreciation (2,738,895) (3,341,624)
------------------ -----------------
11,418,836 14,876,246
Less allowance for loss on
land and building -- (240,663)
------------------ -----------------
$11,418,836 $14,635,583
================== =================
</TABLE>
As of January 1, 1996, the Partnership had 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.
28
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
---------------------------------------------------
The aggregate allowance represented the difference between the property's
carrying value at December 31, 1997, and the estimated net realizable value
of the property based on the anticipated sales price relating to this
property. The Partnership sold this property during the year ended
December 31, 1998, as described below.
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 fund 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 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.
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 (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.
29
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
---------------------------------------------------
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. During 1998, the Partnership collected
the full amount of the outstanding mortgage note receivable balance of
$678,730 (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).
In October 1997, the Partnership sold its property in Mason City, Iowa, to
the tenant for $218,790 and received net sales proceeds 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 (see Note 5).
During the year ended December 31, 1998, the Partnership sold its
properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and
Hagerstown, Maryland, for a total of $3,280,000 and received net sales
proceeds of $3,214,616, resulting in a total gain of $596,586 for financial
reporting purposes. In connection with the sales of the properties in
Daytona Beach and Fernandina Beach, Florida, the Partnership incurred
deferred, subordinated, real estate disposition fees of $53,400 (see Note
11).
In September 1998, the Partnership entered into a new lease agreement for
the Golden Corral property located in Stockbridge, Georgia. In connection
therewith, the Partnership funded $150,000 in renovation costs.
In addition, during the year ended December 31, 1998, the Partnership sold
its property in Hazard, Kentucky to a third party for $435,000, and
received net sales proceeds of $432,625, resulting in a loss of $99,265 for
financial reporting purposes.
30
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
---------------------------------------------------
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 year ended
December 31, 1998, the Partnership recognized a loss of $88,824 (net of
$25,996 in reserves and $103,830 in write-offs), income during 1997 of
$40,000 (net of $15,384 in reserves) and income of $32,667 during 1996, 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, 1998:
<TABLE>
<S> <C>
1999 $ 1,478,029
2000 1,478,029
2001 1,482,555
2002 1,459,600
2003 1,186,149
Thereafter 6,731,050
--------------------
$13,815,412
====================
</TABLE>
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during the
initial lease term. In addition, this table does not include any amounts
for future contingent rentals which may be received on the lease based on a
percentage of the tenants' gross sales.
31
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
4. Net Investment in Direct Financing Leases:
------------------------------------------
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Minimum lease payments receivable $ 2,042,847 $ 2,191,519
Estimated residual value 239,432 239,432
Less unearned income (1,369,387) (1,504,089)
---------------- ----------------
912,892 926,862
Less allowance for impairment in
carrying value of investment in
direct financing lease (25,821) --
---------------- ----------------
Net investment in direct financing leases $ 887,071 $ 926,862
================ ================
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 148,672
200 148,672
2001 148,672
2002 148,672
2003 148,672
Thereafter 1,299,487
-----------------
$2,042,847
=================
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or contingent rental payments that may become due in future periods
(see Note 3).
During 1998, the Partnership recorded an allowance for impairment in
carrying value of net investment in direct financing lease of $25,821 for
financial reporting purposes relating to the property in Hagerstown,
Maryland, due to financial difficulties the tenant is experiencing. The
allowance represents the difference between the carrying value of the
property at December 31, 1998, and the current estimated net realizable
value for this property.
32
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
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, 1998, the Partnership owned a 33 percent interest in
this property.
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, 1998, the Partnership
owned a 9.84% interest in this property.
In January 1998, the Partnership acquired a property located in Overland
Park, Kansas, 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, 1998, the Partnership owned a 25.87% interest
in this property.
In May 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and
hold one restaurant property. As of December 31, 1998, the Partnership had
contributed $676,952 to purchase land and pay for construction relating to
the joint venture. Construction was completed and rent commenced in
December 1998. The Partnership holds a 46.88% interest in the profits and
losses of this joint venture at December 31, 1998. The Partnership
accounts for its investment in this joint venture under the equity method
since the Partnership shares control with an affiliate.
33
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
-----------------------------------------
Titusville Joint Venture, RTO Joint Venture, and the Partnership and
affiliates, as tenants-in-common in three 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:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Land and buildings on operating
leases, less accumulated
depreciation and allowance
for loss on land and building $3,598,641 $3,152,962
Net investment in direct
financing leases 3,418,537 1,003,680
Cash 19,254 16,481
Receivables 1,241 --
Accrued rental income 66,668 11,621
Other assets 2,679 1,480
Liabilities 59,453 18,722
Partners' capital 7,047,567 4,167,502
Revenues 604,672 82,837
Provision for loss on land and
building 125,251 147,100
Net income (loss) 404,446 (157,912)
</TABLE>
The Partnership recognized income of $22,708 and $11,740 for the years
ended December 31, 1998 and 1996, respectively, and recognized a loss
totaling $148,170, for the year ended December 31, 1997, relating to
investment in joint ventures.
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 Partnership
collected the full amount of the outstanding mortgage note, including
interest, during the year ended December 31, 1998.
34
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
6. Mortgage Note Receivable - Continued:
-------------------------------------
The mortgage note receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------------- ---------------
<S> <C> <C>
Principal balance $ -- $ 678,730
Accrued interest receivable -- 2,957
----------------- ---------------
$ -- $ 681,687
================= ===============
</TABLE>
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 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 at a rate of ten
percent per annum, is being collected in 36 equal monthly installments of
$807 and commenced in October 1996. Receivables at December 31, 1998 and
1997, include $7,109 and $16,318, respectively, including accrued interest
of $142 and $164, respectively, relating to the promissory note.
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. During the year ended December 31,
1998, these funds were released by the escrow agent and were used to
acquire additional properties.
35
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
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 not in
liquidation of the Partnership, to the extent distributed, will be
distributed first to the limited partners in an amount sufficient to
provide them with their cumulative 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners.
Any gain from the sale of a property not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners will positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will
be used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves
that may be deemed necessary for any anticipated or unforeseen liabilities
or obligations of the Partnership, iii) third, to pay all of the
Partnership's liabilities, if any, to the general and limited partners, iv)
fourth, after allocations of net income, gains and/or losses, to distribute
to the partners with positive capital accounts balances, in proportion to
such balances, up to amounts sufficient to reduce such positive balances to
zero, and v) thereafter, any funds remaining shall then be distributed 95
percent to the limited partners and five percent to the general partners.
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,477,747 and during each of the
years ended December 31, 1997 and 1996, the Partnership declared
distributions to the limited partners of $2,376,000. Distributions for the
year ended December 31, 1998, including $1,477,747 as a result of
distributions of net sales proceeds from the sale of the properties in
Fernandina Beach and Daytona Beach, Florida. This amount was applied toward
the limited partners' cumulative 10% Preferred Return. No distributions
have been made to the general partners to date.
36
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
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>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Net income for financial reporting purposes $1,736,883 $2,391,835 $1,814,657
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes (17,075) (21,782) (9,754)
Allowance for loss on land and building and
impairment in carrying value of net
investment in direct financing lease 25,821 32,819 --
Direct financing leases recorded as operating
leases for tax reporting purposes 13,970 12,056 7,330
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 (115,137) (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 59,725 140,707 (1,329)
Allowance for doubtful accounts (871) 84,326 (283,135)
Accrued rental income 88,824 (40,000) (32,667)
Capitalization of transaction costs for tax
reporting purposes 14,227 -- --
Rents paid in advance 6,002 (16,680) 12,133
Minority interest in timing differences of
consolidated joint venture (35) (133) (162)
------------ ------------ -----------
Net income for federal income tax purposes $1,812,334 $1,893,867 $1,527,797
============ ============ ===========
</TABLE>
37
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
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 majority stockholder of CNL
Fund Advisors, Inc. The other individual general partner, Robert A.
Bourne, serves as treasurer, director and vice chairman of the board of CNL
Fund Advisors. During the years ended December 31, 1998, 1997, and 1996,
CNL Fund Advisors, Inc. (hereinafter referred to as the "Affiliate")
performed certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliate an annual, noncumulative,
subordinated 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
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, 1998, 1997, and 1996.
The Affiliate is 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-half of a competitive real estate commission or
three percent of the sales price if the Affiliate provides a substantial
amount of services in connection with the 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, cumulative 10% Preferred Return, plus their adjusted capital
contributions. During the years ended December 31, 1998 and 1997, the
Partnership incurred $53,400 and $15,150, respectively, in deferred,
subordinated real estate disposition fees as a result of the Partnership's
sale of the properties in Daytona Beach and Fernandina Beach, Florida, and
the Property in Chicago, Illinois, respectively. No deferred, subordinated
real estate disposition fees were incurred for the year ended December 31,
1996.
38
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
11. Related Party Transactions - Continued:
---------------------------------------
During the years ended December 31, 1998, 1997, and 1996, the Affiliates
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $89,756, $87,056, and $85,906
for the years ended December 31, 1998, 1997, and 1996, respectively, for
such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on
behalf of the Partnership $ 41,888 $38,492
Accounting and administrative
services 42,449 43,746
Deferred, subordinated real
estate disposition fee 68,550 15,150
---------- ----------
$152,887 $97,388
========== ==========
</TABLE>
12. Concentration of Credit Risk:
----------------------------
For the years ended December 31, 1998, 1997, and 1996, rental income from
Golden Corral Corporation was $454,380, $474,553, and $490,196,
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 joint ventures and the properties held as tenants-in-
common with affiliates).
39
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
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 joint ventures and the
properties held as tenants-in-common with affiliates) for each of the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Golden Corral Family
Steakhouse Restaurants $454,380 $474,553 $490,196
KFC 277,508 261,415 254,646
Pizza Hut 211,507 255,055 292,795
Taco Bell N/A 250,140 254,395
Perkins N/A N/A 276,114
Denny's N/A 229,537 355,123
</TABLE>
The information denoted by N/A indicates that for each period presented,
the tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant
chains could significantly impact the results of operations of the
Partnership if the Partnership is not able to re-lease the properties in a
timely manner.
13. Subsequent Event:
----------------
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which
the Partnership would be merged with and into a subsidiary of APF (the
"Merger"). As consideration for the Merger, APF has agreed to issue
2,082,901 shares of its common stock, par value $0.01 per shares (the "APF
Shares"). In order to assist the general partners in evaluating the
proposed merger consideration, the general partners retained Valuation
Associates,
40
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
13. Subsequent Event:
----------------
a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $20,535,734 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with
the consummation of the Merger, and, therefore, would be freely tradable at
the option of the former limited partners. At a special meeting of the
partners, limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In
connection with their recommendation, the general partners will solicit the
consent of the limited partners at the special meeting. If the limited
partners reject the Merger, the Partnership will bear the portion of the
transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
41
<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 28th day of
October, 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.
42
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert A. Bourne President, Treasurer and Director October 28, 1999
- ------------------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director October 28, 1999
- ------------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
43
