FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended June 30, 1999
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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
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CNL Income Fund III, Ltd.
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(Exact name of registrant as specified in its charter)
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<CAPTION>
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Florida 59-2809460
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East South Street
Orlando, Florida 32801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
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</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for 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 _____
<PAGE>
CONTENTS
Page
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets
Condensed Statements of Income
Condensed Statements of Partners' Capital
Condensed Statements of Cash Flows
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II.
Other Information
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
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<CAPTION>
June 30, December 31,
1999 1998
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ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,637,561 and
$2,738,895, respectively $ 10,472,484 $ 11,418,836
Net investment in direct financing leases, less allowance
for impairment in carrying value of $25,821 in 1998 1,129,246 887,071
Investment in joint ventures 2,150,281 2,157,147
Cash and cash equivalents 1,757,137 2,047,140
Restricted cash 1,097,485 --
Receivables, less allowance for doubtful accounts
of $6,158 and $153,598, respectively 18,690 89,519
Prepaid expenses 9,830 6,751
Accrued rental income, less allowance for doubtful
accounts of $41,380 in 1998 86,038 65,914
Other assets 29,354 29,354
------------------ -------------------
$ 16,750,545 $ 16,701,732
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 71,146 $ 2,072
Escrowed real estate taxes payable 12,538 15,217
Distributions payable 500,000 500,000
Due to related party 163,474 152,887
Rents paid in advance 20,614 25,579
------------------ -------------------
Total liabilities 767,772 695,755
Commitments and Contingencies (Note 5)
Minority interests 134,303 135,705
Partners' capital 15,848,470 15,870,272
------------------ -------------------
$ 16,750,545 $ 16,701,732
================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
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<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
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Revenues:
Rental income from operating leases $ 297,471 $ 318,276 $ 680,349 $ 739,401
Earned income from direct financing leases 110,427 33,743 154,395 67,609
Contingent rental income 26,437 21,053 29,418 33,886
Interest and other income 37,862 39,489 54,332 80,671
------------ ------------ ------------ ------------
472,197 412,561 918,494 921,567
------------ ------------ ------------ ------------
Expenses:
General operating and administrative 29,310 38,942 64,032 70,722
Professional services 10,874 20,446 14,162 25,056
Real estate taxes -- 3,306 -- 7,535
State and other taxes 924 204 13,541 11,720
Depreciation and amortization 65,560 83,902 134,840 164,319
Transaction costs 51,231 -- 82,113 --
------------ ------------ ------------ ------------
157,899 146,800 308,688 279,352
------------ ------------ ------------ ------------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Buildings 314,298 265,761 609,806 642,215
Minority Interest in Income of Consolidated
Joint Venture (4,232 ) (4,236 ) (8,577 ) (8,581 )
Equity in Earnings of Unconsolidated
Joint Ventures 41,998 18,523 83,457 41,274
Gain on Sale of Land and Buildings 293,512 13,213 293,512 596,586
------------ ------------ ------------ ------------
Net Income $ 645,576 $ 293,261 $ 978,198 $1,271,494
============ ============ ============ ============
Allocation of Net Income:
General partners $ 5,883 $ 2,932 $ 9,209 $ 11,490
Limited partners 639,693 290,329 968,989 1,260,004
------------ ------------ ------------ ------------
$ 645,576 $ 293,261 $ 978,198 $1,271,494
============ ============ ============ ============
Net Income Per Limited Partner Unit $ 12.79 $ 5.81 $ 19.38 $ 25.20
============ ============ ============ ============
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000 50,000 50,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
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<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
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General partners:
Beginning balance $ 354,638 $ 339,611
Net income 9,209 15,027
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363,847 354,638
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Limited partners:
Beginning balance 15,515,634 17,271,525
Net income 968,989 1,721,856
Distributions ($20.00 and $69.55 per
limited partner unit, respectively) (1,000,000 ) (3,477,747 )
------------------- -----------------
15,484,623 15,515,634
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Total partners' capital $ 15,848,470 $ 15,870,272
=================== =================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
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<CAPTION>
Six Months Ended
June 30,
1999 1998
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Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 958,915 $ 936,758
--------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings 1,792,169 3,214,616
Addition to land and buildings on
operating leases (326,996 ) --
Investment in direct financing lease (612,920 ) --
Investment in joint ventures -- (801,682 )
Collections on note receivable -- 6,557
Decrease (increase) in restricted cash (1,091,192 ) 245,377
--------------- --------------
Net cash provided by (used in) investing
activities (238,939 ) 2,664,868
--------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,000,000 ) (2,571,747 )
Distributions to holders of minority interest (9,979 ) (10,099 )
--------------- --------------
Net cash used in financing activities (1,009,979 ) (2,581,846 )
--------------- --------------
Net Increase (Decrease) in Cash and Cash
Equivalents (290,003 ) 1,019,780
Cash and Cash Equivalents at Beginning of Period 2,047,140 493,118
--------------- --------------
Cash and Cash Equivalents at End of Period $1,757,137 $1,512,898
=============== ==============
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fees incurred
and unpaid at end of period $ -- $ 53,400
=============== ==============
Distributions declared and unpaid at end of
period $500,000 $ 500,000
=============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 1999 may not be indicative of
the results that may be expected for the year ending December 31, 1999.
Amounts as of December 31, 1998, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund III, Ltd. (the "Partnership") for the year ended December
31, 1998.
The Partnership accounts for its 69.07% interest in Tuscawilla Joint
Venture using the consolidation method. Minority interests 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.
2. Land and Buildings on Operating Leases:
In January 1999, the Partnership reinvested the majority of the net
sales proceeds from the 1998 sale of a Po Folks property in Hagerstown,
Maryland, along with amounts collected in 1998 under a promissory note
accepted in connection with the 1997 sale of a Property in Roswell,
Georgia, in a Burger King property in Montgomery, Alabama. The Property
had an approximate cost of $939,900. In accordance with Statement of
Financial Accounting Standards No. 13, "Accounting for Leases," the
land portion of this property was classified as an operating lease
while the building portion was classified as a direct financing lease.
In April 1999, the Partnership sold its property in Flagstaff, Arizona,
to the tenant, for $1,103,127 and received net sales proceeds of
$1,091,192, resulting in a gain of $285,350 for financial reporting
purposes. This property was originally acquired by the Partnership in
October 1998 and had a cost of approximately $993,500, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $97,700 in excess of
its original purchase price (see Note 4).
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
2. Land and Buildings on Operating Leases - Continued:
In June 1999, the Partnership sold its Denny's property in Hagerstown,
Maryland to the tenant, for $710,000 and received net sales proceeds of
$700,977, resulting in a gain of $8,162 for financial reporting
purposes (see Note 3).
3. Net Investment in Direct Financing Leases:
In June 1999, the Partnership sold its Denny's property in Hagerstown,
Maryland, for which the building portion had been classified as a
direct financing lease. In connection therewith, the gross investment
(minimum lease payments receivable and estimated residual value) and
unearned income relating to this property were removed from the
accounts and the gain from the sale relating to this property was
reflected in income (see Note 2).
4. Restricted Cash:
As of June 30, 1999, net sales proceeds of $1,091,192 from the sale of
the property in Flagstaff, Arizona, plus accrued interest of $6,293,
were being held in interest-bearing escrow account pending the release
of funds by the escrow agent to acquire an additional property on
behalf of the Partnership.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 1,041,451 shares of its common stock, par value $0.01 per share
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the
price paid by APF investors (after an adjustment for a one for two
reverse stock split which occurred on June 3, 1999) in three previous
public offerings, the most recent of which was completed in December
1998. 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 Partnership's property portfolio
and other assets were valued on a going concern basis (meaning the
Partnership continues
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
5. Commitments and Contingencies - Continued:
unchanged) at $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 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 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.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF and CNL Fund Advisors, Inc. and certain of its
affiliates, in connection with the proposed Merger. The general
partners and APF believe that the lawsuits are without merit and intend
to defend vigorously against the claims. See Part II - Item 1. Legal
Proceedings.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CNL Income Fund III, Ltd. (the "Partnership") is a Florida limited
partnership that 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 restaurants 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 responsible for all repairs and maintenance, property
taxes, insurance and utilities. As of June 30, 1999, the Partnership owned 26
Properties, which included interests in three Properties owned by joint ventures
in which the Partnership is a co-venturer and three Properties owned with
affiliates of the general partners as tenants-in-common.
Capital Resources
During the six months ended June 30, 1999 and 1998, the Partnership
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $958,915 and $936,758, respectively. The increase in
cash from operations for the six months ended June 30, 1999 is primarily a
result of changes in the Partnership's working capital and changes in income and
expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In January 1999, the Partnership reinvested the majority of the net
sales proceeds from the 1998 sale of a Po Folks Property in Hagerstown,
Maryland, along with a portion of the amounts collected in 1998 under the
promissory note accepted in connection with the 1997 sale of the Property in
Roswell, Georgia, in a Burger King Property in Montgomery, Alabama, at an
approximate cost of $939,900.
In April 1999, the Partnership sold its Property in Flagstaff, Arizona,
to the tenant for $1,103,127 and received net sales proceeds of $1,091,192,
resulting in a gain of $285,350 for financial reporting purposes. This Property
was originally acquired by the Partnership in October 1988 and had a cost of
approximately $993,500, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately $97,700
in excess of its original purchase price. As of June 30, 1999, the net sales
proceeds were being held in an interest bearing escrow account pending the
release of funds by the escrow agent to acquire an additional Property. The
Partnership anticipates this transaction, or a portion thereof, will be
structured to qualify as a like-kind exchange transaction for federal income tax
purposes.
In June 1999, the Partnership sold its Denny's Property in Hagerstown,
Maryland, to the tenant for $710,000 and received net sales proceeds of
$700,977, resulting in a gain of $8,162 for financial reporting purposes. The
Partnership intends to reinvest the remaining net sales proceeds in an
additional Property. The Partnership anticipates that it will distribute amounts
sufficient to enable the limited partners to pay federal and state income taxes,
if any (at a level reasonably assumed by the general partners), resulting from
the sale.
Currently, rental income from the Partnership's Properties and net
sales proceeds from the sale of a Property, pending reinvestment in an
additional Property, are invested in money market accounts or other short-term,
highly liquid investments such as demand deposit accounts at commercial banks,
certificates of deposits, 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 June 30, 1999, the
Partnership had $1,757,137 invested in such short-term investments, as compared
to $2,047,140 at December 31, 1998. The decrease in cash and cash equivalents
during the six months ended June 30, 1999, is primarily attributable to the
reinvestment of net sales proceeds in a Property in Montgomery, Alabama, in
January 1999, as described above. The Partnership expects to use the funds
remaining at June 30, 1999 to pay distributions and other liabilities and to
invest in an additional Property.
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 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.
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 operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, and for the six
months ended June 30, 1998, proceeds received from the sales of two Properties,
the Partnership declared distributions to limited partners of $1,000,000 and
$2,477,747 for the six months ended June 30, 1999 and 1998, respectively
($500,000 for each of the quarters ended June 30, 1999 and 1998). This
represents distributions of $20.00 and $49.55 per unit for the six months ended
June 30, 1999 and 1998, respectively ($10.00 per unit for each of the quarters
ended June 30, 1999 and 1998). Distributions for the six months ended June 30,
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.
No distributions were made to the general partners for the quarters and six
months ended June 30, 1999 and 1998. No amounts distributed to the limited
partners for the six months ended June 30, 1999 and 1998 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.
Total liabilities of the Partnership, including distributions payable,
increased to $767,772 at June 30, 1999 from $695,755 at December 31, 1998
primarily as a result of the Partnership accruing transaction costs relating to
the proposed merger with CNL American Properties Fund, Inc. ("APF"), as
described below. The general partners believe that the Partnership has
sufficient cash on hand to meet its current working capital needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During the six months ended June 30, 1998, the Partnership and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 26 wholly
owned Properties (which included four Properties which were sold in 1998) and
during the six months ended June 30, 1999, the Partnership and its consolidated
joint venture owned and leased 23 wholly owned Properties (which included two
Properties which were sold in 1999), to operators of fast-food and family-style
restaurant chains. In connection therewith, during the six months ended June 30,
1999 and 1998, the Partnership earned $834,744 and $807,010, respectively, in
rental income from operating leases and earned income from direct financing
leases from these Properties, $407,898 and $352,019 of which was earned during
the quarters ended June 30, 1999 and 1998, respectively. The increase in rental
and earned income during the quarter and six months ended June 30, 1999 as
compared to the quarter and six months ended June 30, 1998, is due to the fact
that, during the quarter and six months ended June 30, 1998, the Partnership
terminated its lease with the tenant of the Property in Canton Township,
Michigan. Therefore, during the quarter and six months ended June 30, 1998, the
Partnership wrote-off approximately $59,000 in accrued rental income relating to
this Property, representing non-cash accounting adjustments since inception of
the lease relating to the straight lining of future scheduled rent increases in
accordance with generally accepted accounting principles. No such amounts were
written off during the quarter and six months ended June 30, 1999.
The increase in rental and earned income during the quarter and six
months ended June 30, 1999, was partially offset by a decrease of approximately
$26,100 and $69,700, respectively, as a result of the sale of several Properties
during 1998 and 1999. This decrease was partially offset by an increase in
rental and earned income of approximately $24,300 and $41,600, respectively
during the quarter and six months ended June 30, 1999, due to the fact that
during January 1999, the Partnership reinvested a portion of net sales proceeds
in an additional Property, as described above in "Capital Resources." However,
rental and earned income are expected to remain at reduced amounts as a result
of distributing a portion of the net sales proceeds to limited partners during
1998 from two of the Properties sold during 1998.
For the six months ended June 30, 1999 and 1998, the Partnership owned
and leased three Properties indirectly through joint venture arrangements and
three Properties as tenants-in-common with affiliates of the general partners.
In connection therewith, during the six months ended June 30, 1999 and 1998, the
Partnership earned income of $83,457 and $41,274, respectively, $41,998 and
$18,523 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. The increase in net income earned by joint ventures during the
quarter and six months ended June 30, 1999, is due to the fact that in May 1998,
the Partnership reinvested net sales proceeds from sales of Properties during
1998, in RTO Joint Venture, with an affiliate of the general partners.
In addition, during the six months ended June 30, 1999 and 1998, the
Partnership earned $54,332 and $80,671, respectively, in interest and other
income, $37,862 and $39,489 of which was earned during the quarters ended June
30, 1999 and 1998, respectively. The decrease in interest and other income
during the six months ended June 30, 1999, as compared to the six months ended
June 30, 1998, is primarily attributable to a decrease in interest income as a
result of the fact that in July 1998, the Partnership collected the full balance
of a mortgage note receivable related to the Property in Roswell, Georgia, that
the Partnership had accepted in conjunction with the sale of a Property in a
prior year.
Operating expenses, including depreciation and amortization expense,
were $308,688 and $279,352 for the six months ended June 30, 1999 and 1998,
respectively, of which $157,899 and $146,800 were incurred for the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was primarily due to the fact that
the Partnership incurred approximately $51,200 and $82,100 in transaction costs
during the quarter and six months ended June 30, 1999, respectively, relating 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.
The increase in operating expenses for the quarter and six months ended
June 30, 1999, was partially offset by a decrease in operating expenses due to
the fact that, during 1998, the Partnership recognized real estate tax expense
relating to the Po Folks Property in Hagerstown, Maryland, based on the fact
that payment by the former tenant was doubtful. The Partnership sold this
Property in June 1998. The increase in operating expenses also was offset by a
decrease in operating expenses during the quarter and six months ended June 30,
1999, as a result of a decrease in depreciation expense due to the sale of
several Properties during the six months ended June 30, 1999 and 1998.
As a result of the sales of two Properties during the quarter and six
months ended June 30, 1999, as described above in "Capital Resources," the
Partnership recognized total gains of $293,512 for financial reporting purposes.
In addition, as a result of the sales of one and four Properties during the
quarter and six months ended June 30, 1998, the Partnership recognized total
gains of $13,213 and $596,586, respectively.
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 (the "Merger"). As consideration for the Merger, APF
has agreed to issue 1,041,451 shares of its common stock, par value $0.01 per
share (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the price paid
by APF investors (after an adjustment for a one for two reverse stock split
which occurred on June 3, 1999) in three previous public offerings, the most
recent of which was completed in December 1998. 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 Partnership's property portfolio and other
assets were valued on a going concern basis (meaning the Partnership continues
unchanged) at $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 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 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.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to
add three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF and CNL Fund Advisors, Inc. and certain of its
affiliates, in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims. See Part II - Item 1. Legal Proceedings.
Year 2000 Readiness Disclosure
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. As of June 30, 1999 the
Partnership did not have any information or non-information technology systems.
The general partners and certain of the affiliates of the general partners
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 affiliates of the general partners 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 of the general partners are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The affiliates of the general partners have no
internally generated programmed software coding to correct because substantially
all of the software utilized by the general partners and affiliates is purchased
or licensed from external providers. The maintenance of non-information
technology systems at the Partnership's Properties is the responsibility of the
tenants of the Properties in accordance with the terms of the Partnership's
leases.
In early 1998, the general partners and affiliates formed a Year 2000
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 certain of the affiliates of the general
partners, including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management. The Y2K Team's initial step in assessing the Partnership's Year 2000
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of the
Partnership's systems could have a potential Year 2000 problem.
The information system of the affiliates of the general partners is
comprised of hardware and software applications from mainstream suppliers.
Accordingly, the Y2K Team is in the process of contacting the respective vendors
and manufacturers to verify the Year 2000 compliance of their products. In
addition, the Y2K Team has also requested and is evaluating documentation from
other companies with which the Partnership has a material third party
relationship, including the Partnership's tenants, vendors, financial
institutions and the Partnership's transfer agent. The Partnership depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash and its transfer agent to maintain and track investor
information. The Y2K Team has also requested and is evaluating documentation
from the non-information technology systems providers of the affiliates of the
general partners. Although the general partners continue 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 tenants, financial institutions, transfer agent, other
vendors and system providers have adequately considered the impact of the Year
2000. The general partners are not able to measure the effect on the operations
of the Partnership of any third party's failure to adequately address the impact
of the Year 2000.
The general partners and their affiliates have identified and have
implemented upgrades for certain hardware equipment. In addition, the general
partners and their affiliates have identified certain software applications
which will require upgrades to become Year 2000 compliant. The general partners
expect that all of these upgrades, as well as any other necessary remedial
measures on the information technology systems used in the business activities
and operations of the Partnership, to be completed by September 30, 1999,
although, the general partners cannot be assured that the upgrade solutions
provided by the vendors have addressed all possible Year 2000 issues. The
general partners do not expect the aggregate cost of the Year 2000 remedial
measures to be material to the results of operations of the Partnership.
The general partners and their affiliates have received certification
from the Partnership's transfer agent of its Year 2000 compliance. Due to the
material relationship of the Partnership with its transfer agent, the Y2K Team
is evaluating the Year 2000 compliance of the systems of the transfer agent and
expects to have the evaluation completed by September 30, 1999. Despite the
positive response from the transfer agent and the evaluation of the transfer
agent's system by the Y2K Team, the general partners cannot be assured that the
transfer agent has addressed all possible Year 2000 issues. In the event that
the systems of the transfer agent are not Year 2000 compliant, the general
partners and their affiliates will 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 Partnership.
Based upon the progress the general partners and their affiliates have
made in addressing the Year 2000 issues and their plan and timeline to complete
the compliance program, the general partners do not foresee significant risks
associated with Year 2000 compliance at this time. The general partners and
their affiliates plan to address their significant Year 2000 issues prior to the
Partnership being affected by them; therefore, we have not developed a
comprehensive contingency plan. However, if the general partners and their
affiliates identify significant risks related to their Year 2000 compliance, or
if their progress deviates from the anticipated timeline, the general partners
and their affiliates will develop contingency plans as deemed necessary at that
time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 11, 1999, four limited partners in several CNL Income Funds
served a derivative and purported class action lawsuit filed April
22, 1999 against the general partners and APF in the Circuit Court
of the Ninth Judicial Circuit of Orange County, Florida, alleging
that the general partners breached their fiduciary duties and
violated provisions of certain of the CNL Income Fund partnership
agreements in connection with the proposed Merger. The plaintiffs
are seeking unspecified damages and equitable relief. On July 8,
1999, the plaintiffs filed an amended complaint which, in addition
to naming three additional plaintiffs, includes allegations of
aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended, the
caption of the case is Jon Hale, Mary J. Hewitt, Charles A.
Hewitt, Gretchen M. Hewitt Bernard J. Schulte, Edward M. and
Margaret Berol Trust, and Vicky Berol v. James M. Seneff, Jr.,
Robert A. Bourne, CNL Realty Corporation, and CNL American
Properties Fund, Inc., Case No. CIO-99-0003561.
On June 22, 1999, a limited partner of several CNL Income Funds
served a purported class action lawsuit filed April 29, 1999
against the general partners and APF, Ira Gaines, individually and
on behalf of a class of persons similarly situated, v. CNL
American Properties Fund, Inc., James M. Seneff, Jr., Robert A.
Bourne, CNL Realty Corporation, CNL Fund Advisors, Inc., CNL
Financial Corporation a/k/a CNL Financial Corp., CNL Financial
Services, Inc. and CNL Group, Inc., Case NO. CIO-99-3796, in the
Circuit Court of the Ninth Judicial Circuit of Orange County,
Florida, alleging that the general partners breached their
fiduciary duties and that APF aided and abetted their breach of
fiduciary duties in connection with the proposed Merger. The
plaintiff is seeking unspecified damages and equitable relief.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
Item 5. Other Information. Inapplicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund, Inc.
("APF") dated March 11, 1999 and as amended on
June 4, 1999 (Filed as Appendix B to the
Prospectus Supplement for the Registrant,
constituting a part of Amendment No. 1 to the
Registration Statement of APF on Form S-4, File
No. 74329.)
3.1 Certificate of Limited Partnership of CNL Income
Fund III, Ltd. (Included as Exhibit 3.1 to
Amendment No. 1 to Registration Statement No.
33-15374 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with
the Securities and Exchange Commission on April
5, 1993, and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income
Fund III, Ltd. (Included as Exhibit 3.1 to
Amendment No. 1 to Registration Statement No.
33-15374 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with
the Securities and Exchange Commission on April
5, 1993, and incorporated herein by reference.)
10.1 Property Management Agreement (Included as
Exhibit 10.1 to Form 10-K filed with the
Securities and Exchange Commission on April 5,
1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from
CNL Investment Company to CNL Income Fund
Advisors, Inc. (Included as Exhibit 10.2 to Form
10-K filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Property Management Agreement from
CNL Income Fund Advisors, Inc. to CNL Fund
Advisors, Inc. (Included as Exhibit 10.3 to Form
10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated
herein by reference.)
27 Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of August, 1999.
CNL INCOME FUND III, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
-----------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
-----------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund III, Ltd. at June 30, 1999, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10-Q of CNL Income Fund III, Ltd. for the six months ended June 30,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,854,622<F2>
<SECURITIES> 0
<RECEIVABLES> 24,848
<ALLOWANCES> 6,158
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 13,110,045
<DEPRECIATION> 2,637,561
<TOTAL-ASSETS> 16,750,545
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,848,470
<TOTAL-LIABILITY-AND-EQUITY> 16,750,545
<SALES> 0
<TOTAL-REVENUES> 918,494
<CGS> 0
<TOTAL-COSTS> 308,688
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 978,198
<INCOME-TAX> 0
<INCOME-CONTINUING> 978,198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 978,198
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund III, ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
<F2>Includes $1,097,485 in restricted cash.
</FN>
</TABLE>
