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 March 31, 1999
--------------------------------------------------------------------------
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)
<TABLE>
<CAPTION>
<S> <C>
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) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
------------------------------------------------
</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
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------------- -------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,808,175 and
$2,738,895 $ 11,676,552 $ 11,418,836
Net investment in direct financing leases, less allowance
for impairment in carrying value of $25,821 1,494,852 887,071
Investment in joint ventures 2,153,198 2,157,147
Cash and cash equivalents 1,044,255 2,047,140
Receivables, less allowance for doubtful accounts
of $154,918 and $153,598 64,657 89,519
Prepaid expenses 7,948 6,751
Accrued rental income, less allowance for doubtful
accounts of $41,380 75,172 65,914
Other assets 29,354 29,354
------------------- -------------------
$ 16,545,988 $ 16,701,732
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 31,407 $ 2,072
Accrued and escrowed real estate taxes payable 14,463 15,217
Distributions payable 500,000 500,000
Due to related party 141,182 152,887
Rents paid in advance 20,982 25,579
------------------- -------------------
Total liabilities 708,034 695,755
Minority interests 135,060 135,705
Partners' capital 15,702,894 15,870,272
------------------- -------------------
$ 16,545,988 $ 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
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
-------------- ---------------
<S> <C>
Revenues:
Rental income from operating leases $ 382,878 $ 421,125
Earned income from direct financing leases 43,968 33,866
Contingent rental income 2,981 12,833
Interest and other income 16,470 41,182
-------------- ---------------
446,297 509,006
-------------- ---------------
Expenses:
General operating and administrative 34,722 31,780
Professional services 3,288 4,610
Real estate taxes -- 4,229
State and other taxes 12,617 11,516
Depreciation and amortization 69,280 80,417
Transaction costs 30,882 --
-------------- ---------------
150,789 132,552
-------------- ---------------
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 295,508 376,454
Minority Interest in Income of Consolidated
Joint Venture (4,345 ) (4,345 )
Equity in Earnings of Unconsolidated Joint Ventures 41,459 22,751
Gain on Sale of Land and Buildings -- 583,373
-------------- ---------------
Net Income $ 332,622 $ 978,233
============== ===============
Allocation of Net Income:
General partners $ 3,326 $ 8,558
Limited partners 329,296 969,675
-------------- ---------------
$ 332,622 $ 978,233
============== ===============
Net Income Per Limited Partner Unit $ 6.59 $ 19.39
============== ===============
Weighted Average Number of Limited Partner
Units Outstanding 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
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 31,
1999 1998
------------------- ------------------
<S> <C>
General partners:
Beginning balance $ 354,638 $ 339,611
Net income 3,326 15,027
------------------- ------------------
357,964 354,638
------------------- ------------------
Limited partners:
Beginning balance 15,515,634 17,271,525
Net income 329,296 1,721,856
Distributions ($10.00 and $69.55 per
limited partner unit, respectively) (500,000 ) (3,477,747 )
------------------- ------------------
15,344,930 15,515,634
------------------- ------------------
Total partners' capital $ 15,702,894 $ 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
<TABLE>
<CAPTION>
Quarter Ended
March 31,
1999 1998
--------------- --------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 442,021 $ 501,741
--------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings -- 2,424,977
Additions to land and building on operating
lease (326,996 ) --
Investment in direct financing lease (612,920 ) --
Investment in joint venture -- (415,586 )
Collections on note receivable -- 3,242
Decrease in restricted cash -- 245,377
--------------- --------------
Net cash provided by (used in)
investing activities (939,916 ) 2,258,010
--------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (500,000 ) (594,000 )
Distributions to holders of minority interests (4,990 ) (5,050 )
--------------- --------------
Net cash used in financing activities (504,990 ) (599,050 )
--------------- --------------
Net Increase (Decrease) in Cash and Cash (1,002,885 ) 2,160,701
Equivalents
Cash and Cash Equivalents at Beginning of Quarter 2,047,140 493,118
--------------- --------------
Cash and Cash Equivalents at End of Quarter $1,044,255 $2,653,819
=============== ==============
Supplemental Schedule of Non-Cash Investing and
Financing
Activities:
Deferred real estate disposition fees incurred
and unpaid at end of quarter $ -- $ 53,400
=============== ==============
Distributions declared and unpaid at end of
quarter $ 500,000 $1,977,747
=============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 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 ended March 31, 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 the property in Hagerstown,
Maryland, along with amounts collected in 1998, under a promissory note
in a Burger King property in Montgomery, Alabama, at 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 capital lease.
3. Merger Transaction:
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 share (the
"APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the
price paid by APF investors 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
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Ended March 31, 1999 and 1998
3. Merger Transaction - Continued:
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. Legg Mason
Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. 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 third 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 5, 1999, four limited partners in several of the CNL Income Funds
filed a lawsuit against the general partners and APF in connection with
the proposed Merger (see Part II - Item 1. Legal Proceedings). The
general partners and APF believe that the lawsuit is without merit and
intend to defend vigorously against the claims. Because the lawsuit was
so recently filed, it is premature to further comment on the lawsuit at
this time.
4. Subsequent Event:
In April 1999, the Partnership sold its property in Flagstaff, Arizona,
to the tenant for $1,103,127 and received net sales proceeds of
$1,091,193, resulting in a gain of $285,350 for financial reporting
purposes.
<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 March 31, 1999, the Partnership owned 28
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 as tenants-in-common.
Liquidity and Capital Resources
During the quarters ended March 31, 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 $442,021 and $501,741, respectively. The decrease in
cash from operations for the quarter ended March 31, 1999 is primarily a result
of changes in income and expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following during the
quarter ended March 31, 1999.
In January 1999, the Partnership reinvested the majority of the net
sales proceeds from the 1998 sale of the 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 $1,091,193,
resulting in a gain of $285,350 for financial reporting purposes. The
Partnership intends to reinvest the net sales proceeds in an additional
Property.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At March 31, 1999, the Partnership had $1,044,255
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 quarter ended
March 31, 1999, is primarily attributable to the reinvestment of sales proceeds
in a Property in Montgomery, Alabama, during the quarter ended March 31, 1999,
as described above. The Partnership expects to use the funds remaining at March
31, 1999 to pay distributions and other liabilities and to invest in an
additional Property.
<PAGE>
Liquidity and Capital Resources - Continued
Total liabilities of the Partnership, including distributions payable,
increased to $708,034 at March 31, 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 increase in liabilities was partially offset by a decrease
in amounts due to related parties at March 31, 1999. The general partners
believe that the Partnership has sufficient cash on hand to meet its current
working capital needs.
Based on current and anticipated future cash from operations, and for
the quarter ended March 31, 1998, proceeds received from the sales of two
Properties during 1998, the Partnership declared distributions to limited
partners of $500,000 and $1,977,747 for the quarters ended March 31, 1999 and
1998, respectively. This represents distributions of $10.00 and $39.55 per unit
for the quarters ended March 31, 1999 and 1998, respectively. Distributions for
the quarter ended March 31, 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. 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 descrease in cash distributions to the limited
partners. No distributions were made to the general partners for the quarters
ended March 31, 1999 and 1998. No amounts distributed to the limited partners
for the quarters ended March 31, 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.
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.
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"). 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. APF has agreed to
issue 2,082,901 APF Shares which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the price paid
by APF investors 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
<PAGE>
Liquidity and Capital Resources - Continued
the Partnership continues unchanged) at $20,535,734 as of December 31, 1998.
Legg Mason Wood Walker, Incorporated has rendered a fairness opinion that the
APF Share consideration, payable by APF, is fair to the Partnership from a
financial point of view. 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 third quarter of 1999, limited partners holding in excess of 50% of the
Partnership's outstanding limited partnership interest 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 5, 1999, four limited partners in several of the CNL Income
Funds filed a lawsuit against the general partners and APF in connection with
the proposed Merger (see Part II - Item 1. Legal Proceedings). The general
partners and APF believe that the lawsuit is without merit and intend to defend
vigorously against the claims. Because the lawsuit was so recently filed, it is
premature to further comment on the lawsuit at this time.
Results of Operations
During the quarter ended March 31, 1998, the Partnership and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 27 wholly
owned Properties (which included five Properties which were sold in 1998) and
during the quarter ended March 31, 1999, the Partnership and its consolidated
joint venture owned and leased 23 wholly owned Properties, to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the quarters ended March 31, 1999 and 1998, the Partnership earned $426,846 and
$454,991, respectively, in rental income from operating leases and earned income
from direct financing leases from these Properties. Rental and earned income
decreased by approximately $44,000 during the quarter ended March 31, 1999, as
compared to the quarter ended March 31, 1998, as a result of the sale of five
Properties during 1998. The decrease was partially offset by an increase in
rental and earned income of approximately $17,300 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 "Liquidity and Capital Resources."
Rental and earned income are expected to remain at reduced amounts as a result
of distributing a portion of the net sales proceeds from two of the five
Properties sold during 1998.
In addition, during the quarters ended March 31, 1999 and 1998, the
Partnership earned $16,470 and $41,182, respectively, in interest and other
income. The decrease in interest and other income during the quarter ended March
31, 1999, as compared to the quarter ended March
<PAGE>
Results of Operations - Continued
31, 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 that the Partnership had accepted in conjunction with
the sale of a Property in a prior year.
For the quarters ended March 31, 1999 and 1998, the Partnership owned
and leased one Property indirectly through a joint venture arrangement and three
Properties as tenants-in-common with affiliates of the general partners. In
addition, during the quarter ended March 31, 1999, the Partnership owned and
leased one additional Property indirectly through a joint venture arrangement.
In connection therewith, during the quarters ended March 31, 1999 and 1998, the
Partnership earned income of $41,459 and $22,751, respectively, attributable to
net income recorded by these joint ventures. The increase in net income earned
by joint ventures during the quarter ended March 31, 1999, is primarily
attributable 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 Partnership which has the same general partners.
Operating expenses, including depreciation and amortization expense,
were $150,789 and $132,552 for the quarters ended March 31, 1999 and 1998,
respectively. The increase in operating expenses during the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998, was primarily
attributable to the fact that during the quarter ended March 31, 1999, the
Partnership incurred $30,882 in transaction costs relating to the general
partners retaining financial and legal advisors to assist them in evaluating and
negotiating the proposed Merger with APF, as described above in "Liquidity and
Capital Resources." 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 was partially offset by a decrease in depreciation expense
of approximately $11,000, due to the sales of several Properties during 1998 and
a decrease of approximately $4,200, due to the fact that, during the quarter
ended March 31, 1998, the Partnership recognized real estate tax expense
relating to the Po Folks Property in Hagerstown, Maryland, based on the fact
that payment of this amount by the former tenant was doubtful. The Partnership
sold this Property in June 1998.
As a result of the sales of three Properties during the quarter ended
March 31, 1998, the Partnership recognized a total gain of $583,373 for
financial reporting purposes. No Properties were sold during the quarter ended
March 31, 1999.
<PAGE>
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. The Partnership does not have any
information or non-information technology systems. The general partners and
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
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 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.
<PAGE>
Year 2000 Readiness Disclosure - Continued
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 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 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 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 Partnership.
Based upon the progress the general partners and 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, they 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 5, 1999, four limited partners in several of the CNL Income
Funds filed a lawsuit, Jon Hale, Mary J. Hewitt, Charles A.
Hewitt, and Gretchen M. Hewitt v. James M. Seneff, Jr., Robert A.
Bourne, CNL Realty Corporation, and CNL American Properties Fund,
Inc., Case No. CIO-99-0003561, in the Circuit Court of the Ninth
Judicial Circuit of Orange County, Florida, alleging that the
Messrs. Seneff and Bourne and CNL Realty Corporation, as general
partners of the CNL Income Funds, breached their fiduciary duties
and violated the provisions of certain of the CNL Income Fund
partnership agreements in connection with the proposed acquisition
of the CNL Income Funds by APF. The plaintiffs are seeking
unspecified damages and equitable relief. The general partners and
APF believe that the lawsuit is without merit and intend to defend
vigorously against such claims. Because the lawsuit was so
recently filed, it is premature to further comment on the lawsuit
at this time.
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.
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 (filed as Appendix B
to the Prospectus Supplement for the Registrant,
constituting a part of 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 the 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.)
<PAGE>
4.1 Certificate of Limited Partnership of CNL Income
Fund III, Ltd. (Included as Exhibit 4.1 to
Amendment No. 1 to Registration Statement No.
33-15374 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with
the Securities and Exchange Commission on April
5, 1993, and incorporated herein by reference.)
10.1 Property Management Agreement (Included as
Exhibit 10.1 to Form 10-K filed with the
Securities and Exchange Commission on April 5,
1993, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from
CNL Investment Company to CNL Income Fund
Advisors, Inc. (Included as Exhibit 10.2 to Form
10-K filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Property Management Agreement from
CNL Income Fund Advisors, Inc. to CNL Fund
Advisors, Inc. (Included as Exhibit 10.3 to Form
10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated
herein by reference.)
27 Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 11, 1999 and filed
March 12, 1999, describing the proposed merger of the
Partnership with and into a subsidiary of CNL American
Properties Fund, Inc.
<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 14th day of May, 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 March 31, 1999, and its statement of
income for the three months then ended and is qualified in its entirety by
reference to the Form 10-Q of CNL Income Fund III, Ltd. for the three months
ended March 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,044,255
<SECURITIES> 0
<RECEIVABLES> 219,575
<ALLOWANCES> 154,918
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 14,484,727
<DEPRECIATION> 2,808,175
<TOTAL-ASSETS> 16,545,988
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,702,894
<TOTAL-LIABILITY-AND-EQUITY> 16,545,988
<SALES> 0
<TOTAL-REVENUES> 446,297
<CGS> 0
<TOTAL-COSTS> 150,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 332,622
<INCOME-TAX> 0
<INCOME-CONTINUING> 332,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332,622
<EPS-PRIMARY> 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.
</FN>
</TABLE>
