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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 0-19141
CNL INCOME FUND V, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2922869
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 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 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 value 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 V, 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, Item 7A. Quantitative and Qualitative Disclosures
About Market Risk (incorporating by reference disclosure contained in Item 7.)
and Item 8. Financial Statements and Supplementary Data.
PART I
Item 1. Business
CNL Income Fund V, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 17, 1988. 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 December 16, 1988, 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 June 7, 1989, 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 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 national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totaled
$22,125,000, and were used to acquire 30 Properties, including interests in
three Properties owned by joint ventures in which the Partnership is a
co-venturer. During the year ended December 31, 1996, the Partnership sold its
Property in St. Cloud, Florida, to the tenant of the Property and accepted
$100,000 in cash and a promissory note for the remaining sales price of the
Property. During the year ended December 31, 1997, the Partnership sold its
Properties in Franklin and Smyrna, Tennessee; Salem, New Hampshire; Port St.
Lucie and Tampa, Florida, and Richmond, Indiana. The Partnership reinvested a
portion of these net sales proceeds in a Property in Houston, Texas and a
Property in Sandy, Utah. In addition, the Partnership reinvested a portion of
the net sales proceeds in a Property in Mesa, Arizona and a Property in
Vancouver, Washington, as tenants-in-common, with affiliates of the General
Partners. During the year ended December 31 1998, the Partnership also sold its
Properties in Port Orange, Florida, and Tyler, Texas. The Partnership used a
portion of the sales proceeds to enter into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the Partnership which has the same General
Partners. As a result of the above transactions, as of December 31, 1998, the
Partnership owned 25 Properties. The 25 Properties include interests in four
Properties owned by joint ventures in which the Partnership is a co-venturer and
two 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 also 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
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any particular time, except as may be required under property or joint venture
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms, ranging from seven to 20 years (the average being 18 years) and expire
between 2001 and 2018. All 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 provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $38,500 to
$222,800. Generally, the leases provide for percentage rent, based on sales in
excess of a specified amount, to be paid annually. In addition, a majority of
the leases provide that, commencing in the sixth lease year, the percentage rent
will be an amount equal to the greater of (i) the percentage rent calculated
under the lease formula or (ii) a specified percentage (ranging from one-fourth
to five percent) of the purchase price paid by the Partnership for the Property.
Generally, the leases of the Properties provide for two to 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 the
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 appraisal firm.
The leases also generally provide that, in the event the Partnership wishes
to sell the Property subject to that lease, the Partnership first must 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.
The tenant relating to the Property in Lebanon, New Hampshire, in which the
Partnership has a 66.5% interest, defaulted under the terms of its agreement,
and in February 1995, ceased operations of the restaurant on the Property. The
Partnership is currently seeking a replacement tenant or a purchaser for this
Property.
In February 1994, the tenant of the Properties in Belding and South Haven,
Michigan, defaulted under the terms of its leases and a new operator began
occupying the Properties on a month-to-month basis for reduced rental amounts.
The new operator ceased operations of the Belding and South Haven Properties in
October 1994 and October 1995, respectively. In June 1997, the Partnership
entered into an operating agreement with a new operator for the Property in
South Haven, Michigan. In March 1998, the Partnership entered into a new lease
for the South Haven Property with the former operator as tenant, to operate the
Property. The lease terms of this Property are substantially the same as the
Partnership's other leases as described above in the first three paragraphs of
this section. The Partnership is currently seeking a replacement tenant or a
purchaser for the Property in Belding, Michigan.
In May 1998, the Partnership contributed a portion of the net sales
proceeds from the sale of the Property in Tyler, Texas in a joint venture
arrangement, RTO Joint Venture, with an affiliate of the Partnership which has
the same General Partners as described below in "Joint Venture Arrangements."
The lease terms for this Property are substantially the same as the
Partnership's other leases as described above in the first three paragraphs of
this section.
In August 1998, the Partnership terminated the lease with the tenant of the
Property in Daleville, Indiana, due to financial difficulties the tenant is
experiencing. The Partnership is currently seeking a new tenant or purchaser for
this Property.
During 1994, the lease relating to the Property in New Castle, Indiana was
amended to provide for the payment of reduced annual base rent with no scheduled
rent increases. However, the lease amendment provided for lower percentage rent
breakpoints, as compared to the original lease agreement, a change that was
designed to result in higher percentage rent payments at any time that
percentage rent became payable. This created rental payments under the amended
lease that were equal to or greater than the original lease during the term of
the lease. In accordance with a provision in the amendment, as a result of the
former tenant assigning the lease to a new tenant during 1998, the rent under
the assigned lease reverted back to those that were required under the original
lease agreement.
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Major Tenants
During 1998, Golden Corral Corporation contributed more than ten percent of
the Partnership's total rental and mortgage interest income (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of the rental income from three Properties owned by unconsolidated joint
ventures and two Properties owned with affiliates as tenants-in-common). As of
December 31, 1998, Golden Corral Corporation was the lessee under leases
relating to two 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 and mortgage interest income
in 1999. In addition, two Restaurant Chains, Golden Corral and Wendy's Old
Fashioned Hamburger Restaurants, each accounted for more than ten percent of the
Partnership's total rental and mortgage interest income in 1998 (including
rental income from the Partnership's consolidated joint venture and the
Partnership's share of the rental income from three Properties owned by
unconsolidated joint ventures and two Properties owned with affiliates as
tenants-in-common). It is anticipated that these two Restaurant Chains each will
continue to account for more than ten percent of the total rental and mortgage
interest income to which the Partnership is entitled under the terms of the
leases and mortgage note. Any failure of these lessees or these Restaurant
Chains could materially affect the Partnership's income if the Partnership is
not able to re-lease the Properties in a timely manner. 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, CNL/Longacre
Joint Venture, with an unaffiliated entity, to purchase and hold a Property
through such joint venture. The Partnership has also entered into three separate
joint venture arrangements: Cocoa Joint Venture with CNL Income Fund IV, Ltd.,
an affiliate of the General Partners, to purchase and hold one Property; Halls
Joint Venture with CNL Income Fund VII, Ltd., an affiliate of the General
Partners, to purchase and hold one Property; and RTO Joint Venture with CNL
Income Fund III, Ltd., an affiliate of the General Partners, to purchase and
hold one Property. The affiliates are limited partnerships organized pursuant to
the laws of the State of Florida.
Each joint venture arrangement provides for the Partnership and its joint
venture partners to share in all costs and benefits associated with the joint
venture in proportion to each partner's percentage interest in the joint
venture. The Partnership has a 66.5% interest in CNL/Longacre Joint Venture, a
43 percent interest in Cocoa Joint Venture, a 48.9% interest in Halls Joint
Venture, and a 53.12% interest in RTO Joint Venture. The Partnership and its
joint venture partners are jointly and severally liable for all debts,
obligations, and other liabilities of the joint ventures.
Each joint venture has an initial term of 20 to 30 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer or unless terminated 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 the CNL/Longacre Joint Venture
and shares management control equally with affiliates of the General Partners
for Cocoa Joint Venture and Halls 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 partner, either
upon such terms and conditions as to which the venturers may agree or, in the
event the venturers cannot agree, on the same terms and conditions as any offer
from a third party to purchase such joint venture interest.
Net cash flow from operations of CNL/Longacre Joint Venture, Cocoa Joint
Venture, Halls Joint Venture and RTO Joint Venture is distributed 66.5%, 43.0
percent, 48.9%, and 53.12%, respectively, to the Partnership and the balance is
distributed to each of the other joint venture partners. 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 agreements, in 1997, the Partnership
entered into separate agreements to hold a Property in Mesa, Arizona, as
tenants-in-common, with CNL Income Fund II, Ltd., an affiliate of the General
Partners; and to hold a Property in Vancouver, Washington, as tenants-in-common,
with CNL Income Fund,
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Ltd., CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd., affiliates of the
General Partners. The affiliates are limited partnerships organized pursuant to
the laws of the State of Florida. 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
42.09% and a 24.78% interest in the Property in Mesa, Arizona and the Property
in Vancouver, Washington, respectively. The tenancy in common agreement
restricts each co-tenant's ability to sell, transfer, or assign its interest in
the tenancy in common's Property without first offering it for sale to the
remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement. 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
percent of the sum of gross operating revenues from Properties wholly owned by
the Partnership plus the Partnership's allocable share of gross revenues of
joint ventures in which the Partnership is a co-venturer, but not in excess of
competitive fees for comparable services. Under the management agreement, the
management fee is subordinated to receipt by the Limited Partners of an
aggregate, ten percent, cumulative, 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").
The 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 25 Properties. Of the 25
Properties, 19 are owned by the Partnership in fee simple, four are owned
through joint venture arrangements and two are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation 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 12,300 to
135,000 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.
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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 1
Florida 3
Georgia 1
Illinois 1
Indiana 3
Michigan 2
New Hampshire 1
New York 2
Ohio 2
Tennessee 1
Texas 4
Utah 2
Washington 2
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TOTAL PROPERTIES: 25
========
</TABLE>
Buildings. Generally, 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 1,700 to 10,100 square feet. 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 (including its consolidated joint venture)
and unconsolidated joint ventures (including Properties owned through tenancy in
common arrangements) for federal income tax purposes was $14,858,382 and
$5,889,641, 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>
Arby's 2
Boston Market 1
Burger King 2
Captain D's 2
Chevy's Fresh Mex 1
Denny's 3
Golden Corral 2
Hardee's 1
IHOP 1
Market Street Buffet & Bakery 1
Pizza Hut 1
Ruby Tuesday 1
Taco Bell 2
Tony Roma's 1
Waffle House 1
Wendy's 3
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TOTAL PROPERTIES: 25
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</TABLE>
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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.
As of December 31, 1998, 1997, 1996, 1995, and 1994, the Properties were
88%, 93%, 90%, 90%, and 96% 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) $1,710,326 $1,804,300 $2,119,765 $2,231,108 $2,347,669
Properties (2) 23 24 27 28 30
Average Rent per Unit $ 74,362 $ 75,179 $ 78,510 $ 79,682 $ 78,256
</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 tenancy in common arrangements. Rental revenues have been
adjusted, as applicable, for any amounts for which the Partnership has
established an allowance for doubtful accounts.
(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 1 40,187 2.60%
2001 1 39,100 2.53%
2002 2 101,860 6.59%
2003 -- -- --
2004 2 172,506 11.17%
2005 -- -- --
2006 -- -- --
2007 -- -- --
2008 5 252,126 16.32%
Thereafter 11 938,852 60.79%
--------- ------------- ------------
Totals (1) 22 1,544,631 100.00%
========= ============= ============
</TABLE>
(1) Excludes three Properties which were vacant at December 31, 1998.
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Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1998 (see Item 1. Business -Major
Tenants), are substantially the same as those described in Item 1. Business -
Leases.
Slaymaker Group, Inc., leases one Tony Roma's restaurant pursuant to one
lease, with an initial term of 20 years (expiring in 2017). The average minimum
base annual rent for the lease is $167,500.
Golden Corral Corporation leases two restaurants pursuant to two leases,
each with an initial term of 12 to 15 years (expiring 2002 and 2004), and
average minimum base annual rent of approximately $97,800 ($63,400 and $132,200,
respectively).
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.
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PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on August 17, 1988, 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 and family-style Restaurant Chains. The
leases are generally triple-net leases, with the lessee generally responsible
for all repairs and maintenance, property taxes, insurance and utilities. As of
December 31, 1998, the Partnership owned 25 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 $1,649,735, $1,813,231, and $2,103,745. 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 discussed 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.
During the years ended December 31, 1997 and 1996, the Partnership received
$106,000 and $159,700, respectively, in capital contributions from the corporate
General Partner in connection with the operations of the Partnership. 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.
In October 1996, the Partnership sold its Property in St. Cloud, Florida,
to the tenant for $1,150,000. In connection therewith, the Partnership received
$100,000 in cash and accepted the remaining sales proceeds in the form of a
promissory note in the principal sum of $1,057,299, representing the balance of
the sales price of $1,050,000 plus tenant closing costs in the amount of $7,299
the Partnership financed on behalf of the tenant. The promissory note bears
interest at a rate of 10.75% per annum, is collateralized by a mortgage on the
Property, and is being collected in 12 monthly installments of interest only and
thereafter in 168 equal monthly installments of principal and interest. This
sale is also being accounted for under the installment sales method for
financial reporting purposes; therefore, the gain on the sale of the Property
was deferred and is being recognized as income proportionately as payments of
principal under the mortgage note are collected. The Partnership recognized a
gain of $2,157, $338, and $18,445 for financial reporting purposes for the years
ended December 31, 1998, 1997, and 1996, respectively, and had a deferred gain
in the amount of $181,308 and $183,465 at December 31, 1998 and 1997. The
mortgage note receivable balance relating to this Property at December 31, 1998
and 1997, was $871,812 and $874,443, including accrued interest of $9,350 and
$2,747, and net of the remaining deferred gain of $181,308 and $183,465.
Payments collected under the mortgage note totalling $100,000 were used to pay
liabilities of the Partnership, including quarterly distributions to the Limited
Partners. The General Partners anticipate that payments collected under the
mortgage note in the future will be reinvested in additional Properties or used
for payment of Partnership liabilities.
In January 1997, the Partnership sold its Property in Franklin, Tennessee,
to the tenant, for $980,000 and received net sales proceeds of $960,741. Since
the Partnership had previously established an allowance for loss on land and
building of $169,463 as of December 31, 1996 relating to this Property, no loss
was recognized during 1997 as a result of this sale. The Partnership used
$360,000 of the net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the Limited Partners. In addition, in June
1997, the Partnership entered into an operating agreement for the Property
located in South Haven, Michigan, with an operator to operate the Property as an
Arby's restaurant. In connection therewith, the Partnership used approximately
$120,400 of the net sales proceeds from the sale of the Property in Franklin,
Tennessee, to fund conversion costs associated with the Arby's Property. In
March 1998, the Partnership entered into a new lease for this Property with the
former operator
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as tenant, to operate the Property as an Arby's. In December 1997, the
Partnership reinvested approximately $244,800 of the net sales proceeds in a
Property located in Sandy, Utah, and approximately $150,000 in a Property
located in Vancouver, Washington, as tenants-in-common with affiliates of the
General Partners, as described below. The Partnership intends to use the
remaining net sales proceeds from the sale of the Property in Franklin,
Tennessee to pay liabilities of the Partnership, including quarterly
distributions to the Limited Partners.
In June 1997, the Partnership terminated the leases with the tenant of the
Properties in Connorsville and Richmond, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $35,297 for
amounts relating to past due real estate taxes as a result of the former
tenant's financial difficulties. The promissory note, which is uncollateralized,
bears interest at a rate of ten percent per annum and is being collected in 36
monthly installments. Receivables at December 31, 1998 and 1997 included $25,783
and $37,099, respectively, of such amounts, including accrued interest of $1,802
in 1997. In July 1997, the Partnership entered into a new lease for the Property
in Connorsville, Indiana, with a new tenant to operate the Property as an Arby's
restaurant. In connection therewith, the Partnership incurred $125,000 in
renovation costs and paid these amounts during the year ended December 31, 1998.
During 1997, the Partnership sold its Properties in Smyrna, Tennessee;
Salem, New Hampshire; and Port St. Lucie and Tampa, Florida, for a total of
$4,020,172 and received net sales proceeds totalling $3,925,876, resulting in a
total gain of $549,516 for financial reporting purposes. These Properties were
originally acquired by the Partnership in 1989 and had a total cost of
approximately $3,503,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these Properties for
approximately $422,100 in excess of their original purchase prices. The
Partnership used approximately $132,500 of the net sales proceeds to pay
liabilities of the Partnership, including quarterly distributions to the Limited
Partners, and used the remaining net sales proceeds to acquire additional
Properties and acquire Properties with affiliates of the General Partners. 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.
During the year ended December 31, 1996, the Partnership established an
allowance for the Property in Richmond, Indiana, in the amount of $70,062 which
represented the difference between the Property's carrying value at December 31,
1996, and the estimate of net realizable value of the Property based on an
anticipated sales price of this Property. In November 1997, the Partnership sold
this Property to a third party for $400,000 and received net sales proceeds of
$385,179. As a result of this transaction, the Partnership recognized a loss of
$141,567 for financial reporting purposes. In December 1997, the Partnership
reinvested the net sales proceeds in a Property as tenants-in-common with
affiliates of the General Partners, as described below.
During 1998, the Partnership sold its Properties in Port Orange, Florida,
and Tyler, Texas to the tenants for a total of $2,180,000 and received net sales
proceeds totalling $2,125,220, resulting in a total gain of $466,322 for
financial reporting purposes. These Properties were originally acquired by the
Partnership in 1988 and 1989 and had costs totaling approximately $1,791,300,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the Properties for approximately $333,900 in excess of
their original purchase prices. In addition, the Partnership incurred deferred,
subordinated, real estate disposition fees of $65,400 relating to the sales of
the Properties for which net sales proceeds were not reinvested in additional
Properties. The Partnership distributed $1,838,327 of the net sales proceeds
from the 1997 and 1998 sales of the properties in Tampa, Florida, as described
above, and Port Orange, Florida, as a special distribution to the limited
partners in April 1998. In addition, in May 1998, the Partnership contributed
the net sales proceeds from the sale of the Property in Tyler, Texas in a joint
venture arrangement as described below. The Partnership will distribute amounts
sufficient to enable the limited partners to pay federal and state income taxes,
if any (at a level reasonably assumed by the general partners).
As described above, in May 1998, the Partnership entered into a joint
venture, RTO Joint Venture, a 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 $766,746 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 53.12% interest in the
profits and losses of the joint venture.
In January 1999, the Partnership received notice from the tenant of its
Properties in Endicott and Ithaca, New York, that it intends to exercise its
option to purchase the Properties in accordance with the terms of its lease
agreements; however, as of March 11, 1999, the sales had not occurred.
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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. Under its Partnership Agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf 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, distributions 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
$352,648 invested in such short-term investments as compared to $1,361,290 at
December 31, 1997. The decrease in cash and cash equivalents during 1998, is
primarily attributable to the fact that the Partnership distributed amounts held
at December 31, 1997 relating to the net sales proceeds received from the 1997
sale of the Property in Tampa, Florida, as a special distribution to the Limited
Partners during 1998, as described below. 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 reinvested in additional Properties, distributed
to the Limited Partners or used for other Partnership purposes, as described
above.
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 of 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 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
on current and anticipated future cash from operations, and for the years ended
December 31, 1998 and 1997, a portion of the sales proceeds received from the
sales of the Properties, and for the years ended December 31, 1997 and 1996,
additional capital contributions from the General Partners, the Partnership
declared distributions to the Limited Partners of $3,838,327, $2,300,000, and
$2,300,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
This represents distributions of $77, $46, and $46 per Unit for the years ended
December 31, 1998, 1997, and 1996, respectively. Distributions for 1998 included
$1,838,327 as a result of the distribution of net sales proceeds from the 1997
and 1998 sales of Properties in Tampa and Port Orange, 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 Partners' unpaid cumulative preferred return. In deciding
whether to sell Properties, the General Partners considered factors such as
potential capital appreciation, net cash flow, and federal income tax
considerations. The reduced number of Properties for which the Partnership
receives rental payments, as well as ongoing operations, 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 or to be distributed to the Limited Partners
for the years ended December 1998, 1997, and 1996, are required to be or have
been treated by the Partnership as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions. The
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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 $79,438, $77,353, and $113,560, respectively, for
certain operating expenses. As of December 31, 1998 and 1997, the Partnership
owed $128,548 and $109,367, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, during 1998 and 1997, the
Partnership had incurred $65,400 and $34,500, respectively, in real estate
disposition fees due to an affiliate as a result of its services in connection
with the sale of the Properties in St. Cloud, Port Orange, and Tampa, Florida.
The payment of such fees is deferred until the Limited Partners have received
the sum of their 10% Preferred Return and their adjusted capital contributions.
Other liabilities, including distributions payable, decreased to $524,019 at
December 31, 1998, from $831,100 at December 31, 1997, partially due to a
decrease in construction costs payable as a result of the payment during 1998,
of construction costs accrued at December 31, 1997 for renovation costs relating
to the Partnership's Property located in Connorsville, Indiana, as described
above. The decrease in liabilities is also partially attributable to a decrease
in distributions payable to the Limited Partners at December 31, 1998 and a
decrease in accrued real estate tax expense relating to the Properties in
Belding and South Haven, Michigan at December 31, 1998. Liabilities at December
31, 1998, to the extent they exceed cash and cash equivalents, at December 31,
1998, will be paid from future cash from operations, from amounts collected
under the mortgage notes described above or, in the event the General Partners
elect to make additional capital contributions, from future General Partner
contributions.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During 1996, the Partnership and its consolidated joint venture, CNL/Long
Acre Joint Venture, owned and leased 26 wholly owned Properties (including one
Property in St. Cloud, Florida, which was sold in October 1996), during 1997,
the Partnership owned 27 wholly owned Properties (including six Properties,
which were sold during the year ended December 31, 1997) and during 1998, the
Partnership owned 21 wholly owned Properties (including two Properties, which
were sold during 1998). In addition, during 1998, 1997, and 1996, the
Partnership and its consolidated joint venture, CNL/Long Acre Joint Venture, was
a co-venturer in three separate joint ventures that each owned and leased one
Property. During 1997, the Partnership and its consolidated joint venture,
CNL/Long Acre Joint Venture, owned and leased two Properties, with affiliates of
the General Partners, as tenants-in-common. In addition, during 1998, the
Partnership and its consolidated joint venture, CNL/Long Acre Joint Venture, was
also a co-venturer in a joint venture that owns one Property. As of December 31,
1998, the Partnership owned, either directly or through joint venture
arrangements, 22 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 $38,500 to
$222,800. Generally, the leases provide for percentage rent based on sales in
excess of a specified amount to be paid annually. In addition, a majority of the
leases provide that, commencing in the sixth lease year, the percentage rent
will be an amount equal to the greater of (i) the percentage rent calculated
under the lease formula or (ii) a specified percentage (ranging from one-fourth
to five percent) of the purchase price paid by the Partnership for the Property.
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, CNL/Longacre Joint Venture, earned
$1,367,303, $1,500,967, and $1,931,573, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease in
rental and earned income during the year ended December 31, 1998 and 1997, each
as compared to the previous year, was partially attributable to a decrease of
approximately $506,900 and $322,300, respectively, as a result of the sale of
several Properties, as described above in "Capital Resources." During 1998 and
1997, the decrease in rental income was partially offset by increases of
approximately $299,900 and $24,700 due to the reinvestment of net sales proceeds
in various Properties during 1998 and 1997, as described above in "Capital
Resources".
Rental and earned income also decreased during 1998, as compared to 1997
and 1996, by approximately $39,100, due to the fact that in August 1998, the
Partnership terminated the lease with the tenant of the Property in Daleville,
Indiana due to financial difficulties the tenant is experiencing. The
Partnership is currently seeking a new tenant or purchaser for this Property.
The Partnership will not recognize any rental income relating to this Property
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until such time as the Partnership executes a new lease or until the Property is
sold and the proceeds from such sale is reinvested in an additional Property.
The decrease in rental and earned income during 1998, as compared to 1997,
was partially offset by, and the decrease in 1997, as compared to 1996, was
partially attributable to the Partnership increasing its allowance for doubtful
accounts during 1997, by approximately $57,700 for rental and other amounts
relating to the Hardee's Properties located in Connorsville and Richmond,
Indiana, which were leased by the same tenant, due to financial difficulties the
tenant was experiencing. Rental and earned income decreased by approximately
$79,200 during 1997 due to the fact that the Partnership terminated the lease
with the former tenant of these Properties in June 1997 and the General Partners
agreed that they will cease collection efforts on past due rental amounts once
the former tenant of these Properties pays all amounts due under the promissory
note for past due real estate taxes described above in "Capital Resources." No
such allowance was established during 1998 due to the fact that the Partnership
(i) re-leased the Property located in Connorsville, Indiana, to a new tenant who
began operating the Property after it was renovated into an Arby's Property and
(ii) sold the Property located in Richmond, Indiana, in November 1997, as
described above in "Capital Resources."
In October 1995, the tenant ceased operations of the Property in South
Haven, Michigan. In connection therewith, in June 1997, the Partnership incurred
renovation costs to convert the Property into an Arby's restaurant and entered
into an operating agreement. In March 1998, the Partnership entered into a new
lease for this Property, as described above in "Capital Resources," and earned
approximately $40,200 and $5,100 in rental income during 1998 and 1997,
respectively.
Rental and earned income in 1998, 1997, and 1996, continued to remain at
reduced amounts due to the fact that the Partnership is not receiving any rental
income from the Properties in Belding, Michigan and Lebanon, New Hampshire, as a
result of the tenants defaulting under the terms of their leases and ceasing
operations of the restaurants on the Properties during 1995. The General
Partners are currently seeking either new tenants or purchasers for these
Properties. Rental and earned income for 1999 is expected to remain at reduced
amounts until such time as the Partnership executes new leases for these
Properties or until the Properties are sold and the proceeds from such sales are
reinvested in additional Properties.
For the years ended December 31, 1998, 1997, and 1996, the Partnership
earned $133,179, $233,663, and $130,167, respectively, in contingent rental
income. The decrease in contingent rental income during 1998, as compared to
1997, is partially attributable to, and the increase in contingent rental income
during 1997, as compared to 1996, is primarily due to, amounts collected which
represented a percentage of the net operating income generated by the restaurant
under the operating agreement with the new operator of the Property located in
South Haven, Michigan. In March 1998, the Partnership entered into a new lease
for the Property in South Haven, Michigan, with this operator. The decrease
during 1998, as compared to 1997, is also partially attributable to sales of
Properties, whose leases required the payment of contingent rents.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
earned $282,795, $302,503, and $147,804, respectively, in interest and other
income. The increase in interest income during 1997, as compared to 1996, was
primarily attributable to the interest earned on the mortgage note receivable
accepted in connection with the sale of the Property in St. Cloud, Florida in
October 1996. In addition, interest income increased during 1997 due to interest
earned on the net sales proceeds received relating to the sales of several
Properties.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $173,941, $56,015, and $46,452, respectively, attributable to
net income earned by unconsolidated joint ventures in which the Partnership is a
co-venturer. The increase in net income earned by joint ventures during 1998, as
compared to 1997, is primarily attributable to the fact that during 1998, the
Partnership reinvested a portion of the net sales proceeds it received from the
1997 and 1998 sales of several Properties in a Property with affiliates of the
General Partners, as tenants-in-common and acquired an interest in RTO Joint
Venture with an affiliate of the General Partners, as described above in
"Capital Resources." The increase in net income earned by joint ventures during
1997, as compared to 1996, is primarily attributable to the fact that in October
1997, the Partnership acquired an interest in a Property with affiliates as
tenants-in-common, as described above in "Capital Resources."
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 and mortgage interest income
(including rental income from the Partnership's consolidated joint venture and
the Partnership's share of the rental income from three Properties owned by
unconsolidated joint ventures and two Properties owned with affili-
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ates as tenants-in-common). As of December 31, 1998 Golden Corral Corporation
was the lessee under leases relating to two 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
and mortgage interest income during 1999. In addition, two Restaurant Chains,
Golden Corral and Wendy's Old Fashioned Hamburger Restaurants, each accounted
for more than ten percent of the Partnership's total rental and mortgage
interest income during 1998, (including rental income from the Partnership's
consolidated joint venture and the Partnership's share of the rental income from
three Properties owned by unconsolidated joint ventures and two Properties owned
with affiliates as tenants-in-common). It is anticipated that these two
Restaurant Chains each will continue to account for more than ten percent of the
total rental and mortgage interest income to which the Partnership is entitled
under the terms of the leases and mortgage note. Any failure of these lessees or
Restaurant Chains could materially affect the Partnership's income if the
Partnership is not able to re-lease the Properties in a timely manner.
Operating expenses, including depreciation and amortization expense, were
$520,292, $574,472, and $631,565 for the years ended December 31, 1998, 1997,
and 1996, respectively. The decrease in operating expenses during 1998 and 1997,
each as compared to the previous year, was partially attributable to a decrease
in depreciation expense as a result of the sales of Properties in 1998, 1997,
and 1996, as described above in "Capital Resources." The decrease in operating
expenses during 1998, as compared to 1997, is partially offset by the fact that
the Partnership incurred $14,644 in transaction costs related to the General
Partner's 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.
Due to the tenant defaults under the leases for the Properties in Belding,
Michigan; Daleville, Indiana, and Lebanon, New Hampshire, the Partnership and
its consolidated joint venture, CNL/Longacre Joint Venture, expect to continue
to incur operating expenses relating to such Properties until the Properties are
sold or re-leased to new tenants.
In connection with the sale of its Properties in St. Cloud, Florida and
Myrtle Beach, South Carolina, during 1997 and 1996, respectively, as described
above in "Capital Resources," the Partnership recognized a gain for financial
reporting purposes of $3,291, $1,362, and $19,369 for the years ended December
31, 1998, 1997, and 1996, respectively. In accordance with Statement of
Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate,"
the Partnership recorded the sales using the installment sales method. As such,
the gain on the sales was deferred and is being recognized as income
proportionately as payments under the mortgage notes are collected. Therefore,
the balance of the deferred gain of $319,866 at December 31, 1998, will be
recognized as income in future periods as payments are collected. For federal
income tax purposes, gains of approximately $194,100 and $136,900 from the sale
of the Properties in St. Cloud, Florida, and Myrtle Beach, South Carolina,
respectively, were also deferred and are being recognized as payments under the
mortgage notes are collected.
As a result of the sales of several Properties as described above in
"Capital Resources," the Partnership recognized gains totalling $440,822 and
$549,516 during 1998 and 1997, respectively, for financial reporting purposes.
The gains for 1997, were partially offset by a loss of $141,567 for financial
reporting purposes, resulting from the November 1997 sale of the Property in
Richmond, Indiana, as described above in "Capital Resources."
During 1998 and 1997, the Partnership established allowances for loss on
land and buildings of $403,157 and $250,694, respectively, for financial
reporting purposes, relating to Properties which became vacant and for which the
Partnership has not successfully re-leased. The allowances represent the
difference between the net carrying value at December 31, 1998 and 1997, and
their current estimated net realizable values.
At December 31, 1996, the Partnership established an allowance for loss on
land and building in the amount of $169,463 for its Property in Franklin,
Tennessee, for financial reporting purposes. The allowance represented the
difference between (i) the Property's carrying value at December 31, 1996, plus
the additional rental income (accrued rental income) that the Partnership had
recognized since inception of the lease relating to the straight-lining of
future scheduled rent increases minus (ii) $960,741 received as net sales
proceeds in conjunction with the sale of the Property in January 1997, as
described above in "Capital Resources."
In addition, during 1996, the Partnership established an allowance for loss
on land and building for its Property in Richmond, Indiana. The allowance of
$70,062 represented the difference between the Property's carry-
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ing value at December 31, 1996, and the estimated fair value of the Property
based on an anticipated sales price of this Property. This Property was sold in
November 1997, as described above in "Capital Resources."
The Partnership's leases as of December 31, 1998, are, in general, triple-
net leases and 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
2,049,031 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 $20,212,956 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 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.
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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.
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.
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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.
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.
Interest Rate Risk
The Partnership has provided fixed rate mortgages to borrowers. The
principal amounts outstanding under the mortgage notes totaled $2,049,981 at
December 31, 1998. The General Partners believe that the estimated fair value of
the mortgage notes at December 31, 1998 approximated the outstanding principal
amounts.
The Partnership is exposed to equity loss in the event of changes in
interest rates. The fair value of the mortgage notes would decline if interest
rates rise.
16
<PAGE>
The following table presents the expected cash flows of principal that are
sensitive to these changes.
<TABLE>
<CAPTION>
Mortgage notes
Fixed Rates
--------------
<S> <C>
1999 $ 26,987
2000 1,042,574
2001 50,615
2002 56,332
2003 62,696
Thereafter 810,777
--------------
$ 2,049,981
==============
</TABLE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
This information is described above in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Interest Rate Risk.
Item 8. Financial Statements and Supplementary Data
17
<PAGE>
CNL INCOME FUND V, 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 V, 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 V, 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 18, 1999, except for Note 12 for which the date is March 11, 1999.
19
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
------
Land and buildings on operating leases, less
accumulated depreciation and allowance
for loss on land and buildings $ 10,660,128 $ 12,421,143
Net investment in direct financing leases 1,708,966 2,277,481
Investment in joint ventures 2,282,012 1,558,709
Mortgage notes receivable, less deferred gain 1,748,060 1,758,167
Cash and cash equivalents 352,648 1,361,290
Receivables, less allowance for doubtful
accounts of $141,505 and $137,892 87,490 108,261
Prepaid expenses 1,872 9,307
Accrued rental income 239,963 169,726
Other assets 54,346 54,346
------------ ------------
$ 17,135,485 $ 19,718,430
============ ============
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 7,546 $ 24,229
Accrued construction costs payable -- 125,000
Accrued and escrowed real estate
taxes payable 10,361 93,392
Distributions payable 500,000 575,000
Due to related parties 228,448 143,867
Rents paid in advance and deposits 6,112 13,479
------------ ------------
Total liabilities 752,467 974,967
Minority interest 155,916 222,929
Partners' capital 16,227,102 18,520,534
------------ ------------
$ 17,135,485 $ 19,718,430
============ ============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND V, 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 $ 1,168,301 $ 1,343,833 $ 1,746,021
Earned income from direct financing leases 199,002 157,134 185,552
Contingent rental income 133,179 233,663 130,167
Interest and other income 282,795 302,503 147,804
----------- ----------- -----------
1,783,277 2,037,133 2,209,544
----------- ----------- -----------
Expenses:
General operating and administrative 166,878 166,346 178,991
Professional services 20,542 23,172 22,605
Bad debt expense 5,882 9,007 --
Real estate taxes 35,434 39,619 40,711
State and other taxes 9,658 11,897 12,492
Depreciation and amortization 267,254 324,431 376,766
Transaction costs 14,644 -- --
----------- ----------- -----------
520,292 574,472 631,565
----------- ----------- -----------
Income Before Minority Interest in Loss of Consolidated
Joint Venture, Equity in Earnings Of Unconsolidated
Joint Ventures, Gain on Sale of Land and Buildings and
Provision for Loss on Land and Buildings 1,262,985 1,462,661 1,577,979
Minority interest in Loss of Consolidated Joint Venture 67,013 54,622 23,884
Equity in Earnings of Unconsolidated Joint Ventures 173,941 56,015 46,452
Gain on Sale of Land and Buildings 444,113 409,311 19,369
Provision for Loss on Land and Buildings (403,157) (250,694) (239,525)
----------- ----------- -----------
Net Income $ 1,544,895 $ 1,731,915 $ 1,428,159
=========== =========== ===========
Allocation of Net Income:
General partners $ 9,748 $ 11,809 $ 12,513
Limited partners 1,535,147 1,720,106 1,415,646
----------- ----------- -----------
$ 1,544,895 $ 1,731,915 $ 1,428,159
=========== =========== ===========
Net Income Per Limited Partner Unit $ 30.70 $ 34.40 $ 28.31
=========== =========== ===========
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 V, 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
------------- ----------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 77,500 $ 126,460 $ 25,000,000 $ (15,168,240) $ 12,524,040 $ (2,865,000)
Contributions from general partner 159,700 -- -- -- -- --
Distributions to limited partners
($46 per limited partner unit) -- -- -- (2,300,000) -- --
Net income -- 12,513 -- -- 1,415,646 --
------------- ----------- ------------- ------------- ------------ ------------
Balance, December 31, 1996 237,200 138,973 25,000,000 (17,468,240) 13,939,686 (2,865,000)
Contributions from general partner 106,000 -- -- -- -- --
Distributions to limited partners
($46 per limited partner unit) -- -- -- (2,300,000) -- --
Net income -- 11,809 -- -- 1,720,106 --
------------- ----------- ------------- ------------- ------------ -------------
Balance, December 31, 1997 343,200 150,782 25,000,000 (19,768,240) 15,659,792 (2,865,000)
Distributions to limited partners
($77 per limited partner unit) -- -- -- (3,838,327) -- --
Net income -- 9,748 -- -- 1,535,147 --
------------- ----------- ------------- ------------- ------------ -------------
Balance, December 31, 1998 $ 343,200 $ 160,530 $ 25,000,000 $ (23,606,567) $ 17,194,939 $ (2,865,000)
============= =========== ============= ============= ============ =============
<CAPTION>
Total
------------
<S> <C>
Balance, December 31, 1995 $ 19,694,760
Contributions from general partner 159,700
Distributions to limited partners
($46 per limited partner unit) (2,300,000)
Net income 1,428,159
------------
18,982,619
Balance, December 31, 1996
Contributions from general partner 106,000
Distributions to limited partners
($46 per limited partner unit) (2,300,000)
Net income 1,731,915
------------
18,520,534
Balance, December 31, 1997
Distributions to limited partners
($77 per limited partner unit) (3,838,327)
Net income 1,544,895
------------
Balance, December 31, 1998 $ 16,227,102
============
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
CNL INCOME FUND V, 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 $ 1,490,412 $ 1,771,467 $ 2,083,722
Distributions from unconsolidated joint
ventures 215,839 53,176 53,782
Cash paid for expenses (331,363) (305,341) (161,730)
Interest received 274,847 293,929 127,971
----------- ----------- -----------
Net cash provided by operating activities 1,649,735 1,813,231 2,103,745
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings 2,125,220 5,271,796 100,000
Additions to land and buildings on operating
leases (125,000) (1,900,790) --
Investment in direct financing leases -- (911,072) --
Investment in joint ventures (765,201) (1,090,062) --
Collections on mortgage notes receivable 19,931 9,265 6,712
Other -- -- (26,287)
----------- ----------- -----------
Net cash provided by investing activities 1,254,950 1,379,137 80,425
----------- ----------- -----------
Cash Flows from Financing Activities:
Contributions from general partner -- 106,000 159,700
Distributions to limited partners (3,913,327) (2,300,000) (2,300,000)
----------- ----------- -----------
Net cash used in financing activities (3,913,327) (2,194,000) (2,140,300)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents (1,008,642) 998,368 43,870
Cash and Cash Equivalents at Beginning of Year 1,361,290 362,922 319,052
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 352,648 $ 1,361,290 $ 362,922
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
CNL INCOME FUND V, 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 $ 1,544,895 $ 1,731,915 $ 1,428,159
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 5,882 9,007 --
Depreciation 267,254 324,431 376,766
Minority interest in loss of consolidated
joint venture (67,013) (54,622) (23,884)
Equity in earnings of unconsolidated
joint ventures, net of distributions 41,898 (2,839) 7,330
Gain on sale of land and buildings (444,113) (409,311) (19,369)
Provisions for loss on land and buildings 403,157 250,694 239,525
Decrease in net investment in direct
financing leases 38,017 42,682 46,387
Decrease (increase) in accrued interest
on mortgage note receivable (6,533) 6,788 (9,414)
Decrease (increase) in receivables 17,333 (43,006) 10,270
Decrease in prepaid expenses 7,435 1,109 1,505
Increase in accrued rental income (70,237) (19,527) (27,875)
Increase (decrease) in accounts
payable and accrued expenses (100,554) (12,509) 32,032
Increase (decrease) in due to related parties 19,181 (13,322) 59,945
Increase (decrease) in rents paid in advance
and deposits (6,867) 1,741 (17,632)
----------- ----------- -----------
Total adjustments 104,840 81,316 675,586
----------- ----------- -----------
Net Cash Provided by Operating Activities $ 1,649,735 $ 1,813,231 $ 2,103,745
=========== =========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage note accepted in connection with
sale of land and buildings $ -- $ -- $ 1,057,299
=========== =========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of year $ 65,400 $ -- $ 34,500
=========== =========== ===========
Distributions declared and unpaid at December 31 $ 500,000 $ 575,000 $ 575,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
CNL INCOME FUND V, 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 V, 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 and family-style 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 V, 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, are removed from the accounts and gains or
losses from sales are 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 are
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 66.5%
----------------------------
interest in CNL/Longacre Joint Venture, a Florida general partnership,
using the consolidation method. Minority interest represents the minority
joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany
accounts and transactions have been eliminated.
26
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
The Partnership accounts for its interest in Cocoa Joint Venture, Halls
Joint Venture, RTO Joint Venture and a property in each of Mesa, Arizona
and Vancouver, Washington, held as tenants-in-common with affiliates, using
the equity method since the Partnership shares control with affiliates
which have the same general partners.
Cash and Cash Equivalents - The Partnership considers all highly liquid
-------------------------
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts. The Partnership limits investment of temporary cash investments
to financial institutions with high credit standing; therefore, the
Partnership believes it is not exposed to any significant credit risk on
cash and cash equivalents.
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 properties.
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
estimates relate to the allowance for doubtful accounts and future cash
flows associated with long-lived assets. Actual results could differ from
those estimates.
27
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Reclassification - Certain items in the prior years' financial statements
----------------
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases:
------
The Partnership leases its land and buildings primarily to operators of
national and regional fast-food and family-style 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, some leases have been classified
as direct financing 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 to 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 $ 5,352,136 $ 6,069,665
Buildings 7,857,598 8,546,530
------------ ------------
13,209,734 14,616,195
Less accumulated depreciation (1,895,755) (1,944,358)
------------ ------------
11,313,979 12,671,837
Less allowance for loss on
land and buildings (653,851) (250,694)
------------ ------------
$ 10,660,128 $ 12,421,143
============ ============
</TABLE>
28
<PAGE>
CNL INCOME FUND V, 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 January 1997, the Partnership sold its property in Franklin, Tennessee,
to the tenant for $980,000 and received net sales proceeds of $960,741.
Since the Partnership had established an allowance for loss on land and
building as of December 31, 1996, no loss was recognized during 1997 as a
result of the sale. The Partnership used $360,000 of the net sales proceeds
to pay liabilities of the Partnership, including quarterly distributions to
the limited partners.
In June 1997, the Partnership entered into an operating agreement for the
property located in South Haven, Michigan, with an operator to operate the
property as an Arby's restaurant. In connection therewith, the Partnership
used approximately $120,400 of the net sales proceeds from the sale of the
property in Franklin, Tennessee, for conversion costs associated with the
Arby's property. The Partnership reinvested the majority of the remaining
net sales proceeds in additional properties.
During 1997, the Partnership sold its properties in Salem, New Hampshire;
Port St. Lucie, Florida; and Tampa, Florida for a total of $3,365,172 and
received net sales proceeds totalling $3,291,566 resulting in a total gain
of $447,521 for financial reporting purposes. These properties were
originally acquired by the Partnership in 1989 and had total costs of
approximately $2,934,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the properties for
approximately $357,300 in excess of their original purchase prices. The
Partnership reinvested the majority of net sales proceeds in additional
properties.
In November 1997, the Partnership sold its property in Richmond, Indiana,
to a third party for $400,000 and received net sales proceeds of $385,179.
As a result of this transaction, the Partnership recognized a loss of
$141,567 for financial reporting purposes. In December 1997, the
Partnership reinvested the net sales proceeds in a property located in
Vancouver, Washington, as tenants-in-common with affiliates of the general
partners (see Note 5).
29
<PAGE>
CNL INCOME FUND V, 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:
--------------------------------------------------
During the year ended December 31, 1998, the Partnership sold its
properties in Port Orange, Florida, and Tyler, Texas to the tenants for a
total of $2,180,000 and received net sales proceeds totalling $2,125,220,
resulting in a total gain of $440,822 for financial reporting purposes.
These properties were originally acquired by the Partnership in 1988 and
1989 and had costs totaling approximately $1,791,300, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership
sold these properties for a total of approximately $333,900 in excess of
their original purchase prices. In connection with the sale of the
properties, the Partnership incurred deferred, subordinated, real estate
disposition fees of $65,400 (see Note 10).
In July 1997, the Partnership entered into a new lease for the property in
Connorsville, Indiana, with a new tenant to operate the property as an
Arby's restaurant. In connection therewith, during 1998, the Partnership
paid $125,000 in renovation costs.
In 1997, the Partnership established an allowance for loss on land and
buildings of $250,694, for financial reporting purposes, relating to the
properties in Belding, Michigan and Lebanon, New Hampshire. Due to the fact
that the Partnership has not been able to successfully re-lease these
properties, the Partnership increased the allowance by $155,612 for the
property in Belding, Michigan, and $122,875 for the property in Lebanon,
New Hampshire, owned by the Partnership's consolidated joint venture,
CNL/Longacre Joint Venture at December 31, 1998. In addition, at December
31, 1998, the Partnership established an allowance for loss on land and
building of $124,670 relating to the property located in Daleville,
Indiana, due to the fact that the tenant terminated the lease with the
Partnership. The allowances represent the difference between the net
carrying values of the properties at December 31, 1998 and current
estimates of net realizable values for these properties.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended
December 31, 1998, 1997, and 1996, the Partnership recognized $70,237,
$19,527, and $27,875, respectively, of such rental income.
30
<PAGE>
CNL INCOME FUND V, 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 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 $ 1,087,538
2000 1,101,658
2001 1,075,591
2002 987,031
2003 999,957
Thereafter 8,250,965
------------
$ 13,502,740
============
</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 terms. In addition, this table does not include any amounts
for future contingent rentals which may be received on the leases based on
a percentage of the tenant gross sales.
4. Net Investment in Direct Financing Leases:
-----------------------------------------
The following lists the components of the net investment in direct
financing leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments
receivable $ 3,260,110 $ 4,213,033
Estimated residual values 566,502 806,792
Less unearned income (2,117,646) (2,742,344)
----------- -----------
Net investment in direct
financing leases $ 1,708,966 $ 2,277,481
=========== ===========
</TABLE>
31
<PAGE>
CNL INCOME FUND V, 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 - Continued:
-----------------------------------------------------
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 $ 220,518
2000 220,518
2001 220,518
2002 220,518
2003 220,518
Thereafter 2,157,520
-----------
$ 3,260,110
===========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future
periods (see Note 3).
In May 1997, the Partnership sold its property in Smyrna, Tennessee, to a
third party for $655,000 and received net sales proceeds of $634,310,
resulting in a gain of $101,995 for financial reporting purposes. This
property was originally acquired by the Partnership in March 1989 and had a
cost of approximately $569,500, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $64,800 in excess of its original purchase
price. The Partnership used approximately $82,500 of the net sales
proceeds to pay liabilities of the Partnership, including quarterly
distributions to the limited partners. In addition, the Partnership
reinvested the remaining net sales proceeds in additional properties as
tenants-in-common with affiliates of the general partners.
In June 1998, the Partnership terminated its lease with the tenant of the
property in Daleville, Indiana. As a result, the Partnership reclassified
these assets from net investment in direct financing lease to land and
building on operating lease. In accordance with Statement of Financial
Accounting Standards #13, "Accounting for Leases," the Partnership recorded
the reclassified assets at the lower of original cost, present fair value,
or present carrying value. No loss on termination of direct financing
lease was recorded for financial reporting purposes.
32
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures:
----------------------------
As of December 31, 1998, the Partnership had a 43 percent and a 48.9%
interest in the profits and losses of Cocoa Joint Venture and Halls Joint
Venture, respectively. The remaining interests in these joint ventures are
held by affiliates of the Partnership which have the same general partners.
In October 1997, the Partnership used a portion of the net sales proceeds
from the sale of the Property in Smyrna, Tennessee to acquire a property in
Mesa, Arizona, 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 42.09% interest in this property.
In addition, in December 1997, the Partnership used some or all of the net
sales proceeds from the sales of the Properties in Franklin, Tennessee;
Richmond, Indiana, and Smyrna, Tennessee to acquire a property in
Vancouver, Washington, 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 an
affiliate, and amounts relating to its investment are included in
investment in joint ventures. As of December 31, 1998, the Partnership
owned a 27.78% 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. Construction was completed and rent commenced
in December 1998. As of December 31, 1998, the Partnership had contributed
$766,746 to the joint venture. The Partnership holds a 53.12% interest in
the profits and losses of the joint venture. The Partnership accounts for
its investment in this joint venture under the equity method since the
Partnership shares control with an affiliate.
Cocoa Joint Venture, Halls Joint Venture, RTO Joint Venture and the
Partnership and affiliates as tenants-in-common in two separate tenancy-in-
common arrangements, each own and lease one property to an operator of
national fast-food or family-style restaurants.
33
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
----------------------------------------
The following presents the combined condensed financial information for all
of the Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating
leases, less accumulated
depreciation $4,812,568 $4,277,972
Net investment in direct financing
lease 817,525 --
Cash 17,992 24,994
Receivables 5,168 4,417
Prepaid expenses 458 270
Accrued rental income 112,279 68,819
Liabilities 46,398 1,250
Partners' capital 5,719,592 4,375,222
Revenues 555,103 151,242
Net income 454,922 121,605
</TABLE>
The Partnership recognized income totaling $173,941, $56,015, and $46,452
for the years ended December 31, 1998, 1997, and 1996, respectively, from
these joint ventures.
6. Mortgage Notes Receivable:
-------------------------
In connection with the sale in 1995 of its property in Myrtle Beach, South
Carolina, the Partnership accepted a promissory note in the principal sum
of $1,040,000, collateralized by a mortgage on the property. The
promissory note bears interest at 10.25% per annum and is being collected
in 59 equal monthly installments of $9,319, including interest, with a
balloon payment of $991,332 due in July 2000. As a result of this sale
being accounted for using the installment sales method for financial
reporting purposes as required by Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate," the Partnership
recognized a gain of $1,134, $1,024, and $924 for the years ended December
31, 1998, 1997, and 1996, respectively.
34
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
6. Mortgage Notes Receivable - Continued:
-------------------------------------
In addition, in connection with the sale in 1996 of its property in St.
Cloud, Florida, the Partnership accepted a promissory note in the principal
sum of $1,057,299, representing the balance of the sales price of
$1,050,000 plus tenant closing costs in the amount of $7,299 that the
Partnership financed on behalf of the tenant. The note is collateralized
by a mortgage on the property. The promissory note bears interest at a
rate of 10.75% per annum and was being collected in 12 monthly installments
of interest only, and thereafter in 168 equal monthly installments of
principal and interest. As a result of this sale being accounted for using
the installment sales method for financial reporting purposes as required
by Statement of Financial Accounting Standards No. 66, "Accounting for
Sales of Real Estate," the Partnership recognized a gain of $2,157, $338,
and $18,445 for the years ended December 31, 1998, 1997, and 1996,
respectively.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Principal balance $2,049,981 $2,069,912
Accrued interest receivable 17,945 11,412
Less deferred gains on sale of land and buildings (319,866) (323,157)
---------- ----------
$1,748,060 $1,758,167
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1998 and 1997, approximate the outstanding
principal amount based on estimated current rates at which similar loans
would be made to borrowers with similar credit and for similar maturities.
7. Receivables:
-----------
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Connorsville and Richmond, Indiana. In connection therewith,
the Partnership accepted a promissory note from the former tenant for
$35,297 for amounts relating to past due real estate taxes the Partnership
had accrued as a result of the former tenant's financial difficul-ties.
The promissory note is uncollateralized, bears interest at a rate of ten
percent per annum, and is being collected in 36 monthly installments.
Receivables at December 31, 1998 and 1997, included $25,783 and $37,099,
respectively of such amounts, including accrued interest of $1,802 in 1997.
35
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. 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, cumulative, 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 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 with 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.
36
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. Allocations and Distributions - Continued:
-----------------------------------------
During the year ended December 31, 1998, the Partnership declared
distributions to the limited partners of $3,838,327, and during each of the
years ended December 31, 1997 and 1996, the Partnership distributed
$2,300,000. Distributions for 1998 included $1,838,327 as a result of the
distribution of net sales proceeds from the 1997 and 1998 sales of the
properties in Tampa and Port Orange, Florida. This amount was applied
toward the limited partners' 10% Preferred Return. No distributions have
been made to the general partners to date.
37
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. 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 $1,544,895 $1,731,915 $1,428,159
Depreciation for tax reporting purposes
less than (in excess of) depreciation for
financial reporting purposes 18,802 (23,618) (28,058)
Gain on disposition of land and buildings
for financial reporting purposes in
excess of gain for tax reporting purposes (16,347) (354,648) (1,606)
Allowance for loss on land and buildings 403,157 250,694 239,525
Direct financing leases recorded as operating
leases for tax reporting purposes 38,017 42,682 46,387
Equity in earnings of unconsolidated
joint ventures for tax reporting purposes
in excess of (less than) equity in earnings
of unconsolidated joint ventures for
financial reporting purposes 10,795 (1,914) (1,900)
Capitalization of transaction costs for tax
reporting purposes 14,644 -- --
Allowance for doubtful accounts 3,613 100,149 33,254
Accrued rental income (70,237) (19,527) (27,875)
Capitalization of administrative expenses for tax
reporting purposes 22,990 -- --
Rents paid in advance (6,867) 1,241 (17,632)
Minority interest in temporary differences
of consolidated joint venture (84,622) (41,515) (343)
Other 1,705 36,721 --
---------- ---------- ----------
Net income for federal income tax purposes $1,880,545 $1,722,180 $1,669,911
========== ========== ==========
</TABLE>
38
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
10. 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 management
agreement with the Partnership. In connection therewith, the Partnership
agreed to pay the Affiliate an annual, noncumulative, subordinated
management fee of one percent of the sum of gross revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of
gross revenues from joint ventures, but not in excess of competitive fees
for comparable services in the same geographic area. These fees will be
incurred and will be payable only after the limited partners receive their
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 management fees will be due or payable for such year.
As a result of such threshold, no management fees were incurred during the
years ended December 1998, 1997, and 1996.
The Affiliate of the Partnership 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 sale.
However, if the net sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed.
The payment of the real estate disposition fee is subordinated to receipt
by the limited partners of their aggregate 10% Preferred Return, plus
their adjusted capital contributions. During the years ended December 31,
1998 and 1996, the Partnership incurred a deferred, subordinated real
estate disposition fee of $65,400 and $34,500, respectively, as the result
of the sale of the properties during 1998 and 1996, respectively. No
deferred, subordinated real estate disposition fee was incurred for the
year ended December 31, 1997 due to the reinvestment of net sales proceeds
in additional properties.
39
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
10. Related Party Transactions - Continued:
--------------------------------------
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $94,611, $80,145, and $83,563
for the years ended December 31, 1998, 1997, and 1996, respectively, for
such services.
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Mesa, Arizona, as tenants-in-common for a purchase
price of $1,084,111 (of which the Partnership contributed $460,911 or
42.23%) from CNL BB Corp., also an affiliate of the general partners. CNL
BB Corp. had purchased and temporarily held title to this property in order
to facilitate the acquisition of the property by the Partnership. The
purchase price paid by the Partnership represented the Partnership's
percent of interest in the costs incurred by CNL BB Corp. to acquire and
carry the property, including closing costs.
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 $ 77,907 $ 67,106
Accounting and administrative
services 50,641 42,261
Deferred, subordinated real
estate disposition fee 99,900 34,500
-------- --------
$228,448 $143,867
======== ========
</TABLE>
40
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
11. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental and earned income (including
mortgage interest income) from individual lessees, or affiliated groups of
lessees, each representing more than ten percent of the Partnership's total
rental and earned income (including the Partnership share of total rental
and earned income from unconsolidated 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 Corporation $195,511 $195,511 $ N/A
Shoney's, Inc. N/A 229,795 241,119
</TABLE>
In addition, the following schedule presents total rental and earned income
(including mortgage interest income) from individual restaurant chains,
each representing more than ten percent of the Partnership's total
rental and earned income and mortgage interest income (including the
Partnership's share of total 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>
Wendy's Old Fashioned
Hamburger Restaurant $220,347 $302,253 $293,817
Golden Corral Family
Steakhouse 195,511 N/A N/A
Denny's N/A 312,510 310,021
Perkins N/A 228,492 268,939
</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 (including mortgage interest
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.
41
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
12. 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
2,049,031 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, 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 $20,212,956 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.
42
<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 28/th/ day of
October, 1999.
CNL INCOME FUND V, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
----------------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
----------------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
----------------------------
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <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
James M. Seneff, Jr. Officer)
</TABLE>
