FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended June 30, 1999
------------------------------------------------
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
0-19140
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CNL Income Fund VII, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2963871
- --------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East South Street
Orlando, Florida 32801
- -------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
<PAGE>
CONTENTS
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Page
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Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Part II.
Other Information 15-17
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ---------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,459,373 and
$2,473,926, respectively $ 14,127,414 $ 15,078,507
Net investment in direct financing leases 3,320,665 3,365,392
Investment in joint ventures 3,413,821 3,327,934
Mortgage notes receivable, less deferred gain of
$124,725 and $125,278, respectively 1,235,728 1,241,056
Cash and cash equivalents 906,629 856,825
Restricted cash 1,063,383 --
Receivables, less allowance for doubtful accounts
of $16,679 and $28,853, respectively 2,499 78,478
Prepaid expenses 13,021 4,116
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1999 and 1998 1,175,747 1,205,528
Other assets 60,422 60,422
------------------ -----------------
$ 25,319,329 $ 25,218,258
================== =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 89,920 $ 2,885
Escrowed real estate taxes payable 4,249 5,834
Distributions payable 675,000 675,000
Due to related parties 25,464 25,111
Rents paid in advance and deposits 43,712 49,027
------------------ -----------------
Total liabilities 838,345 757,857
Commitments and Contingencies (Note 5)
Minority interest 146,060 146,605
Partners' capital 24,334,924 24,313,796
------------------ -----------------
$ 25,319,329 $ 25,218,258
================== =================
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------- ------------
Revenues:
Rental income from operating leases $ 490,454 $ 498,467 $ 983,178 $ 991,191
Earned income from direct financing leases 101,201 103,779 203,077 208,154
Contingent rental income 2,169 2,958 3,679 12,378
Interest and other income 44,581 41,148 84,139 85,138
------------ ------------ ------------- ------------
638,405 646,352 1,274,073 1,296,861
------------ ------------ ------------- ------------
Expenses:
General operating and administrative 28,491 34,550 63,827 67,662
Professional services 7,366 7,313 11,785 12,594
State and other taxes -- 40 13,055 2,728
Depreciation and amortization 74,630 76,089 150,719 152,178
Transaction costs 78,624 -- 111,897 --
------------ ------------ ------------- ------------
189,111 117,992 351,283 235,162
------------ ------------ ------------- ------------
Income Before Minority Interest in Income of
Consolidated Joint Venture, Equity in Earnings
of Unconsolidated Joint Ventures, and
Gain on Sale of Land and Buildings 449,294 528,360 922,790 1,061,699
Minority Interest in Income of Consolidated
Joint Venture (4,631 ) (4,596 ) (9,280 ) (9,256 )
Equity in Earnings of Unconsolidated Joint Ventures 195,079 73,260 268,374 151,193
Gain on Sale of Land and Buildings 188,971 252 189,244 499
------------ ------------ ------------- ------------
Net Income $ 828,713 $ 597,276 $1,371,128 $1,204,135
============ ============ ============= ============
Allocation of Net Income:
General partners $ 8,053 $ 5,972 $ 13,477 $ 12,041
Limited partners 820,660 591,304 1,357,651 1,192,094
------------ ------------ ------------- ------------
$ 828,713 $ 597,276 $1,371,128 $1,204,135
============ ============ ============= ============
Net Income Per Limited Partner Unit $ 0.027 $ 0.020 $ 0.045 $ 0.040
============ ============ ============= ============
Weighted Average Number of Limited Partner
Units Outstanding 30,000,000 30,000,000 30,000,000 30,000,000
============ ============ ============= ============
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Six Months Ended Year Ended
June 30, December 31,
1999 1998
----------------- ------------------
General partners:
Beginning balance $ 205,744 $ 181,085
Net income 13,477 24,659
----------------- ------------------
219,221 205,744
----------------- ------------------
Limited partners:
Beginning balance 24,108,052 24,366,693
Net income 1,357,651 2,441,359
Distributions ($0.045 and $0.090 per
limited partner unit, respectively) (1,350,000 ) (2,700,000 )
----------------- ------------------
24,115,703 24,108,052
----------------- ------------------
Total partners' capital $24,334,924 $24,313,796
================= ==================
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1999 1998
--------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $1,405,372 $1,401,833
--------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 1,059,954 --
Increase in restricted cash (1,061,529 ) --
Collections on mortgage notes receivable 5,832 5,267
Other -- 13,255
--------------- ---------------
Net cash provided by investing activities 4,257 18,522
--------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,350,000 ) (1,350,000 )
Distributions to holder of minority interest (9,825 ) (9,663 )
--------------- ---------------
Net cash used in financing activities (1,359,825 ) (1,359,663 )
--------------- ---------------
Net Increase in Cash and Cash Equivalents 49,804 60,692
Cash and Cash Equivalents at Beginning of Period 856,825 761,317
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 906,629 $ 822,009
=============== ===============
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
quarter $ 675,000 $ 675,000
=============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 1999, may not be indicative
of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of
that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund VII, Ltd. (the "Partnership") for the year ended December
31, 1998.
The Partnership accounts for its 83 percent interest in San Antonio
#849 Joint Venture 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.
2. Land and Buildings on Operating Leases:
In June 1999, the Partnership sold its property in Maryville, Tennessee
to the tenant in accordance with the purchase option under the lease
agreement to purchase the property, for $1,068,802, and received net
sales proceeds of $1,059,954, resulting in a gain of $188,691 for
financial reporting purposes. This property was originally acquired by
the Partnership in 1990 at a cost of approximately $890,700, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold this property for a total of approximately $169,300 in
excess of its original purchase price.
3. Investment in Joint Ventures:
In June 1999, Halls Joint Venture, in which the Partnership owns a
51.1% interest, sold its property to the tenant in accordance with the
purchase option under the lease agreement for $891,915, resulting in a
gain to the joint venture of approximately $239,300 for financial
reporting purposes. The property was originally contributed to Halls
Joint Venture in 1990 and had a total cost of approximately $672,000,
excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the joint venture sold the property for approximately
$219,900 in excess of its original purchase price.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1999 and 1998
3. Investment in Joint Ventures - Continued:
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures at:
June 30, December 31,
1999 1998
-------------- -------------
Land and buildings on operating
leases, less accumulated
depreciation $ 9,892,904 $ 10,612,379
Cash 4,133 3,763
Restricted cash 887,114 --
Receivables 32 21,249
Accrued rental income 129,946 178,775
Other assets 1,129 1,116
Liabilities 9,019 8,916
Partners' capital 10,906,239 10,808,366
Revenues 630,777 1,324,602
Gain on sale of land and building 239,336 --
Net income 719,130 1,028,391
The Partnership recognized income totaling $268,374 and $151,193 during
the six months ended June 30, 1999 and 1998, respectively, from these
joint ventures, $195,079 and $73,260 of which was earned during the
quarters ended June 30, 1999 and 1998, respectively.
4. Restricted Cash:
As of June 30, 1999, the net sales proceeds of $1,059,954 from the sale
of the property in Maryville, Tennessee, plus accrued interest of
$3,429, were being held in an interest-bearing escrow account pending
the release of funds by the escrow agent to acquire an additional
property.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1999 and 1998
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 1,601,186 shares of its common stock, par value $0.01 per share
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the
price paid by APF investors (after an adjustment for a one for two
reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other
assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $31,543,529 as of December 31, 1998. The APF
Shares are expected to be listed for trading on the New York Stock
Exchange concurrently with the consummation of the Merger, and
therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess
of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If
the limited partners at the special meeting approve the Merger, APF
will own the properties and other assets of the Partnership. The
general partners intend to recommend that the limited partners of the
Partnership approve the Merger. In connection with their
recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject
the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners
will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates in
connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend
vigorously against the claims. See Part II - Item 1. Legal Proceedings.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1999 and 1998
5. Commitments and Contingencies - Continued:
During the six months ended June 30, 1999, the Partnership received
notice from a tenant deciding to exercise the purchase option under its
lease agreement relating to the Burger King property in Jefferson City,
Tennessee. The general partners believe that the anticipated sales
price for this property exceeds the Partnership's net carrying value
attributable to the property. As of August 6, 1999, the sale had not
occurred.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund VII, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on August 18, 1989, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, as well as land upon which restaurants were to be
constructed (the "Properties"), which are leased primarily to operators of
national and regional fast-food restaurant chains. The leases generally are
triple-net leases, with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities. As of June 30, 1999, the Partnership
owned 38 Properties, which included interests in nine Properties owned by joint
ventures in which the Partnership is a co-venturer and two Properties owned with
affiliates of the general partners as tenants-in-common.
Capital Resources
- -----------------
The Partnership's primary source of capital for the six months ended
June 30, 1999 and 1998, was cash from operations (which includes cash received
from tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $1,405,372 and
$1,401,833 for the six months ended June 30, 1999 and 1998, respectively. The
increase in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, is primarily a result of changes
in the Partnership's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In June 1999, the Partnership sold its Property in Maryville, Tennessee
to the tenant in accordance with the purchase option under the lease agreement
to purchase the Property, for $1,068,802 and received net sales proceeds of
$1,059,954, resulting in a gain of $188,691 for financial reporting purposes.
This Property was originally acquired by the Partnership in 1990 and had a cost
of approximately $890,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $169,300 in excess of its original purchase price. As of June 30,
1999, the net sales proceeds of $1,059,954, plus accrued interest of $3,429,
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional Property. The general
partners believe that the transaction, or a portion thereof, relating to the
sale of the Property in Maryville, Tennessee and the reinvestment of the
proceeds will qualify as a like-kind exchange transaction for federal income tax
purposes. However, the Partnership anticipates that it will distribute amounts
sufficient to enable the limited partners to pay federal and state income taxes,
if any (at a level reasonably assumed by the general partners), resulting from
the sale.
In June 1999, Halls Joint Venture, in which the Partnership owns a
51.1% interest, sold its Property to the tenant in accordance with the purchase
option under the lease agreement for $891,915, resulting in a gain to the joint
venture of approximately $239,300 for financial reporting purposes. The Property
was originally contributed to Halls Joint Venture in 1990 and had a total cost
to the joint venture of approximately $672,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
Property for approximately $219,900 in excess of its original purchase price.
The general partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Halls Joint Venture and the reinvestment
of the proceeds will qualify as a like-kind exchange transaction for federal
income tax purposes.
Currently, rental income from the Partnership's Properties and any net
sales proceeds held by the Partnership, pending reinvestment in additional
Properties, are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit at commercial banks, certificates of
deposit, and money market accounts with less than a 30-day maturity date,
pending the Partnership's use of such funds to pay Partnership expenses or to
make distributions to the partners. At June 30, 1999, the Partnership had
$906,629 invested in such short-term investments, as compared to $856,825 at
December 31, 1998. The funds remaining at June 30, 1999, after payment of
distributions and other liabilities, will be used to meet the Partnership's
working capital and other needs.
Short-Term Liquidity
- --------------------
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on cash from operations, the Partnership declared distributions to the
limited partners of $1,350,000 for each of the six months ended June 30, 1999
and 1998 ($675,000 for each of the quarters ended June 30, 1999 and 1998). This
represents distributions for each applicable six months of $0.045 per unit
($0.023 per unit for each applicable quarter). No distributions were made to the
general partners for the quarters and six months ended June 30, 1999 and 1998.
No amounts distributed to the limited partners for the six months ended June 30,
1999 and 1998, are required to be or have been treated by the Partnership as a
return of capital for purposes of calculating the limited partners' return on
their adjusted capital contributions. The Partnership intends to continue to
make distributions of cash available for distribution to the limited partners on
a quarterly basis.
Total liabilities of the Partnership, including distributions payable,
increased to $838,345 at June 30, 1999, from $757,857 at December 31, 1998. The
increase in liabilities at June 30, 1999 is primarily a result of the
Partnership accruing transaction costs relating to the proposed merger with CNL
American Properties Fund, Inc. ("APF"), as described below. The general partners
believe that the Partnership has sufficient cash on hand to meet its current
working capital needs.
During the six months ended June 30, 1999, the Partnership received
notice from a tenant deciding to exercise the purchase option under the lease
agreement relating to the Burger King Property in Jefferson City, Tennessee. The
general partners believe that the anticipated sales price for this Property
exceeds the Partnership's net carrying value attributable to the Property. As of
August 6, 1999, the sale had not occurred.
Long-Term Liquidity
- -------------------
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
- ---------------------
During the six months ended June 30, 1999 and 1998, the Partnership and
its consolidated joint venture, San Antonio #849 Joint Venture, owned and leased
29 wholly owned Properties to operators of fast-food and family-style restaurant
chains (which included one Property which was sold in 1999). The Partnership and
its consolidated joint venture, earned $1,186,255 and $1,199,345 during the six
months ended June 30, 1999 and 1998, respectively, in rental income from
operating leases and earned income from direct financing leases, $591,655 and
$602,246 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. Rental and earned income decreased approximately $8,100 during the
quarter and six months ended June 30, 1999, as compared to the quarter and six
months ended June 30, 1998, primarily as a result of the sale of the Property in
Maryville, Tennessee, as described above in "Capital Resources."
During the six months ended June 30, 1999 and 1998, the Partnership
owned and leased nine Properties indirectly through other joint venture
arrangements (which included one Property in Halls Joint Venture which was sold
in 1999) and owned two Properties, indirectly with affiliates of the general
partners as tenants-in-common. In connection therewith, during the six months
ended June 30, 1999 and 1998, the Partnership earned $268,374 and $151,193,
respectively, $195,079 and $73,260 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively. The increase in net income earned by joint
ventures is attributable to the fact that in June 1999, Halls Joint Venture, in
which the Partnership owns a 51.1% interest, recognized a gain of approximately
$239,300, approximately $122,000 of which was allocated to the Partnership, for
financial reporting purposes as a result of the sale of its Property in June
1999, as described above in "Capital Resources." Because the joint venture
intends to reinvest the sales proceeds in an additional Property in 1999, the
Partnership does not anticipate that the sale of the Property will have a
material adverse effect on operations.
Operating expenses, including depreciation expense, were $351,283 and
$235,162 for the six months ended June 30, 1999 and 1998, respectively, of which
$189,111 and $117,992 were incurred during the quarters ended June 30, 1999 and
1998, respectively. The increase in operating expenses during the quarter and
six months ended June 30, 1999, was primarily due to the fact that during the
quarter and six months ended June 30, 1999, the Partnership incurred $78,624 and
$111,897, respectively, in transaction costs related to the general partners
retaining financial and legal advisors to assist them in evaluating and
negotiating the proposed Merger with APF, as described below. If the limited
partners reject the Merger, the Partnership will bear the portion of the
transaction costs based upon the percentage of "For" votes and the general
partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
As a result of the sale of the Property in Florence, South Carolina in
August 1995, and recording the gain using the installment method, the
Partnership recognized a gain for financial reporting purposes of $553 and $499
for the six months ended June 30, 1999 and 1998, respectively, $280 and $252 of
which was recognized during the quarters ended June 30, 1999 and 1998,
respectively. In addition, as a result of the sale of the Property in Maryville,
Tennessee, as described above in "Capital Resources," the Partnership recognized
a gain of $188,691 for financial reporting purposes during the quarter and six
months ended June 30, 1999. No Properties were sold during the quarter and six
months ended June 30, 1998.
Proposed Merger
- ---------------
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF
has agreed to issue 1,601,186 shares of its common stock, par value $0.01 per
share (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the price paid
by APF investors (after an adjustment for a one for two reverse stock split
effective June 3, 1999) in three previous public offerings, the most recent of
which was completed in December 1998. In order to assist the general partners in
evaluating the proposed merger consideration, the general partners retained
Valuation Associates, a nationally recognized real estate appraisal firm, to
appraise the Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other assets
were valued on a going concern basis (meaning the Partnership continues
unchanged) at $31,543,529 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the fourth quarter of 1999, limited partners holding
in excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to
add three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF and CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims. See Part II - Item 1. Legal Proceedings.
Year 2000 Readiness Disclosure
- ------------------------------
The Year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. As of June 30, 1999 the
Partnership did not have any information or non-information technology systems.
The general partners and certain of the affiliates of the general partners
provide all services requiring the use of information and non-information
technology systems pursuant to a management agreement with the Partnership. The
information technology system of the affiliates of the general partners consists
of a network of personal computers and servers built using hardware and software
from mainstream suppliers. The non-information technology systems of the
affiliates of the general partners are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The affiliates of the general partners have no
internally generated programmed software coding to correct because substantially
all of the software utilized by the general partners and affiliates is purchased
or licensed from external providers. The maintenance of non-information
technology systems at the Partnership's Properties is the responsibility of the
tenants of the Properties in accordance with the terms of the Partnership's
leases.
In early 1998, the general partners and affiliates formed a Year 2000
team, for the purpose of identifying, understanding and addressing the various
issues associated with the Year 2000 problem. The Y2K Team consists of the
general partners and members from certain of the affiliates of the general
partners, including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management. The Y2K Team's initial step in assessing the Partnership's Year 2000
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of the
Partnership's systems could have a potential Year 2000 problem.
The information system of the affiliates of the general partners is
comprised of hardware and software applications from mainstream suppliers.
Accordingly, the Y2K Team is in the process of contacting the respective vendors
and manufacturers to verify the Year 2000 compliance of their products. In
addition, the Y2K Team has requested and is evaluating documentation from other
companies with which the Partnership has a material third party relationship,
including the Partnership's tenants, vendors, financial institutions and the
Partnership's transfer agent. The Partnership depends on its tenants for rents
and cash flows, its financial institutions for availability of cash and its
transfer agent to maintain and track investor information. The Y2K Team has also
requested and is evaluating documentation from the non-information technology
systems providers of the affiliates of the general partners. Although the
general partners continue to receive positive responses from the companies with
which the Partnership has third party relationships regarding their Year 2000
compliance, the general partners cannot be assured that the tenants, financial
institutions, transfer agent, other vendors and system providers have adequately
considered the impact of the Year 2000. The general partners are not able to
measure the effect on the operations of the Partnership of any third party's
failure to adequately address the impact of the Year 2000.
The general partners and their affiliates have identified and have
implemented upgrades for certain hardware equipment. In addition, the general
partners and their affiliates have identified certain software applications
which will require upgrades to become Year 2000 compliant. The general partners
expect that all of these upgrades, as well as any other necessary remedial
measures on the information technology systems used in the business activities
and operations of the Partnership, to be completed by September 30, 1999,
although, the general partners cannot be assured that the upgrade solutions
provided by the vendors have addressed all possible Year 2000 issues. The
general partners do not expect the aggregate cost of the Year 2000 remedial
measures to be material to the results of operations of the Partnership.
The general partners and their affiliates have received certification
from the Partnership's transfer agent of its Year 2000 compliance. Due to the
material relationship of the Partnership with its transfer agent, the Y2K Team
is evaluating the Year 2000 compliance of the systems of the transfer agent and
expects to have the evaluation completed by September 30, 1999. Despite the
positive response from the transfer agent and the evaluation of the transfer
agent's system by the Y2K Team, the general partners cannot be assured that the
transfer agent has addressed all possible Year 2000 issues. In the event that
the systems of the transfer agent are not Year 2000 compliant, the general
partners and their affiliates will have to allocate resources to internally
perform the functions of the transfer agent. The general partners do not
anticipate that the additional cost of these resources would have a material
impact on the Partnership.
Based upon the progress the general partners and their affiliates have
made in addressing the Year 2000 issues and their plan and timeline to complete
the compliance program, the general partners do not foresee significant risks
associated with Year 2000 compliance at this time. The general partners and
their affiliates plan to address their significant Year 2000 issues prior to the
Partnership being affected by them; therefore, we have not developed a
comprehensive contingency plan. However, if the general partners and their
affiliates identify significant risks related to their Year 2000 compliance, or
if their progress deviates from the anticipated timeline, the general partners
and their affiliates will develop contingency plans as deemed necessary at that
time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in the Partnership's market risk occurred from
December 31, 1998 through June 30, 1999. Information regarding the Partnership's
market risk at December 31, 1998 is included in its Annual Report on Form 10-K
for the year ended December 31, 1998.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 11, 1999, four limited partners in several CNL Income
Funds served a derivative and purported class action lawsuit
filed April 22, 1999 against the general partners and APF in
the Circuit Court of the Ninth Judicial Circuit of Orange
County, Florida, alleging that the general partners breached
their fiduciary duties and violated provisions of certain of
the CNL Income Fund partnership agreements in connection with
the proposed Merger. The plaintiffs are seeking unspecified
damages and equitable relief. On July 8, 1999, the plaintiffs
filed an amended complaint which, in addition to naming three
additional plaintiffs, includes allegations of aiding and
abetting and conspiring to breach fiduciary duties, negligence
and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended,
the caption of the case is Jon Hale, Mary J. Hewitt, Charles
A. Hewitt, Gretchen M. Hewitt Bernard J. Schulte, Edward M.
and Margaret Berol Trust, and Vicky Berol v. James M. Seneff,
Jr., Robert A. Bourne, CNL Realty Corporation, and CNL
American Properties Fund, Inc., Case No. CIO-99-0003561.
On June 22, 1999, a limited partner of several CNL Income
Funds served a purported class action lawsuit filed April 29,
1999 against the general partners and APF, Ira Gaines,
individually and on behalf of a class of persons similarly
situated, v. CNL American Properties Fund, Inc., James M.
Seneff, Jr., Robert A. Bourne, CNL Realty Corporation, CNL
Fund Advisors, Inc., CNL Financial Corporation a/k/a CNL
Financial Corp., CNL Financial Services, Inc. and CNL Group,
Inc., Case NO. CIO-99-3796, in the Circuit Court of the Ninth
Judicial Circuit of Orange County, Florida, alleging that the
general partners breached their fiduciary duties and that APF
aided and abetted their breach of fiduciary duties in
connection with the proposed Merger. The plaintiff is seeking
unspecified damages and equitable relief.
Item 2. Changes in Securities. Inapplicable.
Item 3. Default upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
Item 5. Other Information. Inapplicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund, Inc.
("APF") dated March 11, 1999 and as amended June 4,
1999 (Filed as Appendix B to the Prospectus
Supplement for the Registrant, constituting a part of
Amendment No. 1 to the Registration Statement of APF
on Form S-4, File No. 74329.)
3.1 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 3.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership
of CNL Income Fund VII, Ltd. (Included as Exhibit 4.2
to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein
by reference.)
10.1 Management Agreement between CNL Income Fund VII,
Ltd. and CNL Investment Company (Included as Exhibit
10.1 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and
incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL
Investment Company to CNL Income Fund Advisors, Inc.
(Included as Exhibit 10.2 to Form 10-K filed with the
Securities and Exchange Commission on March 30, 1995,
and incorporated herein by reference.)
10.3 Assignment of Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc.
(Included as Exhibit 10.3 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996,
and incorporated herein by reference.)
27 Financial Data Schedule (Filed herewith.)
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 9th day of August, 1999
CNL INCOME FUND VII, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund VII, Ltd. at June 30, 1999, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10-Q of CNL Income Fund VII, Ltd. for the six months ended June 30,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,970,012<F2>
<SECURITIES> 0
<RECEIVABLES> 19,178
<ALLOWANCES> 16,679
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 16,586,787
<DEPRECIATION> 2,459,373
<TOTAL-ASSETS> 25,319,329
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,334,924
<TOTAL-LIABILITY-AND-EQUITY> 25,319,329
<SALES> 0
<TOTAL-REVENUES> 1,274,073
<CGS> 0
<TOTAL-COSTS> 351,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,371,128
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,371,128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,371,128
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund VII, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
<F2>Includes 1,063,383 in restricted cash.
</FN>
</TABLE>
