UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(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 0-19140
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 Identification No.)
incorporation or organization)
400 East South Street, Suite 500
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 ($1 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
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 30,000,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $1 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
PART I
Item 1. Business
CNL Income Fund VII, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 18, 1989. 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 January 30, 1990, the
Partnership offered for sale up to $30,000,000 of limited partnership interests
(the "Units") (30,000,000 Units each at $1 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. The
offering terminated on August 1, 1990, as of which date the maximum offering
proceeds of $30,000,000 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, totalled
$26,550,000, and were used to acquire 42 Properties, including interests in nine
Properties owned by joint ventures in which the Partnership is a co-venturer,
and to establish a working capital reserve for Partnership purposes. During
1994, the Partnership sold its Property in St. Paul, Minnesota, and reinvested
the majority of the net sales proceeds in a Checkers Property in Winter Springs,
Florida, consisting of only land, and a Jack in the Box Property in Yuma,
Arizona, which is owned as tenants-in-common with an affiliate of the General
Partners. The lessee of the Property consisting of only land owns the building
currently on the land. During 1995, the Partnership sold its Properties in
Florence, South Carolina, and Jacksonville, Florida, and accepted promissory
notes in the principal sum of $1,160,000 and $240,000, respectively. In
addition, the building located on the Partnership's Property in Daytona Beach,
Florida, was demolished in accordance with a condemnation agreement during 1995.
During the year ended December 31, 1996, the Partnership sold its Properties in
Hartland, Michigan, and Colorado Springs, Colorado, and reinvested the net sales
received from the sale of the Colorado Springs, Colorado Property in a Boston
Market Property in Marietta, Georgia. During the year ended December 31, 1997,
the Partnership used the net sales proceeds from the sale of the Property in
Hartland, Michigan, to invest in CNL Mansfield Joint Venture with an affiliate
of the General Partners in exchange for a 79 percent interest in the joint
venture. In addition, during 1997, the Partnership sold its Properties in
Columbus, Indiana and Dunnellon, Florida, and sold the Property in Yuma,
Arizona, which was owned as tenants-in-common with an affiliate of the General
Partners, and reinvested the net sales proceeds in a Property in Smithfield,
North Carolina, and a Property in Miami, Florida, each as tenants-in-common,
with affiliates of the General Partners. As a result of the above transactions,
as of December 31, 1998, the Partnership currently owns 40 Properties, including
interests in ten Properties owned by joint ventures in which the Partnership is
a co-venturer and two Properties owned with affiliates as tenants-in-common. 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 third quarter of 1999, Limited Partners holding in excess of 50% of the
Partnership's outstanding limited partnership interests must approve the Merger
prior to consummation of the transaction. If the Limited Partners at the special
meeting approve the Merger, APF will own the Properties and other assets of the
Partnership. See Item 8.
Financial Statements and Supplementary Data -- Note 11. Subsequent Event.
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
<PAGE>
been granted options to purchase Properties, generally at the Property's then
fair market value after a specified portion of the lease term has elapsed. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property 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 five to 20 years (the average being 17 years), and expire
between 2003 and 2016. Generally, the leases are on a triple-net basis, with the
lessee 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
$22,100 to $191,900. The majority of the leases provide for percentage rent,
based on sales in excess of a specified amount. In addition, some of the leases
provide that, commencing in specified lease years (generally ranging from the
sixth to the eleventh lease year), the annual base rent required under the terms
of the lease will increase.
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 after a specified portion of
the lease term has elapsed. Under the terms of certain leases, the option
purchase price may equal the Partnership's original cost to purchase the
Property (including acquisition costs), plus a specified percentage from the
date of the lease or a specified percentage of the Partnership's purchase price,
if that amount is greater than the Property's fair market value at the time the
purchase option is exercised.
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 that 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.
Major Tenants
During 1998, three lessees of the Partnership and its consolidated
joint venture, Golden Corral Corporation, Restaurant Management Services, Inc.,
and Waving Leaves, Inc., each contributed more than ten percent of the
Partnership's total rental income (including rental income from the
Partnership's consolidated joint venture and the Partnership's share of rental
income from nine 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 five
restaurants, Restaurant Management Services, Inc. was the lessee under leases
relating to seven restaurants and one site currently consisting of land only,
and Waving Leaves, Inc. was the lessee under leases relating to four
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, these three lessees each will continue to contribute
more than ten percent of the Partnership's total rental income in 1999. In
addition, three Restaurant Chains, Golden Corral Family Steakhouse Restaurants
("Golden Corral"), Hardee's, and Burger King, each accounted for more than ten
percent of the Partnership's total rental income in 1998 (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of rental income from nine Properties owned by unconsolidated joint
ventures and two Properties owned with affiliates as tenants-in-common). In
1999, it is anticipated that these three Restaurant Chains each will continue to
account for more than ten percent of the Partnership's total rental income to
which the Partnership is entitled under the terms of the leases. 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. As of December 31, 1998, Golden Corral Corporation leased Properties
with an aggregate carrying value, excluding acquisition fees and certain
acquisition expenses, in excess of 20 percent of the total assets of the
Partnership.
Joint Venture Arrangements
The Partnership has entered into a joint venture arrangement, San
Antonio #849 Joint Venture, with an unaffiliated entity to purchase and hold one
Property. In addition, as of December 31, 1996, the Partnership had entered into
four separate joint venture arrangements, Halls Joint Venture, CNL Restaurant
Investments II, Des Moines Real Estate Joint Venture, and CNL Mansfield Joint
Venture, with affiliates of the General Partners to purchase and hold nine
Properties through such joint ventures. The joint venture arrangements provide
for the Partnership and its joint venture partners to share in all costs and
benefits associated with the joint venture in accordance with their respective
percentage interests in the joint venture. The Partnership and its joint venture
partners are also jointly and severally liable for all debts, obligations and
other liabilities of the joint venture.
San Antonio #849 Joint Venture, Halls Joint Venture, Des Moines Real
Estate Joint Venture, and CNL Mansfield Joint Venture each have an initial term
of 20 years and, after the expiration of the initial term, continue in existence
from year to year unless terminated at the option of any joint venturer or by an
event of dissolution. Events of dissolution include the bankruptcy, insolvency
or termination of any joint venturer, sale of the Property owned by the joint
venture and mutual agreement of the Partnership and each joint venture partner
to dissolve the joint venture. CNL Restaurant Investments II's joint venture
agreement does not provide a fixed term, but continues in existence until
terminated by any of the joint venturers.
The Partnership has management control of the San Antonio #849 Joint
Venture and shares management control equally with affiliates of the General
Partners for Halls Joint Venture, CNL Restaurant Investments II, Des Moines Real
Estate Joint Venture, and CNL Mansfield 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 San Antonio #849 Joint Venture, Halls
Joint Venture, CNL Restaurant Investments II, Des Moines Real Estate Joint
Venture, and CNL Mansfield Joint Venture is distributed 83.3%, 51.1%, 18
percent, 4.79% and 79 percent, respectively, to the Partnership and the balance
is distributed to each of the other joint venture partners in accordance with
their respective percentage interests in the joint venture. Any liquidation
proceeds, after paying joint venture debts and liabilities and funding reserves
for contingent liabilities, will be distributed first to the joint venture
partners with positive capital account balances in proportion to such balances
until such balances equal zero, and thereafter in proportion to each joint
venture partner's percentage interest in the joint venture.
In addition to the above joint venture agreements, in July 1994, the
Partnership entered into an agreement to hold a Jack in the Box Property as
tenants-in-common with an affiliate of the General Partners. The agreement
provided for the Partnership and the affiliate to share in the profits and
losses of the Property in proportion to each co-venturer's percentage. The
Partnership owned a 48.33% interest in this Property. In October 1997, the
Partnership and the affiliate, as tenants-in-common, sold the Jack in the Box
Property in Yuma, Arizona. In December 1997, the Partnership entered into an
agreement to hold a Property in Miami, Florida, as tenants-in-common with
affiliates of the General Partners and in conjunction therewith, reinvested its
portion of the net sales proceeds received from the sale of the Property in
Yuma, Arizona, along with additional funds from the sale of the Property in
Columbus, Indiana. The agreement provides for the Partnership and the affiliate
to share in the profits and losses of the Property in proportion to each
co-venturer's percentage interest. The Partnership owns a 35.64% interest in the
Property in Miami, Florida.
In addition, in December 1997, the Partnership entered into an
agreement to hold a Golden Corral Property in Smithfield, North Carolina, as
tenants-in-common with an affiliate of the General Partners. The agreement
provides for the Partnership and the affiliate to share in the profits and
losses of the Property in proportion to each co-venturer's percentage interest.
The Partnership owns a 53 percent interest in this 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 with the Partnership. Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties. CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases. For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one percent of the sum of gross rental
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 and the Property held as tenants-in-common with an affiliate, 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"). In any year in which the Limited Partners have not
received the 10% Preferred Return, no property management fee will be paid.
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.
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.
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, either directly or
through joint venture arrangements, 40 Properties located in 13 states.
Reference is made to the Schedule of Real Estate and Accumulated Depreciation
filed with this report for a listing of the Properties and their respective
costs, including acquisition fees and certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 10,800
to 110,200 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.
Buildings. Generally, each of the Properties owned by the Partnership
includes a building that is one of a Restaurant Chain's approved designs.
However, the building located on the Checkers Property is owned by the tenant,
while the land parcel is owned by the Partnership.
In addition, the building located on the Partnership's Property in
Daytona Beach, Florida, was demolished in accordance with a condemnation
agreement during 1995. The buildings generally are rectangular and are
constructed from various combinations of stucco, steel, wood, brick and tile.
The sizes of the buildings owned by the Partnership range from approximately 700
to 10,600 square feet. All buildings on Properties 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.
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.
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.
<PAGE>
Golden Corral Corporation leases five Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2004 and 2012) and the
average minimum base annual rent is approximately $148,700 (ranging from
approximately $137,100 to $166,700).
Restaurant Management Services, Inc. leases five Popeyes restaurants,
one Shoney's restaurant, one Church's Fried Chicken restaurant and one site
currently consisting of land only (formerly operated as a Church's Fried
Chicken). The initial term of each lease is 19 to 20 years (expiring between
2009 and 2010) and the average minimum base annual rent is approximately $53,700
(ranging from approximately $22,100 to $121,000).
Waving Leaves, Inc. leases four Hardee's restaurants. The initial term
of each lease is 20 years (expiring in 2010) and the average minimum base annual
rent is approximately $79,200 (ranging from approximately $70,300 to $89,400).
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective properties, is a party to, or
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 11, 1999 there were 3,150 holders of record of the Units.
There is no public trading market for the Units, and it is not anticipated that
a public market for the Units will develop. Limited Partners who wish to sell
their Units may offer the Units for sale pursuant to the Partnership's
distribution reinvestment plan (the "Plan"), and Limited Partners who wish to
have their distributions used to acquire additional Units (to the extent Units
are available for purchase), may do so pursuant to such Plan. The General
Partners have the right to prohibit transfers of Units. From inception through
December 31, 1998, the price paid for any Unit transferred pursuant to the Plan
was $.95 per Unit. The price paid for any Unit transferred other than pursuant
to the Plan was subject to negotiation by the purchaser and the selling Limited
Partner. The Partnership will not redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 1998 and 1997 other than
pursuant to the Plan, net of commissions.
<TABLE>
<CAPTION>
1998 (1) 1997 (1)
-------------------------------- ----------------------------------
High Low Average High Low Average
------- ------- ---------- -------- ------- ----------
<S> <C>
First Quarter $.95 $.91 $.93 $1.00 $.95 $.96
Second Quarter .95 .87 .91 .95 .82 .91
Third Quarter .95 .90 .94 .92 .79 .85
Fourth Quarter .95 .78 .91 .84 .81 .83
</TABLE>
(1) A total of 194,088 and 94,606 Units were transferred other than
pursuant to the Plan for the years ended December 31, 1998 and 1997,
respectively.
The capital contribution per Unit was $1. All cash available for
distribution will be distributed to the partners pursuant to the provisions of
the Partnership Agreement.
For each of the years ended December 31, 1998 and 1997, the Partnership
declared cash distributions of $2,700,000 to the Limited Partners. Distributions
of $675,000 were declared at the close of each of the Partnership's calendar
quarters during 1998 and 1997 to the Limited Partners. No amounts distributed to
partners for the years ended December 31, 1998 and 1997, 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. No distributions have been made to the General Partners to date.
As indicated in the chart below, these distributions were declared at the close
of each of the Partnership's calendar quarters. These amounts include monthly
distributions made in arrears for the Limited Partners electing to receive
distributions on this basis.
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although some Limited Partners, in accordance with their election, receive
monthly distributions, for an annual fee.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------------- -------------- ------------- ------------- --------------
<S> <C>
Year ended December 31:
Revenues (1) $ 2,948,217 $ 2,919,734 $ 2,882,709 $ 2,716,883 $ 2,917,331
Net income (2) 2,466,018 2,606,008 2,326,863 1,982,148 2,503,300
Cash distributions declared (3) 2,700,000 2,700,000 2,700,000 2,700,002 2,760,002
Net income per Unit (2) 0.081 0.086 0.077 0.065 0.083
Cash distributions declared
per Unit (3) 0.090 0.090 0.090 0.090 0.092
At December 31:
Total assets $25,218,258 $25,479,762 $25,523,853 $25,915,616 $26,644,363
Partners' capital 24,313,796 24,547,778 24,641,770 25,014,907 25,732,761
</TABLE>
(1) Revenues include equity in earnings of unconsolidated joint ventures
and minority interest in income of the consolidated joint venture.
(2) Net income for the years ended December 31, 1998, 1997, 1996, 1995, and
1994, includes $1,025, $184,627, $195,675, $1,421, and $77,379,
respectively, from gains on dispositions of land and buildings. Net
income for the years ended December 31, 1997, 1996, and 1995, includes
a loss on sale of land and building of $19,739, $235,465, and $6,556,
respectively. In addition, net income for the year ended December 31,
1995, includes a loss on demolition of building of $174,466.
(3) Distributions for the year ended December 31, 1994, include a special
distribution to the Limited Partners of $60,000 which represented
cumulative excess operating reserves.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8 hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on August 18, 1989, 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 lessees generally responsible
for all repairs and maintenance, property taxes, insurance and utilities. As of
December 31, 1998, the Partnership owned 40 Properties, either directly or
indirectly through joint venture arrangements.
Liquidity and Capital Resources
The Partnership's primary source of capital for the years ended
December 31, 1998, 1997, and 1996, was cash from operations (which includes cash
received from tenants, distributions from joint ventures and interest received,
less cash paid for expenses). Cash from operations was $2,790,975, $2,840,459,
and $2,670,869 for the years ended December 31, 1998, 1997, and 1996,
respectively. The decrease in cash from operations during 1998, as compared to
1997, is primarily a result of changes in the Partnership's working capital. The
increase in cash from operations during 1997, as compared to 1996, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below and changes in the Partnership's working capital.
Other sources and uses of capital included the following during the
years ended December 31, 1998, 1997, and 1996.
In March 1996, the Partnership entered into an agreement with the
tenant of the Property in Daytona Beach, Florida, for payment of certain rental
payment deferrals the Partnership had granted to the tenant through March 31,
1996. Under the agreement, the Partnership agreed to abate approximately $13,200
of the rental payment deferral amounts. The tenant made payments of
approximately $5,700 in each of April 1996, March 1997, and June 1998 in
accordance with the terms of the agreement, and has agreed to pay the
Partnership the remaining balance due of approximately $22,300 in four remaining
annual installments through 2002.
In July 1996, the Partnership sold its Property in Colorado Springs,
Colorado, for $1,075,000, and received net sales proceeds of $1,044,909,
resulting in a gain of $194,839 for financial reporting purposes. This Property
was originally acquired by the Partnership in July 1990 and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$144,000 in excess of its original purchase price. In October 1996, the
Partnership reinvested the net sales proceeds, along with additional funds, in a
Boston Market Property located in Marietta, Georgia. A portion of the
transaction relating to the sale of the Property in Colorado Springs, Colorado,
and the reinvestment of the net sales proceeds were structured to qualify as a
like-kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code. The Partnership distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes resulting from the sale.
In addition, in October 1996, the Partnership sold its Property in
Hartland, Michigan, for $625,000 and received net sales proceeds of $617,035,
resulting in a loss of approximately $235,465, for financial reporting purposes.
In February 1997, the Partnership reinvested the net sales proceeds in CNL
Mansfield Joint Venture. The Partnership has a 79 percent interest in the
profits and losses of CNL Mansfield Joint Venture and the remaining interest in
this joint venture is held by an affiliate of the Partnership which has the same
General Partners.
In May 1997, the Partnership sold its Property in Columbus, Indiana,
for $240,000 and received net sales proceeds of $223,589, resulting in a loss of
$19,739 for financial reporting purposes. In December 1997, the Partnership
reinvested the net sales proceeds, along with additional funds, in a Property in
Miami, Florida, as tenants-in-common with affiliates of the General Partner, in
exchange for a 35.64% interest in this Property.
In October 1997, the Partnership sold its Property in Dunnellon,
Florida, for $800,000 and received net sales proceeds (net of $5,055 which
represents amounts due to the former tenant for prepaid rent) of $752,745,
resulting in a gain of $183,701 for financial reporting purposes. This Property
was originally acquired by the Partnership in August 1990 and had a cost of
approximately $546,300, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$211,500 in excess of its original purchase price. In December 1997, the
Partnership reinvested these net sales proceeds in a Property in Smithfield,
North Carolina, as tenants-in-common with an affiliate of the General Partner.
The General Partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Dunnellon, Florida and the reinvestment
of the net sales proceeds in the Property in Smithfield, North Carolina, will
qualify as a like-kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code. However, 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) resulting from
the sale.
<PAGE>
In addition, in October 1997, the Partnership and an affiliate, as
tenants-in-common, sold the Property in Yuma, Arizona, in which the Partnership
owned a 48.33% interest, for a total sales price of $1,010,000 and received net
sales proceeds of $982,025, resulting in a gain, to the tenancy-in-common, of
approximately $128,400 for financial reporting purposes. The Property was
originally acquired in July 1994 and had a total cost of approximately $861,700,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Property was sold for approximately $120,300 in excess of its original
purchase price. In December 1997, the Partnership reinvested its portion of the
net sales proceeds from the sale of the Yuma, Arizona, Property, along with
funds from the sale of the wholly-owned Property in Columbus, Indiana, in a
Property in Miami, Florida, as tenants-in-common with affiliates of the General
Partners. The General Partners believe that the transaction, or a portion
thereof, relating to the sale of the Property in Yuma, Arizona and the
reinvestment of the net sales proceeds in the Property in Miami, Florida, will
qualify as a like-kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code. However, 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) resulting from
the sale.
None of the Properties owned by the Partnership or the joint ventures
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 is invested
in money market accounts or other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or make
distributions to the partners. At December 31, 1998, the Partnership had
$856,825 invested in such short-term investments, as compared to $761,317 at
December 31, 1997. The funds remaining at December 31, 1998, will be used for
the payment of distributions and other liabilities.
During 1998, 1997, and 1996, affiliates of the General Partners
incurred on behalf of the Partnership $86,851, $74,968, and $97,288,
respectively, for certain operating expenses. As of December 31, 1998 and 1997,
the Partnership owed $17,911 and $27,683, respectively, to affiliates for such
amounts and accounting and administrative services. As of March 11, 1999, the
Partnership had reimbursed the affiliates all such amounts. In addition, as of
December 31, 1998 and 1997, the Partnership owed $7,200 in real estate
disposition fees to an affiliate as a result of its services in connection with
the 1995 sale of the Property in Jacksonville, 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. Total liabilities,
including distributions payable, of the Partnership decreased to $732,746 at
December 31, 1998, from $749,587 at December 31, 1997 primarily as a result of a
decrease in rents paid in advance at December 31, 1998. The General Partners
believe that the Partnership has sufficient cash on hand to meet its current
working capital needs.
Based primarily on cash from operations, the Partnership declared
distributions to the Limited Partners of $2,700,000 for each of the years ended
December 31, 1998, 1997, and 1996. This represents distributions of $0.090 per
Unit for each of the years ended December 31, 1998, 1997, and 1996. No amounts
distributed to the Limited Partners for the years ended December 31, 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 Partnership intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
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.
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.
<PAGE>
Due to low operating expenses and ongoing cash flow, the General
Partners believe that the Partnership has sufficient working capital reserves at
this time. In addition, because all leases of the Partnership's Properties are
on a triple-net basis, it is not anticipated that a permanent reserve for
maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
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 3,202,371 APF Shares which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the price paid
by APF investors in APF's most recent public offering. 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. Legg Mason Wood
Walker, Incorporated has rendered a fairness opinion that the APF Share
consideration, payable by APF, is fair to the Partnership from a financial point
of view. The APF Shares are expected to be listed for trading on the New York
Stock Exchange concurrently with the consummation of the Merger, and, therefore,
would be freely tradable at the option of the former Limited Partners. At a
special meeting of the partners that is expected to be held in the third quarter
of 1999, Limited Partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior to
consummation of the transaction. 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.
Results of Operations
During 1996, the Partnership and its consolidated joint venture, San
Antonio #849 Joint Venture, owned and leased 33 wholly owned Properties
(including two Properties in Colorado Springs, Colorado, and Hartland, Michigan,
which were sold in July and October 1996, respectively), during 1997, the
Partnership and its consolidated joint venture, San Antonio #849 Joint Venture,
owned and leased 31 wholly owned Properties (including two Properties in
Columbus, Indiana and Dunnellon, Florida, which were sold in May and October
1997, respectively), and during 1998, the Partnership and its consolidated joint
venture, San Antonio #849 Joint Venture, owned and leased 29 wholly owned
Properties. In addition, during 1996, the Partnership and its consolidated joint
venture, San Antonio #849 Joint Venture, was a co-venturer in three separate
joint ventures which owned and leased eight Properties and owned and leased one
Property with an affiliate as tenants-in-common. During 1997, the Partnership
and its consolidated joint venture, San Antonio #849 Joint Venture, was a
co-venturer in four separate joint ventures which owned and leased nine
Properties and owned and leased three Properties with affiliates as
tenants-in-common (including one Property in Yuma, Arizona which was sold in
October 1997), and during 1998, the Partnership and its consolidated joint
venture, San Antonio #849 Joint Venture, was a co-venturer in four separate
joint ventures which owned and leased nine Properties and owned and leased two
Properties with affiliates as tenants-in-common. As of December 31, 1998, the
Partnership and its consolidated joint venture, San Antonio #849 Joint Venture,
owned (either directly, as tenants-in-common with an affiliate or through joint
venture arrangements) 40 Properties which are generally 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
$22,100 to $191,900. Substantially all of the leases provide for percentage rent
based on sales in excess of a specified amount. In addition, some of the leases
provide that, commencing in the specified lease years (generally ranging from
the sixth to the eleventh lease year), the annual base rent required under the
terms of the lease will increase. 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, San Antonio #849 Joint Venture,
earned $2,390,557, $2,436,222, and $2,459,094, respectively, in rental income
from operating leases and earned income from direct financing leases. The
decrease in rental and earned income during 1998 and 1997, each as compared to
the previous year, was attributable to a decrease in rental and earned income as
a result of the sales of the Properties in Colorado Springs, Colorado; Hartland,
Michigan; Columbus, Ohio and Dunnellon, Florida, in July 1996, October 1996, May
1997 and October 1997, respectively. The decrease in 1997, as compared to 1996,
was partially offset by an increase in rental and earned income as a result of
reinvesting the net sales proceeds from the sale of the Property in Colorado,
Springs, Colorado, in a Property in Marietta, Georgia, in October 1996. Rental
and earned income are expected to remain at reduced amounts in future years as a
result of reinvesting the proceeds from the sales of the Properties in Hartland,
Michigan; Columbus, Ohio and Dunnellon, Florida in joint ventures and in
Properties owned with affiliates, as tenants-in-common, as described below.
However, as a result of reinvesting in joint ventures and in Properties owned
with affiliates, as tenants-in-common, net income earned by unconsolidated joint
ventures increased in 1998, as described below.
For the years ended December 31, 1998, 1997 and 1996, the Partnership
also earned $93,906, $51,345, $44,973, respectively, in contingent rental
income. The increase in contingent rental income during 1998 and 1997, each as
compared to the previous year, is primarily a result of increased gross sales of
certain restaurant Properties requiring the payment of contingent rental income.
During the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $171,263, $183,579, $240,079, respectively, in interest and
other income. The decrease in interest and other income for 1997, as compared to
1996, is partially attributable to the fact that during 1996, the Partnership
recognized approximately $46,500 in other income due to the fact that the
corporate franchisor of the Properties in Pueblo and Colorado Springs, Colorado,
paid past due real estate taxes relating to the Properties and the Partnership
reversed such amounts during 1996 that it had previously accrued as payable
during 1995. In addition, the decrease in interest and other income during 1997,
as compared to 1996, was due to the fact that during 1996, the Partnership
earned approximately $10,000 in interest income on the net sales proceeds held
in escrow relating to the Property in Colorado Springs, Colorado. These proceeds
were reinvested in a Property in Marietta, Georgia, in October 1996.
For the years ended December 31, 1998, 1997, and 1996, the Partnership
also earned $311,081, $267,251, $157,254, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Partnership is a
co-venturer and Properties owned indirectly with affiliates as
tenants-in-common. The increase in net income earned by joint ventures during
the year ended 1998, as compared to 1997, is partially due to the fact that in
February 1997, the Partnership reinvested the net sales proceeds it received
from the sale, in October 1996, of the Property in Hartland, Michigan, in CNL
Mansfield Joint Venture, with an affiliate of the Partnership which has the same
General Partners. In addition, the increase in net income earned by joint
ventures during the year ended 1998, as compared to 1997, is partially due to
the Partnership investing in a Property in Smithfield, North Carolina, in
December 1997, with affiliates of the General Partners as tenants-in-common, as
described above in "Liquidity and Capital Resources." In addition, the increase
in net income earned by joint ventures during 1998 was partially offset by, and
the increase in net income earned by joint ventures during 1997, as compared to
1996, is partially attributable to, the fact that in October 1997, the
Partnership and an affiliate, as tenants-in-common, sold the Property in Yuma,
Arizona, in which the Partnership owned a 48.33% interest. The tenancy-in-common
recognized a gain of approximately $128,400 for financial reporting purposes, as
described above in "Liquidity and Capital Resources."
During the year ended December 31, 1998, three lessees of the
Partnership and its consolidated joint venture, Golden Corral Corporation,
Restaurant Management Services, Inc., and Waving Leaves, Inc., each contributed
more than ten percent of the Partnership's total rental income (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of rental income from nine 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 five restaurants, Restaurant Management Services, Inc. was the
lessee under leases relating to seven restaurants and one site currently
consisting of land only, and Waving Leaves, Inc. was the lessee under leases
relating to four restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, these three lessees each will continue
to contribute more than ten percent of the Partnership's total rental income
during 1999. In addition, during the year ended December 31, 1998, three
Restaurant Chains, Golden Corral, Hardee's, and Burger King, each accounted for
more than ten percent of the Partnership's total rental income (including rental
income from the Partnership's consolidated joint venture and the Partnership's
share of rental income from nine Properties owned by unconsolidated joint
ventures and two Properties owned with affiliates as tenants-in-common). In
1999, it is anticipated that these three Restaurant Chains each will continue to
account for more than ten percent of the Partnership's total rental income to
which the Partnership is entitled under the terms of the leases. 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 $483,224, $478,614, and $516,056 for the years ended December 31, 1998,
1997, and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily a result of the Partnership incurring $18,781 in
transaction costs relating to the General Partners retaining financial and legal
advisors to assist them in evaluating and negotiating the proposed Merger with
APF, as described above in "Liquidity and Capital Resources." If the Limited
Partners reject the Merger, the Partnership will bear the portion of the
transaction costs based upon the percentage of "For" votes and the General
Partners will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions. The increase in operating
expenses during 1998, as compared to 1997, is partially offset be a decrease in
general operating and administrative expenses.
The decrease in operating expenses during 1997, as compared to 1996,
was primarily a result of a decrease in accounting and administrative expenses
associated with operating the Partnership and its Properties. In addition, the
decrease in operating expenses during 1997, as compared to 1996, was due to the
fact that in July 1996, the Partnership sold the Property in Colorado Springs,
Colorado, as discussed above in "Liquidity and Capital Resources," and in
connection therewith, paid approximately $9,000 in 1996 real estate taxes which
were due upon the sale of the Property. Because of the sale, no real estate
taxes were recorded in 1997.
The decrease in operating expenses during 1997, as compared to 1996,
was also partially attributable to a decrease in depreciation expense due to the
sales of the Properties in Hartland, Michigan and Colorado Springs, Colorado in
1996. The decrease in depreciation expense was partially offset by the purchase
of the Property in Marietta, Georgia, in October 1996.
In connection with the sale of its Property in Florence, South
Carolina, during 1995, the Partnership recognized a gain for financial reporting
purposes of $1,025, $926, $836 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 sale using the installment sales method. As such, the gain on sale
was deferred and is being recognized as income proportionately as payments under
the mortgage note are collected. Therefore, the balance of the deferred gain of
$125,278 at December 31, 1998 is being recognized as income in future periods as
payments are collected. For federal income tax purposes, a gain of approximately
$97,300 from the sale of this Property was also deferred during 1995 and is
being recognized as payments under the mortgage note are collected.
As a result of the sale of the Property in Columbus, Indiana, during
1997, as described above in "Liquidity and Capital Resources," the Partnership
recognized a loss of $19,739 for financial reporting purposes, for the year
ended December 31, 1997. As a result of the sale of the Property in Dunnellon,
Florida, as described above in "Liquidity and Capital Resources," the
Partnership recognized a gain for financial reporting purposes of $183,701 for
the year ended December 31, 1997.
As a result of the sale of the Property in Colorado Springs, Colorado,
during 1996, as described above in "Liquidity and Capital Resources," the
Partnership recognized a gain of $194,839 for financial reporting purposes for
the year ended December 31, 1996. As a result of the sale of the Property in
Hartland, Michigan, as described above in "Liquidity and Capital Resources," the
Partnership recognized a loss for financial reporting purposes of $235,465 for
the year ended December 31, 1996.
The Partnership's leases as of December 31, 1998, are generally
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. Inflation has had a minimal effect on income from
operations. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
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.
<PAGE>
Year 2000
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
The Partnership currently does not have any information technology
systems. Affiliates of the General Partners provide all services requiring the
use of information technology systems pursuant to a management agreement with
the Partnership. The maintenance of embedded systems, if any, at the
Partnership's Properties is the responsibility of the tenants of the Properties
in accordance with the terms of the Partnership's leases. The General Partners
and affiliates have established a team dedicated to reviewing the internal
information technology systems used in the operation of the Partnership, and the
information technology and embedded systems and the Year 2000 compliance plans
of the Partnership's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of the affiliates of the
General Partners consists of a network of personal computers and servers that
were obtained from major suppliers. The affiliates utilize various
administrative and financial software applications on that infrastructure to
perform the business functions of the Partnership. The inability of the General
Partners and affiliates to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of the Partnership's business activities
or operations. Accordingly, the General Partners and affiliates have requested
and are evaluating documentation from the suppliers of the software and
infrastructure of the affiliates regarding the Year 2000 compliance of their
products that are used in the business activities or operations of the
Partnership. The General Partners and affiliates have not yet received
sufficient certifications to be assured that the suppliers have fully considered
and mitigated any potential material impact of the Year 2000 deficiencies. The
costs expected to be incurred by the General Partners and affiliates to become
Year 2000 compliant will be incurred by the General Partners and affiliates;
therefore, these costs will have no impact on the Partnership's financial
position or results of operations.
The Partnership has material third party relationships with its
tenants, financial institutions and 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. If any of these third parties are unable to meet their obligations
to the Partnership because of the Year 2000 deficiencies, such a failure may
have a material impact on the Partnership. Accordingly, the General Partners
have requested and are evaluating documentation from the Partnership's tenants,
financial institutions, and transfer agent relating to their Year 2000
compliance plans. The General Partners have not yet received sufficient
certifications to be assured that the tenants, financial institutions, and
transfer agent have fully considered and mitigated any potential material impact
of the Year 2000 deficiencies. Therefore, the General Partners do not, at this
time, know of the potential costs to the Partnership of any adverse impact or
effect of any Year 2000 deficiencies by these third parties.
The General Partners currently expect that all year 2000 compliance
testing and any necessary remedial measures on the information technology
systems used in the business activities and operations of the Partnership will
be completed prior to June 30, 1999. Based on the progress the General Partners
and affiliates have made in identifying and addressing the Partnership's Year
2000 issues and the plan and timeline to complete the compliance program, the
General Partners do not foresee significant risks associated with the
Partnership's Year 2000 compliance at this time. Because the General Partners
and affiliates are still evaluating the status of the information technology
systems used in business activities and operations of the Partnership and the
systems of the third parties with which the Partnership conducts its business,
the General Partners have not yet developed a comprehensive contingency plan and
are unable to identify "the most reasonably likely worst case scenario" at this
time. If the General Partners identify significant risks related to the
Partnership's Year 2000 compliance or if the Partnership's Year 2000 compliance
program's progress deviates substantially from the anticipated timeline, the
General Partners will develop appropriate contingency plans.
<PAGE>
Interest Rate Risk
The Partnership has provided fixed rate mortgage notes to borrowers.
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 following table presents the expected cash flows of principal that are
sensitive to these changes.
Mortgage notes
Fixed Rates
------------------
1999 $ 11,968
2000 1,114,132
2001 2,195
2002 2,425
2003 2,679
Thereafter 224,478
------------------
$ 1,357,877
==================
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The 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
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Accountants
Financial Statements:
Balance Sheets
Statements of Income
Statements of Partners' Capital
Statements of Cash Flows
Notes to Financial Statements
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund VII, 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 VII, 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.
Orlando, Florida
January 25, 1999, except for Note 11 for which the date is March 11, 1999
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------- ----------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation $15,078,507 $15,382,863
Net investment indirect financing leases 3,365,392 3,447,152
Investment in joint ventures 3,327,934 3,393,932
Mortgage notes receivable, less deferred gain 1,241,056 1,250,597
Cash and cash equivalents 856,825 761,317
Receivables, less allowance for doubtful
accounts of $28,853 and $32,959 78,478 64,092
Prepaid expenses 4,116 4,755
Accrued rental income, less allowance for
doubtful accounts of $9,845 in 1998
and 1997 1,205,528 1,114,632
Other assets 60,422 60,422
----------------- -----------------
$25,218,258 $25,479,762
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 2,885 $ 6,131
Escrowed real estate taxes payable 5,834 7,785
Distributions payable 675,000 675,000
Due to related parties 25,111 34,883
Rents paid in advance and deposits 49,027 60,671
----------------- -----------------
Total liabilities 757,857 784,470
Minority interest 146,605 147,514
Partners' capital 24,313,796 24,547,778
----------------- -----------------
$25,218,258 $25,479,762
================= =================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
-------------- -------------- --------------
<S> <C>
Revenues:
Rental income from operating leases $ 1,976,709 $ 1,960,724 $ 1,954,033
Earned income from direct financing
leases 413,848 475,498 505,061
Contingent rental income 93,906 51,345 44,973
Interest and other income 171,263 183,579 240,079
-------------- -------------- --------------
2,655,726 2,671,146 2,744,146
-------------- -------------- --------------
Expenses:
General operating and administrative 133,915 143,173 159,001
Professional services 23,443 23,546 27,640
Real estate taxes -- 2,979 9,010
State and other taxes 2,729 4,560 2,448
Depreciation 304,356 304,356 317,957
Transaction costs 18,781 -- --
-------------- -------------- --------------
-------------- -------------- --------------
483,224 478,614 516,056
-------------- -------------- --------------
Income Before Minority Interest in Income of
Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, and Gain (Loss) on Sale of Land
and Buildings 2,172,502 2,192,532 2,228,090
Minority Interest in Income of Consolidated
Joint Venture (18,590 ) (18,663) (18,691)
Equity in Earnings of Unconsolidated Joint
Ventures 311,081 267,251 157,254
Gain (Loss) on Sale of Land and Buildings 1,025 164,888 (39,790)
-------------- -------------- --------------
Net Income $ 2,466,018 $ 2,606,008 $ 2,326,863
============== ============== ==============
Allocation of Net Income:
General partners $ 24,659 $ 24,300 $ 23,586
Limited partners 2,441,359 2,581,708 2,303,277
-------------- -------------- --------------
$ 2,466,018 $ 2,606,008 $ 2,326,863
============== ============== ==============
Net Income Per Limited Partner Unit $ 0.081 $ 0.086 $ 0.077
============== ============== ==============
Weighted Average Number of
Limited Partner Units Outstanding 30,000,000 30,000,000 30,000,000
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
--------------------------- ----------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ------------ ------------- ------------- ------------ ------------ ------------
<S> <C>
Balance, December 31, 1995 $ 1,000 $ 132,199 $ 30,000,000 $(14,777,623) $ 13,099,331 $(3,440,000) $25,014,907
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000) -- -- (2,700,000)
Net income -- 23,586 -- -- 2,303,277 -- 2,326,863
------------ ------------ ------------- -------------- ------------- ------------- ------------
Balance, December 31, 1996 1,000 155,785 30,000,000 (17,477,623) 15,402,608 (3,440,000) 24,641,770
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000) -- -- (2,700,000)
Net income -- 24,300 -- -- 2,581,708 -- 2,606,008
------------ ------------ ------------- -------------- ------------- ------------- ------------
Balance, December 31, 1997 1,000 180,085 30,000,000 (20,177,623) 17,984,316 (3,440,000 ) 24,547,778
Distributions to limited
partners ($0.090 per
limited partner unit) -- -- -- (2,700,000 ) -- -- (2,700,000)
Net income -- 24,659 -- -- 2,441,359 -- 2,466,018
------------ ------------ ------------- -------------- ------------- ------------- ------------
Balance, December 31, 1998 $ 1,000 $ 204,744 $ 30,000,000 $ (22,877,623 ) $ 20,425,675 $ (3,440,000 ) $24,313,796
============ ============ ============= ============== ============= ============= ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---------------- --------------- ----------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 2,435,937 $ 2,500,189 $ 2,549,406
Distributions from unconsolidated joint ventures 376,557 300,696 191,174
Cash paid for expenses (187,925 ) (140,819 ) (248,523 )
Interest received 166,406 180,393 178,812
---------------- --------------- ----------------
Net cash provided by operating activities 2,790,975 2,840,459 2,670,869
---------------- --------------- ----------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating leases -- -- (1,041,555 )
Proceeds from sale of land and buildings -- 976,334 1,661,943
Investment in joint ventures -- (1,650,905 ) --
Collections on mortgage notes receivable 10,811 9,766 8,821
Other 13,221 -- --
---------------- --------------- ----------------
Net cash provided by (used in) investing
activities 24,032 (664,805 ) 629,209
---------------- --------------- ----------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,700,000 ) (2,700,000 ) (2,700,000 )
Distributions to holder of minority interest (19,499 ) (19,766 ) (19,723 )
---------------- --------------- ----------------
Net cash used in financing activities (2,719,499 ) (2,719,766 ) (2,719,723 )
---------------- --------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents 95,508 (544,112 ) 580,355
Cash and Cash Equivalents at Beginning of Year 761,317 1,305,429 725,074
---------------- --------------- ----------------
Cash and Cash Equivalents at End of Year $ 856,825 $ 761,317 $ 1,305,429
================ =============== ================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------- --------------- ----------------
<S> <C>
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Net income $ 2,466,018 $ 2,606,008 $ 2,326,863
--------------- --------------- ----------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 304,356 304,356 317,957
Minority interest in income of consolidated
joint venture 18,590 18,663 18,691
Loss (gain) on sale of land and buildings (1,025) (164,888 ) 39,790
Equity in earnings of unconsolidated joint
ventures, net of distributions 65,476 33,445 33,920
Decrease (increase) in receivables (27,330) 17,173 (14,827 )
Decrease (increase) in prepaid expenses 639 (101 ) 379
Decrease in net investment in direct
financing leases 81,760 76,941 70,329
Increase in accrued rental income (90,896) (102,142 ) (104,639 )
Increase (decrease) in accounts
payable and accrued expenses (5,197) 3,222 (40,072 )
Increase (decrease) in due to related parties (9,772) 25,816 (4,244 )
Increase (decrease) in rents paid in
advance and deposits (11,644) 21,966 26,722
--------------- --------------- ----------------
Total adjustments 324,957 234,451 344,006
--------------- --------------- ----------------
Net Cash Provided by Operating Activities $ 2,790,975 $ 2,840,459 $ 2,670,869
=============== =============== ================
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31 $ 675,000 $ 675,000 $ 675,000
=============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CNL INCOME FUND VII, 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 VII, 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.
<PAGE>
CNL INCOME FUND VII, 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 is
considered to be doubtful, an adjustment is made to increase the
allowance for doubtful accounts, which is netted against receivables,
and to decrease rental or other income or increase bad debt expense for
the current period, although the Partnership continues to pursue
collection of such amounts. If amounts are subsequently determined to
be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 83.3%
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.
The Partnership's investments in Halls Joint Venture, CNL Restaurant
Investments II, Des Moines Real Estate Joint Venture, and CNL Mansfield
Joint Venture, and a property in Smithfield, North Carolina, and a
property in Miami, Florida, for which each of the two properties is
held as tenants-in-common with affiliates, are accounted for using the
equity method since the Partnership shares control with affiliates
which have the same general partners.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks and money market funds may exceed
federally insured levels; however, the Partnership has not 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 property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment.
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.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. The more significant areas requiring
the use of management estimates relate to the allowance for doubtful
accounts and future cash flows associated with long-lived assets. The
more significant areas requiring the use of management estimates relate
to the allowance for doubtful accounts and future cash flows associated
with long-lived assets. Actual results could differ from those
estimates.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
2. Leases:
The Partnership leases its land or 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.
For the leases classified as direct financing leases, the building
portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are
operating leases. Substantially all leases are for 15 to 20 years and
provide for minimum and contingent rentals. In addition, the tenant
generally pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage
for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to
four 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>
Land $8,430,465 $8,430,465
Buildings 9,121,968 9,121,968
----------------- -----------------
17,552,433 17,552,433
Less accumulated depreciation (2,473,926 ) (2,169,570 )
----------------- -----------------
$15,078,507 $15,382,863
================= =================
</TABLE>
In May 1997, the Partnership sold its property in Columbus, Indiana,
for $240,000 and received net sales proceeds of $223,589, resulting in
a loss of $19,739 for financial reporting purposes.
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 $90,896, $102,142 (net of $11,159 in reserves), and $104,639
(net of $1,631 in reserves), respectively, of such rental income.
<PAGE>
CNL INCOME FUND VII, 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:
1999 $1,891,776
2000 1,925,741
2001 2,022,708
2002 2,034,710
2003 1,940,473
Thereafter 10,605,505
-----------------
$20,420,913
=================
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's 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>
Minimum lease payments receivable $5,915,553 $6,411,161
Estimated residual values 1,008,935 1,008,935
Less unearned income (3,559,096 ) (3,972,944 )
---------------- ----------------
Net investment in direct financing leases $3,365,392 $3,447,152
================ ================
</TABLE>
<PAGE>
CNL INCOME FUND VII, 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:
1999 $ 495,609
2000 495,609
2001 496,766
2002 496,766
2003 496,766
Thereafter 3,434,037
-----------------
$5,915,553
=================
In October 1997, the Partnership sold its property in Dunnellon,
Florida, for $800,000 and received net sales proceeds (net of $5,055
which represents amounts due to the former tenant for prepaid rent) of
$752,745, resulting in a gain of $183,701 for financial reporting
purposes. This property was originally acquired by the Partnership in
August 1990 and had a cost of approximately $546,300, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $211,500 in excess of
its original purchase price.
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).
5. Investment in Joint Ventures:
The Partnership has a 51.1% interest, an 18 percent interest and a
4.79% interest in the profits and losses of Halls Joint Venture, CNL
Restaurant Investments II, and Des Moines Real Estate Joint Venture,
respectively. The remaining interests in these joint ventures are held
by affiliates of the Partnership which have the same general partners.
In February 1997, the Partnership entered into a joint venture
arrangement, CNL Mansfield Joint Venture, with an affiliate of the
Partnership which has the same general partners, to hold one restaurant
property in Mansfield, Texas. As of December 31, 1998, the Partnership
owned a 79 percent interest, respectively, 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 the affiliate.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
As of January 1, 1997, the Partnership had a 48.33% interest in a
property in Yuma, Arizona, with an affiliate of the Partnership that
has the same general partners, as tenants-in-common. In October 1997,
the Partnership and the affiliate, as tenants-in-common, sold the
property in Yuma, Arizona, for a total sales price of $1,010,000 and
received net sales proceeds of $982,025 resulting in a gain of
approximately $128,400 for financial reporting purposes. The property
was originally acquired in July 1994 and had a total cost of
approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the property was sold for
approximately $120,300 in excess of its original purchase price. In
December 1997, the Partnership reinvested its portion of the net sales
proceeds from the sale of the Yuma, Arizona, property, along with funds
from the sale of a wholly-owned Property in Columbus, Indiana, in a
property in Miami, Florida, as tenants-in-common with affiliates of the
general partners. The Partnership accounts for its investment in the
property in Miami, Florida, using the equity method since the
Partnership shares control with affiliates, and amounts relating to its
investment are included in investment in joint ventures. As of December
31, 1998, the Partnership owned a 35.64% interest in the Miami, Florida
property owned with affiliates as tenants-in-common.
In December 1997, the Partnership acquired a property in Smithfield,
North Carolina 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 53 percent interest in this property.
CNL Restaurant Investments II owns and leases six properties to an
operator of national fast-food or family-style restaurants, and Halls
Joint Venture, Des Moines Real Estate Joint Venture, CNL Mansfield
Joint Venture, and the Partnership and affiliates as tenants-in-common
in two separate tenancy-in-common arrangements, each own and lease one
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
property to an operator of national fast-food or family-style
restaurants. The following presents the combined, condensed financial
information for the joint ventures and the two properties held as
tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C>
Land and buildings on operating
leases, less accumulated
depreciation $10,612,379 $10,892,405
Cash 3,763 750
Receivables 21,249 18,819
Accrued rental income 178,775 147,685
Other assets 1,116 1,079
Liabilities 8,916 8,625
Partners' capital 10,808,366 11,052,113
Revenues 1,324,602 1,012,624
Gain on sale of land and building -- 128,371
Net income 1,028,391 905,117
</TABLE>
The Partnership recognized income totalling $311,081, $267,251, and
$157,254 for the years ended December 31, 1998, 1997, and 1996,
respectively, from these joint ventures and the two properties held as
tenants-in-common with affiliates.
6. Mortgage Notes Receivable:
In connection with the sale of its property in Florence, South Carolina
during 1995, the Partnership accepted a promissory note in the
principal sum of $1,160,000, collateralized by a mortgage on the
property. The promissory note bears interest at a rate of 10.25% per
annum and is being collected in 59 equal monthly installments of
$10,395, with a balloon payment of $1,105,715 due in July 2000.
In addition, the Partnership accepted a promissory note in the
principal sum of $240,000 in connection with the sale of its property
in Jacksonville, Florida in December 1995. The note is collateralized
by a mortgage on the property. The promissory note bears interest at a
rate of ten percent per annum and is being collected in 119 equal
monthly installments of $2,106, with a balloon payment of $218,252 due
in December 2005.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
6. Mortgage Notes Receivable - Continued:
The mortgage notes receivable consisted of the following at December
31:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C>
Principal balance $1,357,877 $1,368,688
Accrued interest receivable 8,457 8,212
Less deferred gain on sale of land
and building (125,278 ) (126,303 )
---------------- ---------------
$1,241,056 $1,250,597
================ ===============
</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. 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 not in liquidation of the Partnership 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.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
7. Allocations and Distributions - Continued:
Generally, net sales proceeds from a liquidating sale of properties,
will be used in the following order: i) first to pay and discharge all
of the Partnership's liabilities to creditors, ii) second, to establish
reserves that may be deemed necessary for any anticipated or unforeseen
liabilities or obligations of the Partnership, iii) third, to pay all
of the Partnership's liabilities, if any, to the general and limited
partners, iv) fourth, after allocations of net income, gains and/or
losses, to distribute to the partners with positive capital accounts
balances, in proportion to such balances, up to amounts sufficient to
reduce such positive balances to zero, and v) thereafter, any funds
remaining shall then be distributed 95 percent to the limited partners
and five percent to the general partners.
During each of the years ended December 31, 1998, 1997, and 1996, the
Partnership declared distributions to the limited partners of
$2,700,000. No distributions have been made to the general partners to
date.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997 and 1996
8. 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>
Net income for financial reporting purposes $2,466,018 $2,606,008 $2,326,863
Depreciation for tax reporting purposes in excess
of depreciation for financial reporting purposes (16,795 ) (25,552 ) (24,753 )
Gain on sale of land and buildings for financial
reporting purposes in excess of gain for tax
reporting purposes (246 ) (178,348 ) (163,152 )
Direct financing leases recorded as operating
leases for tax reporting purposes 81,760 76,941 70,329
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 11,026 (55,911 ) 1,420
Accrued rental income (90,896 ) (102,142 ) (104,639 )
Rents paid in advance (12,644 ) 21,966 26,722
Minority interest in timing differences of
unconsolidated joint venture 982 981 981
Allowance for uncollectible accounts (4,106 ) -- --
Capitalization of transaction costs for tax
reporting purposes 18,781 -- --
Other -- (10,275 ) --
-------------- ------------- --------------
Net income for federal income tax purposes $2,453,880 $2,333,668 $2,133,771
============== ============= ==============
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
9. 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 and the
properties held as tenants-in-common with affiliates, but not in excess
of competitive fees for comparable services. 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 have not received their 10%
Preferred Return in any particular year, no management fee will be due
or payable for such year. As a result of such threshold, no management
fees were incurred during the years ended December 31, 1998, 1997, and
1996.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties
based on the lesser of one-half of a competitive real estate commission
or three percent of the sales price if the Affiliate provides a
substantial amount of services in connection with the 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. No
deferred, subordinated real estate disposition fees were incurred for
the years ended December 31, 1998, 1997, and 1996.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
9. 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 $87,256, $77,078, and 92,985
for the years ended December 31, 1998, 1997, and 1996, respectively,
for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C>
Due to Affiliates:
Expenditures incurred on behalf of the
Partnership $10,111 $20,321
Accounting and administrative services 7,800 7,362
Deferred, subordinated real estate disposition fee 7,200 7,200
--------------- --------------
$25,111 $34,883
=============== ==============
</TABLE>
10. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the two properties held as
tenants-in-common with affiliates), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C>
Golden Corral Corporation $732,650 $625,724 $608,852
Restaurant Management
Services, Inc. 448,691 444,069 446,867
Waving Leaves, Inc. 300,546 N/A --
Flagstar Enterprises, Inc. N/A 307,738 464,042
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
10. Concentration of Credit Risk - Continued:
In addition, the following schedule presents total rental and earned
income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental and earned income
(including the Partnership's share of total rental and earned income
from the unconsolidated joint ventures and the two properties held as
tenants-in-common with affiliates) for each of the years ended December
31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C>
Golden Corral Family
Steakhouse Restaurants $732,650 $625,724 $608,852
Burger King 469,984 466,626 478,901
Hardees 451,348 447,074 524,625
</TABLE>
The information denoted by N/A indicates that for each period
presented, the tenant and the chains did not represent more than ten
percent of the Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains could significantly impact the results of operations
of the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
11. 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 3,202,371 shares of its common stock, par value $0.01 per shares
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $10.00 per APF Share, the
price paid by APF investors in APF's most recent public offering. 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. Legg Mason
Wood Walker, Incorporated has rendered a fairness opinion that the APF
Share
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1998, 1997, and 1996
11. Subsequent Event - Continued:
consideration, payable by APF, is fair to the Partnership from a
financial point of view. The APF Shares are expected to be listed for
trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at
the option of the former limited partners. At a special meeting of the
partners that is expected to be held in the third quarter of 1999,
limited partners holding in excess of 50% of the Partnership's
outstanding limited partnership interests must approve the Merger prior
to consummation of the transaction. 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.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL Fund Advisors, Inc., CNL Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 52, is a principal stockholder of CNL Group,
Inc., a diversified real estate company, and has served as its Chairman of the
Board of Directors, a director and Chief Executive Officer since its formation
in 1980. Mr. Seneff has been Chairman of the Board of Directors, director, and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979. Mr.
Seneff also has held the position of Chairman of the Board of Directors, Chief
Executive Officer, President and director of CNL Management Company, a
registered investment advisor, since its formation in 1976, has served as Chief
Executive Officer, Chairman of the Board and a director of CNL Investment
Company, has served as Chief Executive Officer, a director and Chairman of the
Board of Directors of Commercial Net Lease Realty, Inc., a publicly-traded REIT,
listed on the NYSE, since 1992, served as Chief Executive Officer, a director
and Chairman of the Board of Directors of CNL Realty Advisors, Inc. from its
inception in May 1992 through December 1997, at which time such company merged
with Commercial Net Lease Realty, Inc., and has held the position of Chief
Executive Officer, Chairman of the Board and a director of CNL Institutional
Advisors, Inc., a registered investment advisor, since its inception in December
1990. Mr. Seneff has served as Chairman of the Board of Directors of CNL
American Properties Fund, Inc. since December 1994 and as a director and Chief
Executive Officer since May 1994. Mr. Seneff has served as Chairman of the
Board, Chief Executive Officer and a director of CNL Fund Advisors, Inc. since
March 1994. Mr. Seneff has served as Chairman of the Board, Chief Executive
Officer and a director of CNL Hospitality Properties, Inc. since June 1996 and
of CNL Hospitality Advisors, Inc. since January 1997. Mr. Seneff has also served
as Chairman of the Board, Chief Executive Officer and a director of CNL Health
Care Properties, Inc. since December 1997 and CNL Health Care Advisors, Inc.
since July 1997. Mr. Seneff previously served on the Florida State Commission on
Ethics and is a former member and past Chairman of the State of Florida
Investment Advisory Council, which advises the Florida Board of Administration
investments for various Florida employee retirement funds. The Florida Board of
Administration, Florida's principal investment advisory and money management
agency, oversees the investment of more then $60 billion of retirement funds.
Mr. Seneff has served as a member of the board of directors of First Union
National Bank of Florida since May 1998 and has served as a member of the
Orlando Advisory Board of First Union National Bank of Florida since March 1994.
Since 1971, Mr. Seneff has been active in the acquisition, development, and
management of real estate projects and, directly or through an affiliated
entity, has served as a general partner or joint venturer in over 100 real
estate ventures involved in the financing, acquisition, construction, and rental
of restaurants, office buildings, apartment complexes, hotels, and other real
estate. Included in these real estate ventures are approximately 65 privately
offered real estate limited partnerships in which Mr. Seneff, directly or
through an affiliated entity, serves or has served as a general partner. Also
included are CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income Fund
III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund V, Ltd., CNL Income Fund
VI, Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund
X, Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund
XIII, Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund
XVI, Ltd., CNL Income Fund XVII, Ltd. and CNL Income Fund XVIII, Ltd. (the "CNL
Income Fund Partnerships"), public real estate limited partnerships with
investment objectives similar to those of the Partnership, in which Mr. Seneff
serves as a general partner. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 51, is President and Treasurer of CNL Group,
Inc., President, Treasurer, a director, and a registered principal of CNL
Securities Corp., President, Treasurer, and a director of CNL Investment
Company, and Chief Investment Officer, a director and Treasurer of CNL
Institutional Advisors, Inc., a registered investment advisor. Mr. Bourne served
as President of CNL Institutional Advisor, Inc. from the date of its inception
through July 1997. Mr. Bourne served as President of Commercial Net Lease
Realty, Inc. from July 1992 through February 1996, served as Secretary and
Treasurer from February 1996 through December 1997, and has served as a director
since July 1992 and as Vice Chairman of the Board of Directors since February
1996. In addition, Mr. Bourne served as President of CNL Realty Advisors, Inc.
from May 1992 through February 1996, served as Treasurer from February 1996
through December 1997, served as a director from May 1992 through December 31,
1997 and served as Vice Chairman from February 1996 through December 1997, at
which time such company merged with Commercial Net Lease Realty, Inc. Mr. Bourne
has served as a Vice Chairman of the Board of Directors and Treasurer of CNL
American Properties Fund, Inc. since February 1999, has served as a director
since May 1994 and previously served as President from May 1994 through February
1999. Mr. Bourne has served as a director of CNL Fund Advisors, Inc. since March
1994, has served as Treasurer and Vice Chairman of the Board of Directors since
September 1997, and previously served as President from March 1994 through
September 1997. Mr. Bourne has served as President and a director of CNL
Hospitality Properties, Inc. since June 1996 and of CNL Hospitality Advisors,
Inc. since January 1997. Mr. Bourne has served as President and director of CNL
Health Care Properties, Inc. since December 1997 and CNL Health Care Advisors,
Inc. since July 1997. Mr. Bourne, who joined CNL Securities Corp. in 1979, has
participated as a general partner or joint venturer in over 100 real estate
ventures involved in the financing, acquisition, construction, and rental of
restaurants, office buildings, apartment complexes, hotels, and other real
estate. Included in these real estate ventures are approximately 64 privately
offered real estate limited partnerships in which Mr. Bourne, directly or
through an affiliated entity, serves or has served as a general partner. Also
included are the CNL Income Fund Partnerships, public real estate limited
partnerships with investment objectives similar to those of the Partnership, in
which Mr. Bourne serves as a general partner. Mr. Bourne formerly was a
certified public accountant with Coopers & Lybrand and a partner in the firm of
Bourne & Rose, P.A. Mr. Bourne received a B.A. in Accounting, with honors, from
Florida State University in 1970.
CNL Realty Corporation is a corporation organized on November 26, 1985,
under the laws of the State of Florida. Its sole directors and shareholders are
James M. Seneff, Jr. and Robert A. Bourne, the individual General Partners. CNL
Realty Corporation was organized to serve as the corporate general partner of
real estate limited partnerships, such as the Partnership, organized by one or
both of the individual General Partners. CNL Realty Corporation currently serves
as the corporate general partner of the CNL Income Fund Partnerships.
CNL Fund Advisors, Inc. provides certain management services in
connection with the Partnership and its Properties. CNL Fund Advisors, Inc. is a
corporation organized in 1994 under the laws of the State of Florida, and its
principal office is located at 400 East South Street, Orlando, Florida 32801.
CNL Fund Advisors, Inc. is a majority owned subsidiary of CNL Group, Inc., a
diversified real estate company, and was organized to perform property
acquisition, property management and other services.
CNL Group, Inc., which is the parent company of CNL Fund Advisors,
Inc., was organized in 1980 under the laws of the State of Florida. CNL Group,
Inc. is a diversified real estate company which provides a wide range of real
estate, development and financial services to companies in the United States
through the activities of its subsidiaries. These activities are primarily
focused on the franchised restaurant and hospitality industries. James M.
Seneff, Jr., an individual General Partner of the Partnership, is the Chairman
of the Board, Chief Executive Officer, and a director of CNL Group, Inc. Mr.
Seneff and his wife own all of the outstanding shares of CNL Group, Inc.
The following persons serve as operating officers of CNL Group, Inc. or
its affiliates or subsidiaries in the discretion of the Boards of Directors of
those companies, but, except as specifically indicated, do not serve as members
of the Boards of Directors of those entities. The Boards of Directors have the
responsibility for creating and implementing the policies of CNL Group, Inc. and
its affiliated companies.
Curtis B. McWilliams, age 43, joined CNL Group, Inc. in April 1997 and
currently serves as an Executive Vice President. In addition, Mr. McWilliams has
served as President of CNL Fund Advisors, Inc. and as President of the
Restaurant and Financial Services Groups within CNL Group, Inc. since April
1997. Mr. McWilliams has served as President of CNL American Properties Fund,
Inc. since February 1999 and previously served as Executive Vice President from
February 1998 through February 1999. From September 1983 through March 1997, Mr.
McWilliams was employed by Merrill Lynch & Co., most recently as Chairman of
Merrill Lynch's Private Advisory Services until March 1997. Mr. McWilliams
received a B.S.E. in Chemical Engineering from Princeton University in 1977 and
a Masters of Business Administration with a concentration in finance from the
University of Chicago in 1983.
John T. Walker, age 40, has served as Executive Vice President of CNL
American Properties Fund, Inc. since January 1996, as Chief Operating Officer
since March 1995, and previously served as Senior Vice President since December
1994. In addition, Mr. Walker has served as Executive Vice President of CNL Fund
Advisors, Inc. since January 1996, Chief Operating Officer since April 1995, and
previously served as Senior Vice President from November 1994 through January
1996. In addition, Mr. Walker previously served as Executive Vice President of
CNL Hospitality Properties, Inc. and CNL Hospitality Advisors, Inc. From May
1992 to May 1994, Mr. Walker, a certified public accountant, was Executive Vice
President for Finance and Administration and Chief Financial Officer of Z Music,
Inc., a cable television network (subsequently acquired by Gaylord
Entertainment), where he was responsible for overall financial and
administrative management and planning. From January 1990 through April 1992,
Mr. Walker was Chief Financial Officer of the First Baptist Church in Orlando,
Florida. From April 1984 through December 1989, he was a partner in the
accounting firm of Chastang, Ferrell & Walker, P.A., where he was the partner in
charge of audit and consulting services, and from 1981 to 1984, Mr. Walker was a
Senior Consultant/Audit Senior at Price Waterhouse. Mr. Walker is a Cum Laude
graduate of Wake Forest University with a B.S. in Accountancy and is a certified
public accountant.
Lynn E. Rose, age 50, a certified public accountant, has served as
Secretary of CNL American Properties Fund, Inc. since December 1994 and served
as Treasurer from December 1994 through February 1999. Ms. Rose has served as a
director and Secretary of CNL Fund Advisors, Inc. since March 1994, and as
Treasurer from the date of its inception through June 30, 1997. Ms. Rose has
served as Secretary of CNL Group, Inc. since 1987, as Chief Financial Officer of
CNL Group, Inc. since December 1993, and served as Controller of CNL Group, Inc.
from 1987 until December 1993. In addition, Ms. Rose has served as Chief
Financial Officer and Secretary of CNL Securities Corp. since July 1994. She has
served as Chief Operating Officer, Vice President and Secretary of CNL Corporate
Services, Inc. since November 1994. Ms. Rose also has served as Chief Financial
Officer and Secretary of CNL Institutional Advisors, Inc. since its inception in
1990, as Treasurer of CNL Realty Advisors, Inc. from 1991 to February 1996, and
as Secretary and a director of CNL Realty Advisors, Inc. since its inception in
1991 until December 31, 1997, at which time CNL Realty Advisors, Inc. merged
with Commercial Net Lease Realty, Inc. In addition, Ms. Rose served as Secretary
and Treasurer of Commercial Net Lease Realty, Inc. from 1992 to February 1996.
Ms. Rose also serves as Secretary and Treasurer of CNL Hospitality Properties,
Inc. and CNL Health Care Properties, Inc. and as Secretary, Treasurer and a
director of CNL Hospitality Advisors, Inc. and CNL Health Care Advisors, Inc.
Ms. Rose also currently serves as Secretary for approximately 50 additional
corporations. Ms. Rose oversees the legal compliance, accounting, tenant
compliance, and reporting for over 250 corporations, partnerships and joint
ventures. Prior to joining CNL, Ms. Rose was a partner with Robert A. Bourne in
the accounting firm of Bourne & Rose, P.A., Certified Public Accountants. Ms.
Rose holds a B.A. in Sociology from the University of Central Florida.
Jeanne A. Wall, age 40, has served as Executive Vice President of CNL
American Properties Fund, Inc. since December 1994. Ms. Wall has served as
Executive Vice President of CNL Fund Advisors, Inc. since November 1994, and
previously served as Vice President from March 1994 through November 1994. Ms.
Wall has served as Chief Operating Officer of CNL Investment Company and of CNL
Securities Corp. since November 1994 and has served as Executive Vice President
of CNL Investment Company since January 1991. Ms. Wall joined CNL Securities
Corp. in 1984. In 1985, Ms. Wall became Vice President of CNL Securities Corp.
In 1987, she became Senior Vice President and in July 1997 she became Executive
Vice President of CNL Securities Corp. In this capacity, Ms. Wall serves as
national marketing and sales director and oversees the national marketing plan
for the CNL investment programs. In addition, Ms. Wall oversees product
development, partnership administration and investor services for programs
offered through participating brokers and corporate communications for CNL
Group, Inc. and its affiliates. Ms. Wall also has served as Senior Vice
President of CNL Institutional Advisors, Inc., a registered investment advisor,
from 1990 to 1993, as Vice President of CNL Realty Advisors, Inc. since its
inception in 1991 until December 31, 1997, at which time CNL Realty Advisors,
Inc. merged with Commercial Net Lease Realty, Inc., and served as Vice President
of Commercial Net Lease Realty, Inc. from 1992 through December 31, 1997. In
addition, Ms. Wall serves as Executive Vice President of CNL Hospitality
Properties, Inc., CNL Hospitality Advisors, Inc., CNL Health Care Properties,
Inc. and CNL Health Care Advisors, Inc. Ms. Wall holds a B.A. in Business
Administration from Linfield College and is a registered principal of CNL
Securities Corp. Ms. Wall currently serves as a trustee on the board of the
Investment Program Association and on the Direct Participation Program committee
for the National Association of Securities Dealers (NASD).
Steven D. Shackelford, age 35, a certified public accountant, has
served as Chief Financial Officer of CNL American Properties Fund, Inc. since
January 1997 and as Chief Financial Officer of CNL Fund Advisors, Inc. since
September 1996. From March 1995 to July 1996, Mr. Shackelford was a senior
manager in the national office of Price Waterhouse where he was responsible for
advising foreign clients seeking to raise capital and a public listing in the
United States. From August 1992 to March 1995, he served as a manager in the
Price Waterhouse, Paris, France office
<PAGE>
serving several multinational clients. Mr. Shackelford was an audit staff and
audit senior from 1986 to 1992 in the Orlando, Florida office of Price
Waterhouse. Mr. Shackelford received a B.A. in Accounting, with honors, and a
Masters of Business Administration from Florida State University.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 11, 1999, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 11, 1999, the beneficial
ownership interests of the General Partners in the Registrant.
<TABLE>
<CAPTION>
Title of Class Name of Partner Percent of Class
<S> <C>
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
-----
100%
</TABLE>
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above. On March 11, 1999, the
Registrant entered into an Agreement and Plan of Merger with CNL American
Properties Fund, Inc. ("APF") pursuant to which the Registrant would be merged
with and into a subsidiary of APF (the "Merger"). For further discussion, see
Item 8. Financial Statements and Supplementary Data -- Note 11.
Subsequent Event.
<PAGE>
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of
computation and amounts of compensation, fees and distributions paid or payable
by the Partnership to the General Partners and their affiliates for the year
ended December 31, 1998, exclusive of any distributions to which the General
Partners or their affiliates may be entitled by reason of their purchase and
ownership of Units.
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1998
------------------------- --------------------- -----------------------
<S> <C>
Reimbursement to affiliates for Operating expenses are reimbursed Operating expenses incurred on
operating expenses at the lower of cost or 90 percent behalf of the Partnership:
of the prevailing rate at which $86,851
comparable services could have been
obtained in the same geographic Accounting and administrative
area. Affiliates of the General services: $87,256
Partners from time to time incur
certain operating expenses on
behalf of the Partnership for which
the Partnership reimburses the
affiliates without interest.
Annual, subordinated manage-ment fee to One percent of the sum of gross $ - 0 -
affiliates 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 and the Property
owned with an affiliate as
tenants-in-common, subordinated to
certain minimum returns to the
Limited Partners. The management
fee will not exceed competitive
fees for comparable services. Due
to the fact that these fees are
non-cumulative, if the Limited
Partners have not received their
10% Preferred Return in any
particular year, no management
fees will be due or payable for
such year.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1998
------------------------- --------------------- -----------------------
<S> <C>
Deferred, subordinated real estate A deferred, subordinated real $ - 0 -
disposition fee payable to affiliates estate disposition fee, payable
upon sale of one or more
Properties, in an amount equal to
the lesser of (i) one-half of a
competitive real estate
commission, or (ii) three percent
of the sales price of such
Property or Properties. Payment of
such fee shall be made only if
affiliates of the General Partners
provide a substantial amount of
services in connection with the
sale of a Property or Properties
and shall be subordinated to
certain minimum returns to the
Limited Partners. However, if the
net sales proceeds are reinvested
in a replacement Property, no such
real estate disposition fee will
be incurred until such replacement
Property is sold and the net sales
proceeds are distributed.
General Partners' deferred, A deferred, subordinated share $ - 0 -
sub-ordinated share of Partnership net equal to one percent of Partnership
cash flow distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, A deferred, subordinated share $ - 0 -
sub-ordinated share of Partnership net equal to five percent of
sales proceeds from a sale or sales not Partnership distributions of such
in liquidation of the Partnership net sales proceeds, subordinated to
certain minimum returns to the
Limited Partners.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 1998
------------------------- --------------------- -----------------------
<S> <C>
General Partners' share of Partnership Distributions of net sales proceeds $ - 0 -
net sales proceeds from a sale or sales from a sale or sales of
in liquidation of the Partnership substantially all of the
Partnership's assets will be
distributed in the following order
or priority: (i) first, to pay all
debts and liabilities of the
Partnership and to establish
reserves; (ii) second, to Partners
with positive capital account
balances, determined after the
allocation of net income, net
loss, gain and loss, in proportion
to such balances, up to amounts
sufficient to reduce such balances
to zero; and (iii) thereafter, 95%
to the Limited Partners and 5% to
the General Partners.
</TABLE>
As discussed above in Item 8. Financial Statements and Supplementary
Data -- Note 11. Subsequent Event, the Registrant has entered into an Agreement
and Plan of Merger, dated March 11, 1999, with APF pursuant to which the
Registrant would be merged with and into a subsidiary of APF in exchange for the
issuance of APF Shares. The APF Shares are expected to be listed for trading on
the New York Stock Exchange concurrently with the consummation of the Merger. If
the Merger is approved by Limited Partners holding units greater than 50% of the
outstanding units of the Registrant, the General Partners of the Registrant
would receive certain benefits, including:
o With respect to their ownership in the Registrant, the General
Partners will be issued approximately 31,848 shares of APF
common stock, par value $0.01 per share.
o Following the Merger, James M. Seneff, Jr. and Robert A.
Bourne, the individual General Partners, will continue to
serve as directors of APF, with Mr. Seneff serving as Chairman
and Mr. Bourne serving as Vice Chairman. As APF directors,
they may also be entitled to receive stock options under any
stock option plan adopted by APF.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Accountants
Balance Sheets at December 31, 1998 and 1997
Statements of Income for the years ended December 31, 1998,
1997, and 1996
Statements of Partners' Capital for the years ended December
31, 1998, 1997, and 1996
Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997, and 1996
Schedule III - Real Estate and Accumulated Depreciation at
December 31, 1998
Notes to Schedule III - Real Estate and Accumulated
Depreciation at December 31, 1998
Schedule IV - Mortgage Loans on Real Estate at December 31,
1998
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or
notes thereto.
3. Exhibits
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.)
<PAGE>
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.)
(b) The Registrant filed no reports on Form 8-K during the period
from October 1, 1998 through December 31, 1998.
(c) Not applicable.
(d) Other Financial Information
The Partnership is required to file audited financial
information of its tenant, Golden Corral Corporation, as a
result of this tenant leasing more than 20 percent of the
Partnership's total assets for the year ended December 31,
1998. Corral Corporation is a privately-held company and its
financial information is not publicly available.
<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 30th day of
March, 1999.
CNL INCOME FUND VII, 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>
/s/ Robert A. Bourne President, Treasurer and Director March 30, 1999
- -----------------------------
Robert A. Bourne Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 30, 1999
- ----------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Additions Deductions
------------------------------- --------------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
-------- ----------------- -------------- -------------- --------------- ----------- ------------ -----------
<S> <C>
1996 Allowance for
doubtful
accounts (a) $470,298 $-- $11,187 (b) $412,202 (c) $15,263 $54,020
============== ============== =============== =========== ============ ===========
1997 Allowance for
doubtful
accounts (a) $54,020 $-- $5,000 (b) $10,497 (c) $5,719 $42,804
============== ============== =============== =========== ============ ===========
1998 Allowance for
doubtful
accounts (a) $42,804 $1,454 $ 159 (b) $ -- (c) $5,719 $38,698
============== ============== =============== =========== ============ ===========
</TABLE>
(a) Deducted from receivables and accrued rental income on the balance
sheet.
(b) Reduction of rental, earned and other income.
(c) Amounts written off as uncollectible.
<PAGE>
<TABLE>
<CAPTION>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<S> <C>
Costs Capitalized
Subsequent To
Initial Cost Acquisition
-------------------------- -------------------
Encum- Buildings and Improve- Carrying
brances Land Improvements ments Costs
------------ --------- ------------- --------- --------
Properties the Partnership
has Invested in Under
Operating Leases:
Boston Market Restaurant:
Marietta, Georgia - $534,421 $507,133 - -
Burger King Restaurants:
Jefferson City, Tennessee - 216,633 546,967 - -
Maryville, Tennessee - 419,766 545,880 - -
Sierra Vista, Arizona - 421,170 - - -
Checkers Drive-In Restaurant:
Winter Springs, Florida - 397,536 - - -
Church's Fried Chicken
Restaurants:
Gainesville, Florida (h) - 79,395 124,653 - -
Daytona Beach, Florida - 149,701 - - -
Golden Corral Family
Steakhouse Restaurants:
Odessa, Texas - 502,364 815,831 - -
Midland, Texas - 481,748 857,185 - -
El Paso, Texas - 745,506 - 802,132 -
Harlingen, Texas - 503,799 - 890,878 -
Hardee's Restaurants:
Akron, Ohio - 198,086 - - -
Dalton, Ohio - 180,556 - - -
Minerva, Ohio - 143,775 - - -
Orrville, Ohio - 176,169 - - -
Seville, Ohio - 245,648 - - -
Clinton, Tennessee - 295,861 - - -
Jack in the Box Restaurant:
San Antonio, Texas - 525,720 - 381,591 -
KFC Restaurants:
Friendswood, Texas - 161,906 - - -
Arcadia, Florida - 175,020 333,759 - -
Popeyes Famous Fried
Chicken Restaurants:
Jacksonville, Florida - 128,398 139,768 136,262 -
Lake City, Florida - 130,300 254,747 139,099 -
Jacksonville, Florida - 142,490 137,396 134,259 -
Brunswick, Georgia - 104,720 251,955 150,888 -
Rally's Restaurant:
Toledo, Ohio - 281,880 196,608 47,002 -
Shoney's Restaurants:
Pueblo, Colorado - 492,230 559,769 - -
Saddlebrook, Florida - 427,238 - 765,532 -
Taco Bell Restaurant:
Detroit, Michigan - 168,429 - 402,674 -
------------ ------------ ------------- -------
$8,430,465 $5,271,651 $3,850,317 -
============ ============ ============= =======
Property of Joint Venture in
Which the Partnership has
a 51.10% Interest and has
Invested in Under an
Operating Lease:
Burger King Restaurant:
Knoxville, Tennessee - $283,961 $430,406 - -
============ ============ ============= =======
Properties of Joint Venture in
Which the Partnership has
an 18% Interest and has
Invested in Under Operating
Leases:
Burger King Restaurants:
Columbus, Ohio - $345,696 $651,985 - -
San Antonio, Texas - 350,479 623,615 - -
Pontiac, Michigan - 277,192 982,200 - -
Raceland, Louisiana - 174,019 986,879 - -
New Castle, Indiana - 264,239 662,265 - -
Hastings, Minnesota - 155,553 657,159 - -
------------ ------------ ------------- -------
$1,567,178 $4,564,103 - -
============ ============ ============= =======
Property of Joint Venture in Which
the Partnership has a 4.79% Interest
and has Invested in Under an Operating
Lease:
Jack in the Box Restaurant:
Des Moines, Washington - $322,726 $791,658 - -
============ ============ ============= =======
Property of Joint Venture in Which the
Partnership has a 79% Interest and has
Invested in Under an Operating Lease:
Jack in the Box Restaurant:
Mansfield, Texas - $297,295 $482,914 - -
============ ============ ============= =======
Property in Which the Partnership has a
53% Interest as Tenants-in-Common and
has Invested in Under an Operating Lease:
Golden Corral Restaurant:
Smithfield, North Carolina - $264,272 $1,155,018 - -
============ ============ ============= =======
Property in Which the Partnership has a
35.64% Interest as Tenants-in-Common
and has Invested in Under an Operating
Lease:
Chevy's Fresh Mex Restaurant:
Miami, Florida - $976,357 $974,016 - -
============ ============ ============= =======
Properties the Partnership has
Invested in Under Direct
Financing Leases:
Burger King Restaurant:
Sierra Vista, Arizona - - - $333,212 -
Hardee's Restaurants:
Akron, Ohio - - 540,215 - -
Dalton, Ohio - - 490,656 - -
Minerva, Ohio - - 436,663 - -
Orrville, Ohio - - 446,337 - -
Seville, Ohio - - 487,630 - -
Clinton Tennessee - - 338,216 - -
KFC Restaurants:
Friendswood, Texas - - - 359,055 -
Popeyes Famous Fried
Chicken Restaurant:
Jacksonville, Florida - 78,842 146,035 142,348 -
------------ ------------ ------------- -------
$78,842 $2,885,752 $834,615 -
============ ============ ============= =======
Gross Amount at Which Life on Which
Carried at Close of Period (c) Depreciation in
----------------------------------------- Date Latest Income
Buildings and Accumulated of Con- Date Statement is
Land Improvements Total Depreciation struction Acquired Computed
----------- ------------- ----------- ------------ -------- -------- --------------
$534,421 $507,133 $1,041,554 $36,673 1994 10/96 (b)
216,633 546,967 763,600 156,597 1988 01/90 (b)
419,766 545,880 965,646 157,632 1986 01/90 (b)
421,170 (f) 421,170 - 1990 06/90 (d)
397,536 - 397,536 (g) - 07/94 (g)
79,395 124,653 204,048 33,070 1983 01/91 (b)
149,701 - 149,701 - 1985 01/91 (i)
502,364 815,831 1,318,195 238,193 1990 03/90 (b)
481,748 857,185 1,338,933 249,719 1990 04/90 (b)
745,506 802,132 1,547,638 221,520 1990 05/90 (b)
503,799 890,878 1,394,677 248,470 1990 06/90 (b)
198,086 (f) 198,086 - 1990 11/90 (d)
180,556 (f) 180,556 - 1990 11/90 (d)
143,775 (f) 143,775 - 1990 11/90 (d)
176,169 (f) 176,169 - 1990 11/90 (d)
245,648 (f) 245,648 - 1990 11/90 (d)
295,861 (f) 295,861 - 1992 09/92 (d)
525,720 381,591 907,311 107,229 1990 05/90 (b)
161,906 (f) 161,906 - 1990 06/90 (d)
175,020 333,759 508,779 93,514 1985 08/90 (b)
128,398 276,030 404,428 78,153 1985 04/90 (b)
130,300 393,846 524,146 111,913 1985 04/90 (b)
142,490 271,655 414,145 77,116 1985 04/90 (b)
104,720 402,843 507,563 112,072 1974 04/90 (b)
281,880 243,610 525,490 64,896 1990 01/91 (b)
492,230 559,769 1,051,999 156,275 1989 08/90 (b)
427,238 765,532 1,192,770 218,614 1990 04/90 (b)
168,429 402,674 571,103 112,270 1990 06/90 (b)
- ---------- ------------- ------------ -----------
$8,430,465 $9,121,968 $17,552,433 $2,473,926
========== ============= ============ ===========
$283,961 $430,406 $714,367 $127,688 1985 01/90 (b)
========== ============= ============ ===========
$345,696 $651,985 $997,681 $157,846 1986 09/91 (b)
350,479 623,615 974,094 150,977 1986 09/91 (b)
277,192 982,200 1,259,392 237,791 1987 09/91 (b)
174,019 986,879 1,160,898 238,924 1988 09/91 (b)
264,239 662,265 926,504 160,335 1988 09/91 (b)
155,553 657,159 812,712 159,099 1990 09/91 (b)
- ---------- ------------- ------------ -----------
$1,567,178 $4,564,103 $6,131,281 $1,104,972
========== ============= ============ ===========
$322,726 $791,658 $1,114,384 $163,895 1992 10/92 (b)
========== ============= ============ ===========
$297,295 $482,914 $780,209 $28,964 1997 02/97 (b)
========== ============= ============ ===========
$264,272 $1,155,018 $1,419,290 $39,450 1996 12/97 (b)
========== ============= ============ ===========
$976,357 $974,016 $1,950,373 $32,556 1995 12/97 (b)
========== ============= ============ ===========
- (f) (f) (d) 1990 06/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1990 11/90 (d)
- (f) (f) (d) 1992 09/92 (d)
- (f) (f) (d) 1990 06/90 (d)
(f) (f) (f) (e) 1985 04/90 (e)
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(a) Transactions in real estate and accumulated depreciation during 1998,
1997 and 1996, are summarized as follows:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
------------------ -----------------
<S> <C>
Properties the Partnership has Invested
in Under Operating Leases:
Balance, December 31, 1995 $ 18,088,038 $ 1,686,119
Acquisitions 1,041,554 --
Dispositions (1,333,831) (138,862 )
Depreciation expense -- 317,957
------------------ -----------------
Balance, December 31, 1996 17,795,761 1,865,214
Dispositions (243,328) --
Depreciation expense -- 304,356
------------------ -----------------
Balance, December 31, 1997 17,552,433 2,169,570
Depreciation expense -- 304,356
------------------ -----------------
Balance, December 31, 1998 $ 17,552,433 $ 2,473,926
================== =================
Property of Joint Venture in Which
the Partnership has a 51.10%
Interest and has Invested in
Under an Operating Lease:
Balance, December 31, 1995 $ 714,367 $ 84,647
Depreciation expense -- 14,347
------------------ -----------------
Balance, December 31, 1996 714,367 98,994
Depreciation expense -- 14,347
------------------ -----------------
Balance, December 31, 1997 714,367 113,341
Depreciation expense -- 14,347
------------------ -----------------
Balance, December 31, 1998 $ 714,367 $ 127,688
================== =================
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
----------------- -----------------
<S> <C>
Properties of Joint Venture in
Which the Partnership has an 18%
Interest and has Invested in
Under Operating Leases:
Balance, December 31, 1995 $ 6,131,281 $ 648,561
Depreciation expense -- 152,137
----------------- -----------------
Balance, December 31, 1996 6,131,281 800,698
Depreciation expense -- 152,137
----------------- -----------------
Balance, December 31, 1997 6,131,281 952,835
Depreciation expense -- 152,137
----------------- -----------------
Balance, December 31, 1998 $ 6,131,281 $ 1,104,972
================= =================
Property of Joint Venture in Which
the Partnership has a 4.79%
Interest and has Invested in
Under an Operating Lease:
Balance, December 31, 1995 $ 1,114,384 $ 84,729
Depreciation expense -- 26,389
----------------- -----------------
Balance, December 31, 1996 1,114,384 111,118
Depreciation expense -- 26,389
----------------- -----------------
Balance, December 31, 1997 1,114,384 137,507
Depreciation expense -- 26,388
----------------- -----------------
Balance, December 31, 1998 $ 1,114,384 $ 163,895
================= =================
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
<TABLE>
<CAPTION>
December 31, 1998
Accumulated
Cost Depreciation
------------------ ------------------
<S> <C>
Property in Which the Partnership
has a 48.33% Interest as
Tenants-in-Common and has Invested
in Under an Operating Lease:
Balance, December 31, 1995 $ 881,033 $ 30,580
Depreciation expense -- 20,860
------------------ ------------------
Balance, December 31, 1996 881,033 51,440
Depreciation expense -- 17,383
Dispositions (881,033 ) (68,823 )
------------------ ------------------
Balance, December 31, 1997 -- --
Depreciation expense -- --
------------------ ------------------
Balance, December 31, 1998 $ -- $ --
================== ==================
Property of Joint Venture in Which the
Partnership has a 79% Interest and has
Invested in Under an Operating
Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 780,209 --
Depreciation expense -- 12,778
------------------ ------------------
Balance, December 31, 1997 780,209 12,778
Depreciation expense -- 16,186
------------------ ------------------
Balance, December 31, 1998 $ 780,209 $ 28,964
================== ==================
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
----------------- -----------------
<S> <C>
Property of Joint Venture in
Which the Partnership has a 53%
Interest as Tenants-in-Common
and has Invested in Under an
Operating Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 1,419,290 --
Depreciation expense -- 949
----------------- -----------------
Balance, December 31, 1997 1,419,290 949
Depreciation expense -- 38,501
----------------- -----------------
Balance, December 31, 1998 $ 1,419,290 $ 39,450
================= =================
Property in Which the Partnership
has a 35.64% Interest as
Tenants-in-Common and has Invested
in Under an Operating Lease:
Balance, December 31, 1996 $ -- $ --
Acquisitions 1,950,373 --
Depreciation expense -- 89
----------------- -----------------
Balance December 31, 1997 1,950,373 89
Depreciation -- 32,467
----------------- -----------------
Balance December 31, 1998 $ 1,950,373 $ 32,556
================= =================
</TABLE>
(b) Depreciation expense is computed for buildings and improvements
based upon estimated lives of 30 years.
(c) As of December 31, 1998, the aggregate cost of the Properties owned
by the Partnership and its consolidated joint venture, and the
unconsolidated joint ventures (including the Properties held as
tenants-in-common) for federal income tax purposes was $21,303,689
and $12,109,904, respectively. All of the leases are treated as
operating leases for federal income tax purposes.
(d) For financial reporting purposes, the portion of the lease relating
to the building has been recorded as a direct financing lease. The
cost of the building has been included in the net investment in
direct financing leases; therefore, depreciation is not applicable.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 1998
(e) For financial reporting purposes, the lease for the land and
building has been recorded as a direct financing lease. The cost of
the land and building has been included in net investment in direct
financing leases; therefore, depreciation is not applicable.
(f) For financial reporting purposes, certain components of the lease
relating to land and building have been recorded as a direct
financing lease. Accordingly, costs relating to these components of
this lease are not shown.
(g) The building portion of this Property is owned by the tenant;
therefore, depreciation is not applicable.
(h) The tenant of this Property, Restaurant Management Services, Inc.,
has subleased this Property to a local, independent restaurant.
Restaurant Management Services, Inc. continues to be responsible
for complying with all the terms of the lease agreement and is
continuing to pay rent on this Property, subject to certain rent
concessions, to the Partnership.
(i) The building located on this Property was demolished in 1995;
therefore, depreciation is not applicable.
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal
Description Rate Date Terms Liens Mortgages Mortgages (3) or Interest
----------------- --------- ---------------- ----------- --------- ------------- -------------- -------------
<S> <C>
Perkins -
Florence, SC
First Mortgage 10.25% July 2000 (1) $-- $1,160,000 $1,003,529 $--
Church's -
Jacksonville, FL
First Mortgage 10.00% December 2005 (2) -- 240,000 237,527 --
--------- ------------- -------------- -------------
Total $-- $1,400,000 $1,241,056 (4) $--
========= ============= ============== =============
</TABLE>
(1) Monthly payments of principal and interest at an annual rate of 10.25%,
with a balloon payment at maturity of $1,105,715.
(2) Monthly payments of principal and interest at an annual rate of 10.00%,
with a balloon payment at maturity of $218,252.
(3) The tax carrying value of the notes is approximately $1,262,723, which is
net of deferred gain of $95,154.
(4) The changes in the carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ----------------
<S> <C>
Balance at beginning of period $1,250,597 $1,259,495 $1,267,849
Interest earned 139,446 140,188 140,822
Collection of principal and interest (150,012 ) (150,012 ) (150,012 )
Recognition of deferred gain on sale of
land and building 1,025 926 836
--------------- --------------- ----------------
Balance at end of period $1,241,056 $1,250,597 $1,259,495
=============== =============== ===================
</TABLE>
<PAGE>
EXHIBITS
<PAGE>
EXHIBIT INDEX
Exhibit Number
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.)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund VII, Ltd. at December 31, 1998, and its statement of
income for the year then ended and is qualified in its entirety by reference to
the Form 10-K of CNL Income Fund VII, Ltd. for the year ended December 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 856,825
<SECURITIES> 0
<RECEIVABLES> 107,331
<ALLOWANCES> 28,853
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 17,552,433
<DEPRECIATION> 2,473,926
<TOTAL-ASSETS> 25,218,258
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,313,796
<TOTAL-LIABILITY-AND-EQUITY> 25,218,258
<SALES> 0
<TOTAL-REVENUES> 2,655,726
<CGS> 0
<TOTAL-COSTS> 483,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,466,018
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,466,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,466,018
<EPS-PRIMARY> 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.
</FN>
</TABLE>
