FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
0-20016
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CNL Income Fund X, Ltd.
-------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3004139
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-6
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 7-13
Part II
Other Information 14
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- ------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,300,992
and $1,113,247 $17,037,038 $15,709,899
Net investment in direct financing leases 10,751,793 13,460,125
Investment in joint ventures 3,437,666 3,505,326
Cash and cash equivalents 1,662,186 1,583,883
Restricted cash 1,260,266 92,236
Receivables, less allowance for doubtful
accounts of $217,437 and $137,856 294 123,903
Prepaid expenses 9,249 5,877
Accrued rental income, less allowance for
doubtful accounts of $257,225 and $117,593 1,348,423 1,775,374
Other assets 33,104 33,104
----------------- -----------------
$35,540,019 $36,289,727
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 1,367 $ 6,033
Accrued and escrowed real estate taxes payable 71,478 27,784
Distributions payable 900,001 900,001
Due to related parties 5,500 4,946
Rents paid in advance and deposits 90,378 132,419
----------------- -----------------
Total liabilities 1,068,724 1,071,183
Minority interest 64,480 64,501
Partners' capital 34,406,815 35,154,043
----------------- -----------------
$35,540,019 $36,289,727
================= =================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ -------------- -------------
<S> <C>
Revenues:
Rental income from operating leases $ 499,787 $ 477,904 $ 1,396,043 $ 1,436,157
Adjustments to accrued rental income (13,155 ) (6,099 ) (445,370 ) (22,714 )
Earned income from direct financing leases 353,378 376,124 976,635 1,129,655
Contingent rental income 6,239 10,014 16,894 22,186
Interest and other income 27,008 14,289 85,774 74,727
------------ ------------ -------------- -------------
873,257 872,232 2,029,976 2,640,011
------------ ------------ -------------- -------------
Expenses:
General operating and administrative 43,273 37,138 126,834 112,266
Bad debt expense -- -- 5,887 --
Professional services 7,277 5,282 20,636 17,114
Real estate taxes 14,004 -- 23,578 --
State and other taxes -- -- 10,520 9,503
Depreciation and amortization 71,349 52,536 187,745 157,609
------------ ------------ -------------- -------------
135,903 94,956 375,200 296,492
------------ ------------ -------------- -------------
Income Before Minority Interest in
Income of Consolidated Joint
Venture, Equity in Earnings in
Unconsolidated Joint Ventures and
Gain on Sale of Land, Building and Net
Investment in Direct Financing Lease 737,354 777,276 1,654,776 2,343,519
Minority Interest in Income of
Consolidated Joint Venture (2,337 ) (2,271 ) (6,592 ) (6,325 )
Equity in Earnings of Unconsolidated
Joint Ventures 76,163 71,523 213,432 204,167
Gain on Sale of Land, Building and Net
Investment in Direct Financing Lease -- 132,238 171,159 132,238
------------ ------------ -------------- -------------
Net Income $ 811,180 $ 978,766 $ 2,032,775 $ 2,673,599
============ ============ ============== =============
Allocation of Net Income:
General partners $ 8,112 $ 8,466 $ 18,616 $ 25,414
Limited partners 803,068 970,300 2,014,159 2,648,185
------------ ------------ -------------- -------------
$ 811,180 $ 978,766 $ 2,032,775 $ 2,673,599
============ ============ ============== =============
Net Income Per Limited Partner Unit $ 0.20 $ 0.24 $ 0.50 $ 0.66
============ ============ ============== =============
Weighted Average Number of Limited
Partner Units Outstanding 4,000,000 4,000,000 4,000,000 4,000,000
============ ============ ============== =============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
---------------------------- ------------------
<S> <C>
General partners:
Beginning balance $ 208,709 $ 174,718
Net income 18,616 33,991
----------------- ---------------
227,325 208,709
----------------- ---------------
Limited partners:
Beginning balance 34,945,334 35,047,947
Net income 2,014,159 3,497,390
Distributions ($0.70 and
$0.90 per limited partner
unit, respectively) (2,780,003 ) (3,600,003 )
----------------- ---------------
34,179,490 34,945,334
----------------- ---------------
Total partners' capital $34,406,815 $35,154,043
================= ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities $ 2,774,783 $ 2,748,032
---------------- ----------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 1,231,106 1,363,805
Increase in restricted cash (1,140,970 ) (1,363,805 )
---------------- ----------------
Net cash used in investing activities 90,136 --
---------------- ----------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,780,003 ) (2,740,001 )
Distributions to holder of minority interest (6,613 ) (6,198 )
---------------- ----------------
Net cash used in financing
activities (2,786,616 ) (2,746,199 )
---------------- ----------------
Net Increase in Cash and Cash Equivalents 78,303 1,833
Cash and Cash Equivalents at Beginning
of Period 1,583,883 1,769,483
---------------- ----------------
Cash and Cash Equivalents at End of
Period $ 1,662,186 $ 1,771,316
================ ================
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Net investment in direct financing leases
reclassified to land and building on
operating leases as a result of lease
amendments $ 2,024,000 $ --
================ ================
Distributions declared and unpaid at end of
period $ 900,001 $ 900,001
================ ================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund X, Ltd. (the "Partnership") for the year ended December 31,
1997.
The Partnership accounts for its 88.26% interest in Allegan Real Estate
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.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
Interim Financial Periods." Adoption of this consensus did not have a
material effect on the Partnership's financial position or results of
operations.
2. Land and Building on Operating Leases:
In January 1998, the Partnership sold its property in Sacramento,
California, to the tenant for $1,250,000 and received net sales
proceeds of $1,230,672, resulting in a gain of $163,349 for financial
reporting purposes. This property was originally acquired by the
Partnership in December 1991 and had a cost of approximately $969,400,
excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the property for approximately $261,300
in excess of its original purchase price.
5
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Land and Building on Operating Leases - Continued:
In addition, in March 1998, a vacant parcel of land relating to the
property in Austin, Texas, was sold to a third party who had previously
subleased the land from the Partnership's lessee. In connection
therewith, the Partnership received net sales proceeds of $68,434
($68,000 of which had been received as a deposit in 1995), resulting in
a gain of $7,810 for financial reporting purposes.
3. Net Investment in Direct Financing Leases:
In March 1998, the Partnership sold its property in Sacramento,
California, for which the building portion had been classified as a
direct financing lease. In connection therewith, the gross investment
(minimum lease payments receivable and the estimated residual value)
and unearned income relating to the building were removed from the
accounts and the gain from the sale of the property was reflected in
income (see Note 2).
In August 1998, three of the Partnership's leases were amended. As a
result, the Partnership reclassified the leases from direct financing
leases to operating leases. In accordance with the Statement of
Financial Accounting Standards #13, "Accounting for Leases," the
Partnership recorded the reclassified leases at the lower of original
costs, present fair value, or present carrying amount. No losses on the
termination of direct financing leases were recorded for financial
reporting purposes.
4. Restricted Cash:
As of September 30, 1998, the net sales proceeds of $1,230,672 from the
sale of the property in Sacramento, California, plus accrued interest
of $29,594 were being held in an interest-bearing escrow account
pending the release of funds by the escrow agent to acquire an
additional property.
5. Subsequent Event:
In October 1998, the Partnership sold its property in Billings,
Montana, to the tenant for $362,000 and received net sales proceeds of
$360,688, resulting in a gain of $47,800 for financial reporting
purposes.
In November 1998, the Partnership reinvested approximately $1,020,800
of the net sales proceeds it received from the sale of the property in
Sacramento, California in a Jack in the Box property located in San
Marcos, Texas. In connection therewith, the Partnership entered into a
long term, triple-net lease with terms substantially the same as its
other leases.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund X, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on April 16, 1990, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, as well as land upon which restaurants were to be
constructed (the "Properties"), which are leased primarily to operators of
selected national and regional fast-food and family-style restaurant chains. The
leases are triple-net leases, with the lessees generally responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of
September 30, 1998, the Partnership owned 48 Properties, which included nine
Properties owned by joint ventures in which the Partnership is a co-venturer and
two properties owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
The Partnership's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and other
income received, less cash paid for expenses). Cash from operations was
$2,774,783 and $2,748,032 for the nine months ended September 30, 1998 and 1997,
respectively. The increase in cash from operations for the nine months ended
September 30, 1998, is primarily a result of changes in the Partnership's
working capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1998.
In January 1998, the Partnership sold its Property in Sacramento,
California to the tenant, for $1,250,000 and received net sales proceeds of
$1,230,672, resulting in a gain of $163,349 for financial reporting purposes.
This Property was originally acquired by the Partnership in December 1991 and
had a cost of approximately $969,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the Property
for approximately $261,300 in excess of its original purchase price. As of
September 30, 1998, net sales proceeds of $1,230,672 plus accrued interest of
$29,594 were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional Property. The
general partners believe that the transaction, or a portion thereof, relating to
the sale of the Property in Sacramento, California, and the reinvestment of the
net sales proceeds, will qualify as a like-kind exchange transaction for federal
income tax purposes. 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.
In addition, in March 1998, a vacant parcel of land relating to the
Property in Austin, Texas, was sold to a third party who had previously
subleased the land from the Partnership's lessee. In connection therewith, the
Partnership received net sales proceeds of $68,434 ($68,000 of which had been
received as a deposit in 1995), resulting in a gain of $7,810 for financial
reporting purposes.
7
<PAGE>
Liquidity and Capital Resources - Continued
In October 1998, the Partnership sold its Property in Billings, Montana
to the tenant for $362,000 and received net sales proceeds of $360,688,
resulting in a gain of $47,800 for financial reporting purposes. The Partnership
plans to reinvest the net sales proceeds from the sale of this Property in an
additional Property.
In November 1998, the Partnership reinvested approximately $1,020,800
of the net sales proceeds it received from the sale of the Property in
Sacramento, California in a Jack in the Box Property located in San Marcos,
Texas. In connection therewith, the Partnership entered into a long term,
triple-net lease with terms substantially the same as its other leases.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At September 30, 1998, the Partnership had
$1,662,186 invested in such short-term investments as compared to $1,583,883 at
December 31, 1997. The funds remaining at September 30, 1998, after payment of
distributions and other liabilities, will be used to meet the Partnership's
working capital and other needs.
Total liabilities of the Partnership, including distributions payable,
decreased to $1,068,724 at September 30, 1998, from $1,071,183 at December 31,
1997. The general partners believe that the Partnership has sufficient cash on
hand to meet its current working capital needs.
Based on cash from operations, and for the nine months ended September
30, 1998, accumulated excess operating reserves, the Partnership declared
distributions to limited partners of $2,780,003 and $2,700,002 for the nine
months ended September 30, 1998 and 1997, respectively ($900,001 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions of
$0.70 and $0.68 per unit for the nine months ended September 30, 1998 and 1997,
respectively ($0.23 per unit for each applicable quarter ended September 30,
1998 and 1997). No distributions were made to the general partners for the
quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the limited partners for the nine months ended September 30, 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. The Partnership intends to continue to make
distributions of cash available for distribution to the limited partners on a
quarterly basis.
The general partners have been informed by CNL American Properties
Fund, Inc. ("APF"), an affiliate of the general partners, that it intends to
significantly increase its asset base by proposing to acquire affiliates of the
general partners which have similar restaurant property portfolios, including
the Partnership. 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. Accordingly, the
general partners anticipate that APF will make an offer to acquire the
Partnership in exchange for securities of APF. The general partners have
recently retained financial and legal advisors to assist them in evaluating and
negotiating any
8
<PAGE>
Liquidity and Capital Resources - Continued
offer that may be proposed by APF. However, at this time, APF has made no such
offer. In the event that an offer is made, the general partners will evaluate it
and if the general partners believe that the offer is worth pursuing, the
general partners will promptly inform the limited partners. Any agreement to
sell the Partnership would be subject to the approval of the limited partners in
accordance with the terms of the partnership agreement.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Results of Operations
During the nine months ended September 30, 1997, the Partnership and
its consolidated joint venture, Allegan Real Estate Joint Venture, owned and
leased 39 wholly owned Properties (including one Property in Fremont,
California, which was sold in September 1997) and during the nine months ended
September 30, 1998, the Partnership owned and leased 39 Properties (including
one Property in Sacramento, California, which was sold in January 1998) to
operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the
Partnership and Allegan Real Estate Joint Venture earned $1,927,308 and
$2,543,098, respectively, in rental income from operating leases (net of
adjustments to accrued rental income) and earned income from direct financing
leases from these Properties, $840,010 and $847,929 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income during the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997, is partially due to a
decrease of approximately $84,400 in rental and earned income due to the fact
that the lease relating to the Perkins Property in Ft. Pierce, Florida, was
amended to provide for rent reductions from May 1997 through December 31, 1998.
Due to the lease amendment and questionable collectibility of future scheduled
rent increases from this tenant, the Partnership increased its reserve for
accrued rental income (non-cash accounting adjustment relating to the
straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles) by approximately
$139,600 during the nine months ended September 30, 1998, as compared to
approximately $22,700 during the nine months ended September 30, 1997. In
addition, rental and earned income decreased by approximately $172,900 during
the nine months ended September 30, 1998, as a result of the sale of the
Properties in Fremont and Sacramento, California in September 1997 and January
1998. The decrease in rental and earned income for the nine months ended
September 30, 1998 was partially offset by an increase in rental and earned
income of approximately $97,300 during the nine months ended September 30, 1998,
due to the reinvestment of a portion of the net sales proceeds from the 1997
sale of the Property in Fremont, California, in a Property in Homewood, Alabama
in October 1997.
9
<PAGE>
Results of Operations - Continued
In addition, the decrease during the nine months ended September 30,
1998, as compared to the nine months ended September 30, 1997, was partially
attributable to the fact that in May 1998 the tenant of the Properties in
Lancaster and Amherst, New York, filed for bankruptcy. As a result, during the
nine months ended September 30, 1998, the Partnership wrote off approximately
$292,600 of accrued rental income (non-cash accounting adjustment relating to
the straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles). The Partnership also
increased the allowance for doubtful accounts for past due rental amounts for
these Properties in the amount of $14,100 for the nine months ended September
30, 1998, due to the fact that collection of such amounts is questionable. The
tenant has rejected the lease relating to the Property in Lancaster, New York,
and as a result, the Partnership will not receive rental income from this
Property. The tenant is currently in the process of deciding whether to affirm
or reject the lease for the Property in Amherst, New York. If the lease for the
Amherst, New York Property is rejected, the Partnership anticipates that rental
income from this Property will terminate. However, the general partners do not
anticipate that any decrease in rental income due to lost revenues relating to
these Properties will have a material effect on the Partnership's financial
position or results of operations. The general partners are currently seeking
either new tenants or purchasers for these Properties.
In addition, the decrease in rental and earned income during the nine
months ended September 30, 1998 is partially attributable to the fact that in
October 1998 the tenant of one Boston Market Property filed for bankruptcy and
ceased operations relating to this Property. As a result, during the nine months
ended September 30, 1998, the Partnership wrote off approximately $13,200 of
accrued rental income (non-cash accounting adjustments relating to the
straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles). If the lease is
eventually rejected, the Partnership anticipates that rental income relating to
this Property will terminate until a new tenant is located or until the Property
is sold and the proceeds from such a sale are reinvested in an additional
Property. However, the general partners do not anticipate that any decrease in
rental income due to lost revenues relating to this Property will have a
material effect on the Partnership's financial position or results of
operations.
The decrease in rental and earned income for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997, is
also partially due to a decrease of approximately $13,200 for the nine months
ended September 30, 1998, due to the fact that the leases relating to the Burger
King Properties in Irondequoit, New York, Ashland, Ohio and Henderson, North
Carolina were amended to provide for rent reductions from August 1998 through
the end of the lease term.
For the nine months ended September 30, 1998 and 1997, the Partnership
also owned and leased eight Properties indirectly through other joint venture
arrangements and one Property as tenants-in-common with affiliates of the
general partners, and for the nine months ended September 30, 1998, the
Partnership owned and leased one additional Property as tenants-in-
10
<PAGE>
Results of Operations - Continued
common with affiliates of the general partners. In connection therewith, during
the nine months ended September 30, 1998 and 1997, the Partnership earned
$213,432 and $204,167, respectively, attributable to the net income earned by
unconsolidated joint ventures, $76,163 and $71,523 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The increase in
net income earned by unconsolidated joint ventures during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is primarily attributable to the Partnership investing
in a Property in Miami, Florida, in December 1997, with affiliates of the
general partners as tenants-in-common.
Operating expenses, including depreciation and amortization expense,
were $375,200 and $296,492 for the nine months ended September 30, 1998 and
1997, respectively, of which $135,903 and $94,956 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
the result of an increase in depreciation expense due to the purchase of the
Property in Homewood, Alabama, in October 1997 and the fact that during the
quarter and nine months ended September 30, 1998, the Partnership reclassified
the leases relating to the Properties in Irondequoit, New York, Ashland, Ohio
and Henderson, North Carolina from direct financing leases to operating leases
due to lease amendments. In addition, the increase in operating expenses is
partially due to the fact that the Partnership recorded bad debt expense and
real estate tax expense relating to the Properties in Lancaster and Amherst, New
York due to the fact that the tenant of these Properties filed for bankruptcy,
as described above. Due to the fact that the tenant rejected the lease in
Lancaster, New York and if the tenant rejects the lease in Amherst, New York,
the Partnership will continue to incur certain expenses, such as real estate
taxes, insurance, and maintenance, until a new tenant or buyer for the
Properties are located.
In addition, the increase in operating expenses during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Partnership recorded
approximately $14,000 in real estate tax expense due to the fact that in October
1998 the tenant of the Boston Market Property in Homewood, Alabama filed for
bankruptcy, as described above. If the tenant decides to reject the lease, the
Partnership will continue to incur certain expenses, such as real estate taxes,
insurance and maintenance, until a new tenant or buyer for the Property is
located.
As a result of the sale of the Property in Sacramento, California, and
the sale of the parcel of land in Austin, Texas, as described above in
"Liquidity and Capital Resources," the Partnership recognized a gain of $171,159
for financial reporting purposes during the nine months ended September 30,
1998. As a result of the sale of the Property in Fremont, California, the
Partnership recognized a gain of $132,238 for financial reporting purposes for
the quarter and nine months ended September 30, 1997.
11
<PAGE>
Results of Operations - Continued
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim
Financial Periods." Adoption of this consensus did not have a material effect on
the Partnership's financial position or results of operations.
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 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 affiliates regarding
the Year 2000 compliance of their products that are used in the business
activities or operations of the Partnership. 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. At this time,
the general partners have not yet received sufficient certifications to be
assured that the tenants, financial institutions, and transfer agent have fully
12
<PAGE>
Results of Operations - Continued
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 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. As 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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 11th day of November, 1998.
CNL INCOME FUND X, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund X, Ltd. at September 30, 1998, and its statement of
income for the nine months then ended and is qualified in its entirety by
reference to the Form 10-Q of CNL Income Fund X, Ltd. for the nine months ended
September 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,922,452<F2>
<SECURITIES> 0
<RECEIVABLES> 217,731
<ALLOWANCES> 217,437
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 18,338,030
<DEPRECIATION> 1,300,992
<TOTAL-ASSETS> 35,540,019
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 34,406,815
<TOTAL-LIABILITY-AND-EQUITY> 35,540,019
<SALES> 0
<TOTAL-REVENUES> 2,029,976
<CGS> 0
<TOTAL-COSTS> 369,313
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,887
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,032,775
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,032,775
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,032,775
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund X, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
<F2>Includes $1,260,266 in restricted cash.
</FN>
</TABLE>
