FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended June 30, 1999
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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 ____________________
Commission file number
0-20016
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CNL Income Fund X, Ltd.
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(Exact name of registrant as specified in its charter)
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Florida 59-3004139
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East South Street
Orlando, Florida 32801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
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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 _________
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CONTENTS
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Page
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Part I.
Item 1. Financial Statements:
Condensed Balance Sheets
Condensed Statements of Income
Condensed Statements of Partners' Capital
Condensed Statements of Cash Flows
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II.
Other Information
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
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June 30, December 31,
1999 1998
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ASSETS
Landand buildings on operating leases,
less accumulated depreciation of
$1,486,382 and $1,329,832, respectively
and allowance for loss on
land and building of $908,518 in 1999 and 1998 $ 17,278,201 $ 16,685,182
Net investment in direct financing leases, less allowance
for impairment in carrying value of $93,328 in 1998 10,041,160 10,713,000
Investment in joint ventures 4,179,673 3,421,329
Cash and cash equivalents 1,136,363 1,835,972
Restricted cash -- 361,403
Receivables, less allowance for doubtful accounts of
$113,570 and $236,810, respectively 54,716 81,100
Prepaid expenses 20,280 5,229
Accrued rental income, less allowance for doubtful
accounts of $281,618 and $269,421, respectively 1,388,814 1,342,166
Other assets 35,584 35,484
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$ 34,134,791 $ 34,480,865
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 95,764 $ 2,403
Accrued and escrowed real estate taxes payable 24,270 27,418
Distributions payable 900,001 900,001
Due to related party 29,076 29,987
Rents paid in advance and deposits 99,859 103,414
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Total liabilities 1,148,970 1,063,223
Commitments and Contingencies (Note 5)
Minority interest 64,425 64,745
Partners' capital 32,921,396 33,352,897
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$ 34,134,791 $ 34,480,865
=================== ===================
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See accompanying notes to condensed financial statements.
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
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Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
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Revenues:
Rental income from operating leases $ 513,902 $ 453,539 $ 968,457 $ 906,911
Adjustments to accrued rental income (6,099 ) (426,116 ) (12,197 ) (432,215 )
Earned income from direct financing leases 286,157 264,420 563,015 623,257
Interest and other income 17,748 32,294 31,462 58,766
------------ ------------ ------------ ------------
811,708 324,137 1,550,737 1,156,719
------------ ------------ ------------ ------------
Expenses:
General operating and administrative 36,293 45,324 86,775 83,561
Bad debt expense -- 3,854 -- 5,887
Professional services 19,981 8,160 30,026 13,359
Real estate taxes 5,306 9,574 16,910 9,574
State and other taxes 105 249 14,682 10,520
Depreciation 84,256 58,198 156,550 116,396
Transaction costs 90,788 -- 124,449 --
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236,729 125,359 429,392 239,297
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Income Before Minority Interest in Income of
Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint Ventures,
and Gain on Sale of Land and Buildings 574,979 198,778 1,121,345 917,422
Minority Interest in Income of Consolidated
Joint Venture (2,099 ) (2,069 ) (3,978 ) (4,255 )
Equity in Earnings of Unconsolidated Joint
Ventures 95,090 74,135 176,494 137,269
Gain on Sale of Land and Buildings -- -- 74,640 171,159
------------ ------------ ------------ ------------
Net Income $ 667,970 $ 270,844 $1,368,501 $1,221,595
============ ============ ============ ============
Allocation of Net Income:
General partners $ 6,680 $ 2,708 $ 12,941 $ 10,504
Limited partners 661,290 268,136 1,355,560 1,211,091
------------ ------------ ------------ ------------
$ 667,970 $ 270,844 $1,368,501 $1,221,595
============ ============ ============ ============
Net Income Per Limited Partner Unit $ 0.17 $ 0.07 $ 0.34 $ 0.30
============ ============ ============ ============
Weighted Average Number of Limited Partner
Units Outstanding 4,000,000 4,000,000 4,000,000 4,000,000
============ ============ ============ ============
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See accompanying notes to condensed financial statements.
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
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Six Months Ended Year Ended
June 30, December 31,
1999 1998
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General partners:
Beginning balance $ 229,725 $ 208,709
Net income 12,941 21,016
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242,666 229,725
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Limited partners:
Beginning balance 33,123,172 34,945,334
Net income 1,355,560 1,857,842
Distributions ($0.45 and $0.92 per
limited partner unit, respectively) (1,800,002 ) (3,680,004 )
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32,678,730 33,123,172
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Total partners' capital $32,921,396 $33,352,897
================== ==================
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See accompanying notes to condensed financial statements.
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
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Six Months Ended
June 30,
1999 1998
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Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $1,654,349 $1,908,622
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Cash Flows from Investing Activities:
Proceeds from sale of land and buildings 1,150,000 1,231,106
Additions to land and buildings on operating
leases (1,257,217 ) --
Investment in joint ventures (802,431 ) --
Decrease (increase) in restricted cash 359,990 (1,140,970 )
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Net cash provided by (used in)
investing activities (549,658 ) 90,136
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Cash Flows from Financing Activities:
Distributions to limited partners (1,800,002 ) (1,880,002 )
Distributions to holder of minority interest (4,298 ) (4,268 )
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Net cash used in financing activities (1,804,300 ) (1,884,270 )
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Net Increase (Decrease) in Cash and Cash Equivalents (699,609 ) 114,488
Cash and Cash Equivalents at Beginning of Period 1,835,972 1,583,883
---------------- ---------------
Cash and Cash Equivalents at End of Period $1,136,363 $1,698,371
================ ===============
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period $ 900,001 $ 900,001
================ ===============
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See accompanying notes to condensed financial statements.
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 1999, may not be indicative
of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, included in the financial
statements, have been derived from audited financial statements as of
that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund X, Ltd. (the "Partnership") for the year ended December 31,
1998.
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 1999 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Land and Buildings on Operating Leases:
In March 1999, the Partnership sold its property in Amherst, New York,
received net sales proceeds of $1,150,000 and recorded a gain of
$74,640 for financial reporting purposes (see Note 3). In March 1999,
the Partnership reinvested the net sales proceeds plus additional
funds, in a Golden Corral property in Fremont, Nebraska.
3. Net Investment in Direct Financing Leases:
At December 31, 1998, the Partnership had recorded an allowance of
$93,328 for the impairment in the carrying value of the Property in
Amherst, New York, due to the tenant filing for bankruptcy. The
allowance represented the difference between the carrying value of the
property at December 31, 1998 and the estimated net realizable value
for this property. In March 1999, the Partnership sold this property,
received net sales proceeds of $1,150,000 and recorded a gain of
$74,640 for financial reporting purposes, resulting
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
3. Net Investment in Direct Financing Leases - Continued:
in a aggregate net loss of approximately $18,700. The building portion
of this property had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments
receivable and the estimated residual value), unearned income, and the
allowance for impairment in carrying value 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).
4. Investment in Joint Ventures:
In January 1999, the Partnership entered into a joint venture
arrangement, Ocean Shores Joint Venture, with CNL Income Fund XVII,
Ltd., an affiliate of the general partners, to own and lease one
restaurant property. The Partnership contributed approximately $802,400
to the joint venture and as of June 30, 1999, owned a 69.06% interest
in the profits and losses of the joint venture. The Partnership
accounts for its investment in this joint venture under the equity
method since the Partnership shares control with an affiliate.
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures and
properties held as tenants-in-common at:
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June 30, December 31,
1999 1998
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Land and buildings on operating
leases, less accumulated
depreciation $ 9,575,806 $ 9,340,944
Net investment in direct
financing leases 1,462,165 657,426
Cash 3,753 2,935
Receivables 32 7,597
Prepaid expenses 12,018 24,337
Accrued rental income 37,436 19,880
Liabilities 1,478 3,119
Partners' capital 11,089,732 10,050,000
Revenues 615,270 1,115,856
Net income 468,911 843,914
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
4. Investment in Joint Ventures - Continued:
The Partnership recognized income totaling $176,494 and $137,269 for
the six months ended June 30, 1999 and 1998, respectively, from these
joint ventures, $95,090 and $74,135 of which was earned during the
quarters ended June 30, 1999 and 1998, respectively.
5. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 2,121,622 shares of its common stock, par value $0.01 per share
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the
price paid by APF investors (after an adjustment for a one for two
reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other
assets were valued on a going concern basis (meaning the Partnership
continues unchanged) at $41,779,262 as of December 31, 1998. The APF
Shares are expected to be listed for trading on the New York Stock
Exchange concurrently with the consummation of the Merger, and
therefore, would be freely tradable at the option of the former limited
partners. At a special meeting of the partners that is expected to be
held in the fourth quarter of 1999, limited partners holding in excess
of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If
the limited partners at the special meeting approve the Merger, APF
will own the properties and other assets of the Partnership. The
general partners intend to recommend that the limited partners of the
Partnership approve the Merger. In connection with their
recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject
the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners
will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
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CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
5. Commitments and Contingencies - Continued:
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners and APF in connection with the proposed Merger. The general
partners, APF and CNL Fund Advisors, Inc. and certain of its affiliates
believe that the lawsuits are without merit and intend to defend
vigorously against the claims. See Part II - Item 1. Legal Proceedings.
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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, which are leased primarily to operators of national and regional
fast-food and family-style restaurant chains (collectively, the "Properties").
The leases generally are triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of June 30,
1999, the Partnership owned 49 Properties, which included interests in ten
Properties owned by joint ventures in which the Partnership is a co-venturer and
two Properties owned with affiliates of the general partners as
tenants-in-common.
Capital Resources
The Partnership's primary source of capital for the six months ended
June 30, 1999 and 1998 was cash from operations (which includes cash received
from tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $1,654,349 and
$1,908,622 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, is
primarily a result of changes in the Partnership's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In January 1999, the Partnership used a portion of the net proceeds
from the sales of properties during 1998 and 1997 to enter into a joint venture
arrangement, Ocean Shores Joint Venture, with CNL Income Fund XVII, Ltd., an
affiliate of the general partners, to own and lease one restaurant property. The
Partnership contributed approximately $802,400 to the joint venture and as of
June 30, 1999, owned a 69.06% interest in the profits and losses of the joint
venture.
In March 1999, the Partnership sold its Property in Amherst, New York
and received net sales proceeds of $1,150,000. The Partnership had recorded an
allowance for impairment in the carrying value relating to this Property of
$93,328 at December 31, 1998 due to the tenant filing for bankruptcy. The
allowance represented the difference between the carrying value of the property
at December 31, 1998 and the estimated net realizable value for this property.
At March 31, 1999 the Partnership recorded a gain relating to the sale of this
Property of $74,460, for financial reporting purposes, resulting in an aggregate
net loss relating to the sale of this Property of approximately $18,700. In
March 1999, the Partnership reinvested the net sales proceeds from the sale of
this Property, plus additional funds, in a Golden Corral Property in Fremont,
Nebraska.
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Currently, rental income from the Partnership's Properties and any net
sales proceeds held by the Partnership pending reinvestment in additional
Properties, are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks,
certificates of deposit and money market accounts with less than a 30-day
maturity date, pending the Partnership's use of such funds to pay Partnership
expenses or to make distributions to the partners. At June 30, 1999, the
Partnership had $1,136,363 invested in such short-term investments, as compared
to $1,835,972 at December 31, 1998. The decrease in cash and cash equivalents is
primarily attributable to the fact that in January 1999 the Partnership used
uninvested net sales proceeds from the 1997 and 1998 sales of Properties to
enter into a joint venture arrangement with an affiliate of the general
partners, as described above. The funds remaining at June 30, 1999, after
payment of distributions and other liabilities, will be used meet the
Partnership's working capital and other needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, and, for the six
months ended June 30, 1998, accumulated excess operating reserves, the
Partnership declared distributions to limited partners of $1,800,002 and
$1,880,002 for the six months ended June 30, 1999 and 1998, respectively
($900,001 for each of the quarters ended June 30, 1999 and 1998). This
represents distributions of $0.45 and $0.47 per unit for the six months ended
June 30, 1999 and 1998, respectively ($0.23 per unit for each quarter ended June
30, 1999 and 1998). No distributions were made to the general partners for the
quarters and six months ended June 30, 1999 and 1998. No amounts distributed to
the limited partners for the six months ended June 30, 1999 and 1998, are
required to be or have been treated by the Partnership as a return of capital
for purposes of calculating the limited partners' return on their adjusted
capital contributions. The Partnership intends to continue to make distributions
of cash available for distribution to the limited partners on a quarterly basis.
Total liabilities of the Partnership, including distributions payable,
increased to $1,148,970 at June 30, 1999, from $1,063,223 at December 31, 1998,
primarily as a result of the Partnership accruing transaction costs relating to
the proposed Merger with CNL American Properties Fund, Inc. ("APF"), as
described below. The general partners believe that the Partnership has
sufficient cash on hand to meet its current working capital needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During the six months ended June 30, 1998, the Partnership and its
consolidated joint venture, Allegan Real Estate Joint Venture, owned and leased
39 wholly owned Properties (which included one Property in Sacramento,
California, which was sold in January 1998) to operators of fast-food and
family-style restaurant chains. During the six months ended June 30, 1999, the
Partnership and Allegan Real Estate Joint Venture owned and leased 39 wholly
owned Properties (which included one Property in Amherst, New York, which was
sold in March 1999). During the six months ended June 30, 1999 and 1998, the
Partnership and Allegan Real Estate Joint Venture earned $1,519,275 and
$1,097,953, respectively, in rental income from operating leases (net of
adjustments to accrued rental income) and earned income from direct financing
leases from these Properties, $793,960 and $291,843 of which was earned during
the quarters ended June 30, 1999 and 1998, respectively. Rental and earned
income was higher for the quarter and six months ended June 30, 1999, due to the
fact that in May 1998, the tenant of the Properties in Lancaster and Amherst,
New York filed for bankruptcy, rejected the lease relating to the Property in
Lancaster, New York and ceased making rental payments on such lease. As a
result, during the quarter and six months ended June 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)
relating to both Properties. No such amounts were written off during the quarter
and six months ended June 30, 1999. Rental and earned income was also higher
during the quarter and six months ended June 30, 1999, due to the fact that
during the quarter and six months ended June 30, 1998, the Partnership increased
the allowance for doubtful accounts for past due rental amounts for these
Properties in the amount of $126,100 and $138,600, respectively, due to
financial difficulties the tenant was experiencing. No such allowance was
established during the quarter and six months ended June 30, 1999. The increase
in rental and earned income during the quarter and six months ended June 30,
1999 was partially offset by a decrease in rental and earned income of
approximately $35,900 and $71,900 for the quarter and six months ended June 30,
1999, respectively, due to the fact that the tenant ceased making rental
payments relating to the Property in Lancaster, New York, in May 1998, as
described above. The lost revenues resulting from this Property could have an
adverse effect on the results of operations of the Partnership if the
Partnership is unable to re-lease the Property in a timely manner. The
Partnership will not recognize rental income relating to this Property until a
new tenant is located or until the Property is sold and the proceeds from such
sale are reinvested in an additional Property. The general partners are
currently seeking either a new tenant or purchaser for this Property.
The increase in rental and earned income was also offset by a decrease
of approximately $37,400 and $49,300 during the quarter and six months ended
June 30, 1999, respectively, due to the fact that the Partnership sold the
Property located in Amherst, New York, as described above in "Capital
Resources." In addition, rental and earned income was higher during the quarter
and six months ended June 30, 1999, due to the fact that the Partnership
collected and recognized as income some of the past due rental amounts for which
the Partnership had previously established an allowance for doubtful accounts
relating to the Amherst Property.
The increase in rental and earned income was partially offset by a
decrease in rental and earned income of approximately $36,800 and $73,600 for
the quarter and six months ended June 30, 1999, respectively, due to the fact
that in October 1998, the tenant of the Boston Market Property in Homewood,
Alabama, filed for bankruptcy, rejected the lease relating to this Property and
ceased making rental payments to the Partnership. The Partnership will not
recognize rental and earned income from this Property until a new tenant for
this Property is located or until the Property is sold and the proceeds from
such a sale are reinvested in an additional Property. The lost revenues
resulting from the rejection of this lease could have an adverse effect on the
results of operations of the Partnership if the Partnership is not able to
re-lease this Property in a timely manner. The general partners are currently
seeking either a new tenant or purchaser for this Property.
The increase in rental and earned income was also partially offset by a
decrease of $22,300 and $44,700 for the quarter and six months ended June 30,
1999, respectively, due to the fact that the leases relating to three Burger
King Properties were amended to provide for rent reductions from August 1998
through the end of the lease term. In addition, the increase in rental and
earned income was offset by a decrease of approximately $10,600 and $26,800 for
the quarter and six months ended June 30, 1999, respectively, as a result of the
sale of the Property in Billings, Montana in October 1998. However, rental and
earned income increased by approximately $59,400 and $68,100 during the quarter
and six months ended June 30, 1999, respectively, due to the reinvestment of net
sales proceeds from the 1998 sale of the Property in Sacramento, California in a
Property in San Marcos, Texas and the reinvestment of net sales proceeds from
the 1999 sale of the Property in Amherst, New York, in a Property in Fremont,
Nebraska.
The increase in rental and earned income during the quarter and six
months ended June 30, 1999, was also due to an increase of approximately $15,170
and $58,610 for the quarter and six months ended June 30, 1999, respectively,
because in January 1999, the rents under the lease relating to the Perkins
Property in Ft. Pierce, Florida, which had been amended in a prior year to
provide for rent reductions from May 1997 through December 31, 1998, reverted
back to the amounts due under the original lease agreement. Rental and earned
income during the quarter and six months ended June 30, 1999 were higher due to
the fact that 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
$133,500 and $139,600 during the quarter and six months ended June 30, 1998,
respectively, as compared to approximately $6,100 and $12,200 during the quarter
and six months ended June 30, 1999, respectively.
During the six months ended June 30, 1999 and 1998, the Partnership
earned $31,462 and $58,766, respectively, in interest and other income, $17,748
and $32,294 of which was earned during the quarters ended June 30, 1999 and
1998. The decrease in interest and other income during the quarter and six
months ended June 30, 1999, as compared to the quarter and six months ended June
30, 1998, was primarily attributable to the fact that during the quarter and six
months ended June 30, 1998, the Partnership earned interest on the net sales
proceeds relating to the sale of the Property in Sacramento, California, pending
the reinvestment of the net sales proceeds in an additional Property. The net
sales proceeds were reinvested in November 1998.
For the quarter and six months ended June 30, 1999 and 1998, the
Partnership also owned and leased eight Properties indirectly through joint
venture arrangements and two Properties as tenants-in-common with affiliates of
the general partners. For the quarter and six months ended June 30, 1999, the
Partnership also owned and leased one additional Property indirectly through a
joint venture arrangement. In connection therewith, during the six months ended
June 30, 1999 and 1998, the Partnership earned $176,494 and $137,269,
respectively, $95,090 and $74,135 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively. The increase in net income earned by
unconsolidated joint ventures during the quarter and six months ended June 30,
1999, was primarily attributable to the Partnership investing in a joint venture
arrangement, Ocean Shores Joint Venture, in January 1999, with CNL Income Fund
XVII, Ltd., an affiliate of the general partners.
Operating expenses, including depreciation expense, were $429,392 and
$239,297 for the six months ended June 30, 1999 and 1998, respectively, of which
$236,729 and $125,359 were incurred for the quarters ended June 30, 1999 and
1998, respectively. The increase in operating expenses during the quarter and
six months ended June 30, 1999, as compared to the quarter and six months ended
June 30, 1998, was primarily the result of an increase in depreciation expense
due to the purchase of the Property in Fremont, Nebraska in March 1999 and the
fact that during 1998, the Partnership reclassified the leases relating to three
Properties from direct financing leases to operating leases due to lease
amendments. The increase in operating expenses was also partially due to the
fact that the Partnership accrued insurance, real estate tax expense, and legal
fees as a result of the fact that two tenants filed for bankruptcy and rejected
two leases relating to the Properties in Lancaster, New York and Homewood,
Alabama, as described above. The Partnership will continue to incur these types
of expenses, until replacement tenants or purchasers are located. The
Partnership is currently seeking either replacement tenants or purchasers for
these Properties.
In addition, the increase in operating expenses for the quarter and six
months ended June 30, 1999 was partially due to the fact that the Partnership
incurred $90,788 and $124,449 in transaction costs for the quarter and six
months ended June 30, 1999, respectively, related to the general partners
retaining financial and legal advisors to assist them in evaluating and
negotiating the Merger with APF, as described below. If the limited partners
reject the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners will
bear the portion of such transaction costs based upon the percentage of
"Against" votes and abstentions.
As a result of the sale of the Property in Amherst, New York, as
described above in "Capital Resources," the Partnership recorded a gain of
$74,640 for financial reporting purposes during the six months ended June 30,
1999. As a result of the sale of the Property in Sacramento, California, and the
sale of the parcel of land in Austin, Texas, the Partnership recognized a gain
of $171,159 for financial reporting purposes for the six months ended June 30,
1998.
Proposed Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF
has agreed to issue 2,121,622 shares of its common stock, par value $0.01 per
share (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the price paid
by APF investors (after an adjustment for a one for two reverse stock split
effective June 3, 1999) in three previous public offerings, the most recent of
which was completed in December 1998. In order to assist the general partners in
evaluating the proposed merger consideration, the general partners retained
Valuation Associates, a nationally recognized real estate appraisal firm, to
appraise the Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other assets
were valued on a going concern basis (meaning the Partnership continues
unchanged) at $41,779,262 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the fourth quarter of 1999, limited partners holding
in excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to
add three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF and CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims. See Part II - Item 1. Legal Proceedings.
Year 2000 Readiness Disclosure
The Year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. As of June 30, 1999 the
Partnership did not have any information or non-information technology systems.
The general partners and certain of the affiliates of the general partners
provide all services requiring the use of information and non-information
technology systems pursuant to a management agreement with the Partnership. The
information technology system of the affiliates of the general partners consists
of a network of personal computers and servers built using hardware and software
from mainstream suppliers. The non-information technology systems of the
affiliates of the general partners are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The affiliates of the general partners have no
internally generated programmed software coding to correct because substantially
all of the software utilized by the general partners and affiliates is purchased
or licensed from external providers. The maintenance of non-information
technology systems at the Partnership's Properties is the responsibility of the
tenants of the Properties in accordance with the terms of the Partnership's
leases.
In early 1998, the general partners and affiliates formed a Year 2000
team, for the purpose of identifying, understanding and addressing the various
issues associated with the Year 2000 problem. The Y2K Team consists of the
general partners and members from certain of the affiliates of the general
partners, including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management. The Y2K Team's initial step in assessing the Partnership's Year 2000
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of the
Partnership's systems could have a potential Year 2000 problem.
The information system of the affiliates of the general partners is
comprised of hardware and software applications from mainstream suppliers.
Accordingly, the Y2K Team is in the process of contacting the respective vendors
and manufacturers to verify the Year 2000 compliance of their products. In
addition, the Y2K Team has also requested and is evaluating documentation from
other companies with which the Partnership has a material third party
relationship, including the Partnership's tenants, vendors, financial
institutions and the Partnership's transfer agent. The Partnership depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash and its transfer agent to maintain and track investor
information. The Y2K Team has also requested and is evaluating documentation
from the non-information technology systems providers of the affiliates of the
general partners. Although the general partners continue to receive positive
responses from the companies with which the Partnership has third party
relationships regarding their Year 2000 compliance, the general partners cannot
be assured that the tenants, financial institutions, transfer agent, other
vendors and system providers have adequately considered the impact of the Year
2000. The general partners are not able to measure the effect on the operations
of the Partnership of any third party's failure to adequately address the impact
of the Year 2000.
The general partners and their affiliates have identified and have
implemented upgrades for certain hardware equipment. In addition, the general
partners and their affiliates have identified certain software applications
which will require upgrades to become Year 2000 compliant. The general partners
expect that all of these upgrades, as well as any other necessary remedial
measures on the information technology systems used in the business activities
and operations of the Partnership, to be completed by September 30, 1999,
although, the general partners cannot be assured that the upgrade solutions
provided by the vendors have addressed all possible Year 2000 issues. The
general partners do not expect the aggregate cost of the Year 2000 remedial
measures to be material to the results of operations of the Partnership.
The general partners and their affiliates have received certification
from the Partnership's transfer agent of its Year 2000 compliance. Due to the
material relationship of the Partnership with its transfer agent, the Y2K Team
is evaluating the Year 2000 compliance of the systems of the transfer agent and
expects to have the evaluation completed by September 30, 1999. Despite the
positive response from the transfer agent and the evaluation of the transfer
agent's system by the Y2K Team, the general partners cannot be assured that the
transfer agent has addressed all possible Year 2000 issues. In the event that
the systems of the transfer agent are not Year 2000 compliant, the general
partners and their affiliates will have to allocate resources to internally
perform the functions of the transfer agent. The general partners do not
anticipate that the additional cost of these resources would have a material
impact on the Partnership.
Based upon the progress the general partners and their affiliates have
made in addressing the Year 2000 issues and their plan and timeline to complete
the compliance program, the general partners do not foresee significant risks
associated with Year 2000 compliance at this time. The general partners and
their affiliates plan to address their significant Year 2000 issues prior to the
Partnership being affected by them; therefore, we have not developed a
comprehensive contingency plan. However, if the general partners and their
affiliates identify significant risks related to their Year 2000 compliance, or
if their progress deviates from the anticipated timeline, the general partners
and their affiliates will develop contingency plans as deemed necessary at that
time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 11, 1999, four limited partners in several CNL Income Funds
served a derivative and purported class action lawsuit filed April
22, 1999 against the general partners and APF in the Circuit Court
of the Ninth Judicial Circuit of Orange County, Florida, alleging
that the general partners breached their fiduciary duties and
violated provisions of certain of the CNL Income Fund partnership
agreements in connection with the proposed Merger. The plaintiffs
are seeking unspecified damages and equitable relief. On July 8,
1999, the plaintiffs filed an amended complaint which, in addition
to naming three additional plaintiffs, includes allegations of
aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended, the
caption of the case is Jon Hale, Mary J. Hewitt, Charles A. Hewitt,
Gretchen M. Hewitt Bernard J. Schulte, Edward M. and Margaret Berol
Trust, and Vicky Berol v. James M. Seneff, Jr., Robert A. Bourne,
CNL Realty Corporation, and CNL American Properties Fund, Inc., Case
No. CIO-99-0003561.
On June 22, 1999, a limited partner of several CNL Income Funds
served a purported class action lawsuit filed April 29, 1999 against
the general partners and APF, Ira Gaines, individually and on behalf
of a class of persons similarly situated, v. CNL American Properties
Fund, Inc., James M. Seneff, Jr., Robert A. Bourne, CNL Realty
Corporation, CNL Fund Advisors, Inc., CNL Financial Corporation
a/k/a CNL Financial Corp., CNL Financial Services, Inc. and CNL
Group, Inc., Case NO. CIO-99-3796, in the Circuit Court of the Ninth
Judicial Circuit of Orange County, Florida, alleging that the
general partners breached their fiduciary duties and that APF aided
and abetted their breach of fiduciary duties in connection with the
proposed Merger. The plaintiff is seeking unspecified damages and
equitable relief.
Item 2. Changes in Securities. Inapplicable.
Item 3. Default upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
Item 5. Other Information. Inapplicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund,
Inc. ("APF") dated March 11, 1999 and as amended
June 4, 1999 (Filed as Appendix B to the
Prospectus Supplement for the Registrant,
constituting a part of Amendment No. 1 to the
Registration Statement of APF on Form S-4, File
No. 74329.)
3.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund X, Ltd. (Included as Exhibit
3.2 to Registration Statement No. 33-35049 on
Form S-11 and incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund X, Ltd. (included as Exhibit
3.2 to Registration Statement No. 33-35049 on
Form S-11 and incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited
Partnership of CNL Income Fund X, Ltd. (Included
as Exhibit 3.3 to Post-Effective Amendment No. 4
to Registration Statement No. 33-35049 on Form
S-11 and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund X,
Ltd. and CNL Investment Company (Included as
Exhibit 10.1 to Form 10-K filed with the
Securities and Exchange Commission on March 17,
1998, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL
Investment Company to CNL Income Fund Advisors,
Inc. (Included as Exhibit 10.2 to Form 10-K
filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors,
Inc. (Included as Exhibit 10.3 to Form 10-K
filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated
herein by reference.)
27 Financial Data Schedule (Filed herewith.)
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 9th day of August, 1999.
CNL INCOME FUND 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 June 30, 1999, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10Q of CNL Income Fund X, Ltd. for the six months ended June 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,136,363
<SECURITIES> 0
<RECEIVABLES> 168,286
<ALLOWANCES> 113,570
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 18,764,583
<DEPRECIATION> 1,486,382
<TOTAL-ASSETS> 34,134,791
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 32,921,396
<TOTAL-LIABILITY-AND-EQUITY> 34,134,791
<SALES> 0
<TOTAL-REVENUES> 1,550,737
<CGS> 0
<TOTAL-COSTS> 429,392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,368,501
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,368,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,368,501
<EPS-BASIC> 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.
</FN>
</TABLE>
