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
-------------------------------------------------------
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
0-21560
----------------------------
CNL Income Fund XI, Ltd.
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3078854
(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 7-11
Part II
Other Information 12
<PAGE>
CNL INCOME FUND XI, 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 $2,799,124
and $2,455,129 $23,217,022 $23,561,017
Net investment in direct financing leases 6,539,506 6,611,661
Investment in joint ventures 2,528,168 2,567,786
Cash and cash equivalents 1,492,088 1,272,386
Receivables, less allowance for doubtful
accounts of $20,283 in 1998 28,202 119,575
Prepaid expenses 14,612 13,363
Accrued rental income 1,607,969 1,517,726
Other assets 122,024 122,024
----------------- -----------------
$35,549,591 $35,785,538
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 4,393 $ 6,508
Escrowed real estate taxes payable 24,764 19,410
Distributions payable 875,006 875,006
Due to related parties 5,263 6,648
Rents paid in advance and deposits 69,832 68,333
----------------- -----------------
Total liabilities 979,258 975,905
Minority interest 501,915 501,401
Partners' capital 34,068,418 34,308,232
----------------- -----------------
$35,549,591 $35,785,538
================= =================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
CNL INCOME FUND XI, 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 $ 672,887 $ 675,491 $2,023,869 $2,026,676
Earned income from direct financing
leases 195,141 208,391 608,546 629,142
Contingent rental income 50,903 46,040 113,667 115,123
Interest and other income 16,421 25,999 114,469 53,455
------------ ------------ ------------ ------------
935,352 955,921 2,860,551 2,824,396
------------ ------------ ------------ ------------
Expenses:
General operating and
administrative 43,130 36,804 117,587 111,662
Professional services 9,699 6,046 23,892 23,451
Management fees to related parties 9,923 9,327 28,975 27,575
Real estate taxes 2,179 -- 2,179 --
State and other taxes -- -- 24,370 25,779
Depreciation and amortization 114,665 114,665 343,995 344,584
------------ ------------ ------------ ------------
179,596 166,842 540,998 533,051
------------ ------------ ------------ ------------
Income Before Minority Interest in
Income of Consolidated Joint
Ventures and Equity in Earnings of
Unconsolidated Joint Ventures 755,756 789,079 2,319,553 2,291,345
Minority Interest in Income of
Consolidated Joint Ventures (16,760 ) (17,628 ) (50,684 ) (52,226 )
Equity in Earnings of Unconsolidated
Joint Ventures 58,730 58,782 156,335 163,945
------------ ------------ ------------ ------------
Net Income $ 797,726 $ 830,233 $2,425,204 $2,403,064
============ ============ ============ ============
Allocation of Net Income:
General partners $ 7,977 $ 8,303 $ 24,252 $ 24,031
Limited partners 789,749 821,930 2,400,952 2,379,033
------------ ------------ ------------ ------------
$ 797,726 $ 830,233 $2,425,204 $2,403,064
============ ============ ============ ============
Net Income Per Limited Partner Unit $ 0.20 $ 0.21 $ 0.60 $ 0.59
============ ============ ============ ============
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 XI, 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 $ 176,232 $ 143,281
Net income 24,252 32,951
---------------- ---------------
200,484 176,232
---------------- ---------------
Limited partners:
Beginning balance 34,132,000 34,369,896
Net income 2,400,952 3,262,128
Distributions ($0.67 and
$0.88 per limited partner
unit, respectively) (2,665,018 ) (3,500,024 )
---------------- ---------------
33,867,934 34,132,000
---------------- ---------------
Total partners' capital $34,068,418 $34,308,232
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CNL INCOME FUND XI, 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 $ 2,934,890 $ 2,743,042
---------------- ---------------
Cash Flows from Investing Activities:
Investment in joint ventures -- (1,044,750 )
Decrease in restricted cash -- 1,044,750
---------------- ---------------
Net cash provided by investing
activities -- --
---------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,665,018 ) (2,665,018 )
Distributions to holders of minority
interests (50,170 ) (41,783 )
---------------- ---------------
Net cash used in financing
activities (2,715,188 ) (2,706,801 )
---------------- ---------------
Net Increase in Cash and Cash Equivalents 219,702 36,241
Cash and Cash Equivalents at Beginning
of Period 1,272,386 1,225,860
---------------- ---------------
Cash and Cash Equivalents at End of
Period $ 1,492,088 $ 1,262,101
================ ===============
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Land and building under operating lease
exchanged for land and building under
operating lease $ 850,381 $ --
================ ===============
Distributions declared and unpaid at end of
period $ 875,006 $ 875,006
================ ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CNL INCOME FUND XI, 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 XI, Ltd. (the "Partnership") for the year ended December
31, 1997.
The Partnership accounts for its 85 percent interest in Denver Joint
Venture and its 77.33% interest in CNL/Airport Joint Venture using the
consolidation method. Minority interests represent the minority joint
venture partners' proportionate share of equity in the Partnership's
consolidated joint ventures. All significant intercompany accounts and
transactions have been eliminated.
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 September 1998, the tenant of the property in Columbus, Ohio,
exercised its option under the terms of its lease agreement, to
exchange one existing property with a replacement property. In
conjunction therewith, the Partnership exchanged the Burger King
property in Columbus, Ohio, for a Burger King property in Danbury,
Connecticut. The lease for the property in Columbus, Ohio, was amended
to allow the property in Danbury, Connecticut to continue under the
terms of the original lease. All closing costs were paid by the tenant.
The Partnership accounted for this as a nonmonetary exchange of similar
assets and recorded the acquisition of the property in Danbury,
Connecticut at the net book value of the property in Columbus, Ohio. No
gain or loss was recognized due to this being accounted for as a
nonmonetary exchange of similar assets.
5
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Subsequent Event:
In October 1998, the Partnership sold its property in Nashua, New
Hampshire, to a third party for $1,748,000 and received net sales
proceeds of $1,630,296, resulting in a gain of $461,862 for financial
reporting purposes.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund XI, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on August 20, 1991, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, 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 leases
are triple-net leases, with the lessees responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of September 30, 1998,
the Partnership owned 39 Properties, which included four Properties owned by
joint ventures in which the Partnership is a co-venturer and one Property owned
with an affiliate 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
$2,934,890 and $2,743,042 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 income and expenses as
described in "Results of Operations" below and changes in the Partnership's
working capital.
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
$1,492,088 invested in such short-term investments, as compared to $1,272,386 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.
In October 1998, the Partnership sold its Property in Nashua, New
Hampshire, to a third party for $1,748,000 and received net sales proceeds of
$1,630,296, resulting in a gain of $461,862 for financial reporting purposes.
The Partnership intends to reinvest the net sales proceeds in a replacement
Property.
Total liabilities of the Partnership, including distributions payable,
increased to $979,258 at September 30, 1998, from $975,905 at December 31, 1997.
The general partners believe that the Partnership has sufficient cash on hand to
meet its current working capital needs.
7
<PAGE>
Liquidity and Capital Resources - Continued
Based on cash from operations, and for the nine months ended September
30, 1998, accumulated excess operating reserves, the Partnership declared
distributions to the limited partners of $2,665,018 and $2,625,018 for the nine
months ended September 30, 1998 and 1997, respectively ($875,006 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions of
$0.67 and $0.66 per unit for the nine months ended September 30, 1998 and 1997,
respectively ($0.22 per unit for each applicable quarter). 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 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 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 ventures, Denver Joint Venture and CNL/Airport Joint
Venture, owned and leased 36 wholly owned Properties, and during the nine months
ended September 30, 1998, the Partnership and its consolidated joint ventures
owned and leased 37 wholly owned Properties (including one Property in Columbus,
Ohio exchanged for one Property in Danbury, Connecticut), 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, Denver Joint
Venture and CNL/Airport
8
<PAGE>
Results of Operations - Continued
Joint Venture earned $2,632,415 and $2,655,818, respectively, in rental income
from operating leases and earned income from direct financing leases, $868,028
and $883,882 of which was earned during the quarters ended September 30, 1998
and 1997, respectively.
In addition, for the nine months ended September 30, 1998 and 1997, the
Partnership owned and leased two Properties indirectly through other joint
venture arrangements and owned and leased one Property with an affiliate as
tenants-in-common. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Partnership earned $156,335 and $163,945,
respectively, attributable to net income earned by unconsolidated joint
ventures, $58,730 and $58,782 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. Net income earned by joint ventures
decreased during the nine months ended September 30, 1998, as compared to the
nine months ended September 30, 1997, due to Ashland Joint Venture adjusting
estimated contingent rental amounts accrued at December 31, 1997, to actual
amounts billed during the nine months ended September 30, 1998.
During the nine months ended September 30, 1998 and 1997, the
Partnership earned $114,469 and $53,455, respectively, in interest and other
income, $16,421 and $25,999 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in interest and other
income during the nine months ended September 30, 1998 was primarily
attributable to the Partnership collecting and recognizing $60,000 in other
income in May 1998, as a result of executing an amendment to a purchase and sale
agreement with a third party to extend the closing date for the Burger King
Property located in Nashua, New Hampshire. In accordance with the terms of the
amendment, the Partnership was deemed to have earned the $60,000 upon execution
of the amendment to extend the closing date of this Property. This Property was
sold in October 1998, as described above in "Liquidity and Capital Resources."
Operating expenses, including depreciation and amortization expense,
were $540,998 and $533,051 for the nine months ended September 30, 1998 and
1997, respectively, $179,596 and $166,842 of which were incurred during the
quarters ended September 30, 1998 and 1997, respectively.
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,
9
<PAGE>
Results of Operations - Continued
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 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
10
<PAGE>
Results of Operations - Continued
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.
11
<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.
12
<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 XI, 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 XI, 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 XI, 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> 1,492,088
<SECURITIES> 0
<RECEIVABLES> 48,485
<ALLOWANCES> 20,283
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 26,016,146
<DEPRECIATION> 2,799,124
<TOTAL-ASSETS> 35,549,591
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 34,068,418
<TOTAL-LIABILITY-AND-EQUITY> 35,549,591
<SALES> 0
<TOTAL-REVENUES> 2,860,551
<CGS> 0
<TOTAL-COSTS> 540,998
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,425,204
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,425,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,425,204
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund XI, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
