UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 422-1574
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($10 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
The Form 10-K of CNL Income Fund XI, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
PART I
Item 1. Business
CNL Income Fund XI, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 20, 1991. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on March 18, 1992, the
Partnership offered for sale up to $40,000,000 of limited partnership interests
(the "Units") (4,000,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
March 12, 1992. The offering terminated on September 28, 1992, at which date the
maximum offering proceeds of $40,000,000 had been received from investors who
were admitted to the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$35,200,000, and were used to acquire 39 Properties, including interests in four
Properties owned by joint ventures in which the Partnership is a co-venturer,
and to establish a working capital reserve for Partnership purposes. During the
year ended December 31, 1996, the Partnership sold its Property in Philadelphia,
Pennsylvania. During January 1997, the Partnership reinvested the net sales
proceeds from the sale of the Property in Philadelphia, Pennsylvania, in a
Black-eyed Pea Property located in Corpus Christi, Texas, with an affiliate of
the General Partners as tenants-in-common. As a result of these transactions, as
of December 31, 1997, the Partnership owned 39 Properties. The 39 Properties
included interests in 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. The Partnership leases the Properties on a triple-net basis
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities.
The Partnership will hold its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed. In general, the General Partners plan to seek the sale of some of
the Properties commencing seven to 12 years after their acquisition. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property purchase options
granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms, ranging from 14 to 20 years (the average being 18 years), and expire
between 2006 and 2016. All leases are on a triple-net basis, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. The leases of the Properties provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $45,600 to
$183,600. All of the leases provide for percentage rent, based on sales in
excess of a specified amount. In addition, some of the leases provide that,
commencing in specified lease years (generally the sixth lease year), the annual
base rent required under the terms of the lease will increase.
Generally, the leases of the Properties provide for two to five -year
renewal options subject to the same terms and conditions as the initial lease.
Certain lessees also have been granted options to purchase Properties at the
Property's then fair market value after a specified portion of the lease term
has elapsed. Under the terms of certain leases, the option purchase price may
equal the Partnership's original cost to purchase the Property (including
acquisition costs), plus a specified percentage from the date of the lease or a
specified percentage of the Partnership's purchase price, if that amount is
greater than the Property's fair market value at the time the purchase option is
exercised.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership first must
offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
In January 1997, the Partnership reinvested the net sales proceeds from
the sale of the Property in Philadelphia, Pennsylvania, in a Black-eyed Pea
Property located in Corpus Christi, Texas, with an affiliate of the General
Partners, as tenants-in-common, as described below in "Joint Venture
Arrangements." The lease terms for this Property are substantially the same as
the Partnership's other leases, as described above in the first three paragraphs
of this section.
Major Tenants
During 1997, five lessees (or group of affiliated lessees) of the
Partnership and its consolidated joint ventures, (i) Golden Corral Corporation,
(ii) Foodmaker, Inc., (iii) Burger King Corporation and BK Acquisition, Inc.
(which are affiliated entities under common control) (hereinafter referred to as
Burger King Corporation), (iv) Flagstar Enterprises, Inc., Denny's, Inc. and
Quincy's Restaurants, Inc. (which are affiliated entities under common control
of Flagstar Corporation) (hereinafter referred to as Flagstar Corporation), and
DenAmerica Corporation each contributed more than ten percent of the
Partnership's total rental income (including rental income from the
Partnership's consolidated joint ventures, the Partnership's share of rental
income from two Properties owned by unconsolidated joint ventures and one
Property owned with an affiliate as tenants-in-common). As of December 31, 1997,
Golden Corral Corporation was the lessee under leases relating to three
restaurants, Foodmaker, Inc. was the lessee under leases relating to eight
restaurants, Burger King Corporation was the lessee under leases relating to
eight restaurants, Flagstar Corporation was the lessee under leases relating to
nine restaurants and DenAmerica Corporation was the lessee under leases relating
to five restaurants. It is anticipated that, based on the minimum rental
payments required by the leases, these five lessees (or group of affiliated
lessees) each will continue to contribute more than ten percent of the
Partnership's total rental income in 1998 and subsequent years. In addition,
four Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden
Corral"), Jack in the Box, Burger King and Denny's, each accounted for more than
ten percent of the Partnership's total rental income during 1997 (including
rental income from the Partnership's consolidated joint ventures, the
Partnership's share of rental income from two Properties owned by unconsolidated
joint ventures and one Property owned with an affiliate as tenants-in-common).
In subsequent years, it is anticipated that these four Restaurant Chains each
will continue to account for more than ten percent of the Partnership's total
rental income to which the Partnership is entitled under the terms of the
leases. Any failure of these lessees or Restaurant Chains could materially
affect the Partnership's income. No single tenant or group of affiliated tenants
lease Properties with an aggregate carrying value in excess of 20 percent of the
total assets of the Partnership.
Joint Venture Arrangements and Tenancy in Common Arrangements
The Partnership has entered into two separate joint venture
arrangements: Denver Joint Venture with an unaffiliated entity to purchase and
hold one Property and CNL/Airport Joint Venture with an unaffiliated entity to
purchase and hold one Property. In addition, the Partnership has entered into
two separate joint venture arrangements: Ashland Joint Venture with CNL Income
Fund IX, Ltd. and CNL Income Fund X, Ltd., affiliates of the General Partners,
to purchase and hold one Property; and Des Moines Real Estate Joint Venture with
CNL Income Fund VII, Ltd. and CNL Income Fund XII, Ltd., affiliates of the
General Partners, to purchase and hold one Property. Each of the affiliates is a
limited partnership organized pursuant to the laws of the State of Florida.
The joint venture arrangements provide for the Partnership and its
joint venture partners to share in all costs and benefits associated with the
joint ventures in accordance with their respective percentage interests in the
joint ventures. The Partnership has an 85 percent interest in Denver Joint
Venture, a 77.33% interest in CNL/Airport Joint Venture, a 62.16% interest in
Ashland Joint Venture and a 76.6% interest in Des Moines Real Estate Joint
Venture. The Partnership and its joint venture partners are also jointly and
severally liable for all debts, obligations and other liabilities of the joint
ventures.
CNL/Airport Joint Venture, Denver Joint Venture and Des Moines Real
Estate Joint Venture each have an initial term of 20 years and Ashland Joint
Venture has an initial term of 30 years and, after the expiration of the initial
term, continue in existence from year to year unless terminated at the option of
any of the joint venturers or by an event of dissolution. Events of dissolution
include the bankruptcy, insolvency or termination of any joint venturer, sale of
the Property owned by the joint venture and mutual agreement of the Partnership
and its joint venture partners to dissolve the joint venture.
The Partnership has management control of CNL/Airport Joint
Venture and Denver Joint Venture and shares management control equally with
affiliates of the General Partners for Ashland Joint Venture and Des Moines Real
Estate Joint Venture. The joint venture agreements restrict each venturer's
ability to sell, transfer or assign its joint venture interest without first
offering it for sale to its joint venture partners, either upon such terms and
conditions as to which the venturers may agree or, in the event the venturers
cannot agree, on the same terms and conditions as any offer from a third party
to purchase such joint venture interest.
Net cash flow from operations of CNL/Airport Joint Venture, Denver
Joint Venture, Ashland Joint Venture and Des Moines Real Estate Joint Venture is
distributed 77.33%, 85 percent, 62.16% and 76.6%, respectively, to the
Partnership and the balance is distributed to each of the joint venture partners
in accordance with its respective percentage interest in the joint venture. Any
liquidation proceeds, after paying joint venture debts and liabilities and
funding reserves for contingent liabilities, will be distributed first to the
joint venture partners with positive capital account balances in proportion to
such balances until such balances equal zero, and thereafter in proportion to
each joint venture partner's percentage interest in the joint venture.
In addition to the above joint venture agreements, in January 1997, the
Partnership entered into an agreement to hold a Black-eyed Pea Property as
tenants-in-common , with CNL Income Fund XVII, Ltd., an affiliate of the General
Partners. The agreement provides for the Partnership and the affiliate to share
in the profits and losses of the Property in proportion to each co- tenant's
percentage interest. The Partnership owns a 72.50 percent interest in this
Property. The affiliate is a limited partnership organized pursuant to the laws
of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
CNL Income Fund Advisors, Inc., an affiliate of the General Partners,
provided certain services relating to management of the Partnership and its
Properties pursuant to a management agreement with the Partnership through
September 30, 1995. Under this agreement, CNL Income Fund Advisors, Inc. was
responsible for collecting rental payments, inspecting the Properties and the
tenants' books and records, assisting the Partnership in responding to tenant
inquiries and notices and providing information to the Partnership about the
status of the leases and the Properties. CNL Income Fund Advisors, Inc. also
assisted the General Partners in negotiating the leases. For these services, the
Partnership had agreed to pay CNL Income Fund Advisors, Inc. an annual fee of
one percent of the sum of gross rental revenues from Properties wholly owned by
the Partnership plus the Partnership's allocable share of gross revenues of
joint ventures in which the Partnership is a co-venturer, but not in excess of
competitive fees for comparable services.
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and its obligations under, the management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
management agreement, including the payment of fees, as described above, remain
unchanged.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
1
<PAGE>
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL Fund Advisors, Inc. perform
certain services for the Partnership. In addition, the General Partners have
available to them the resources and expertise of the officers and employees of
CNL Group, Inc., a diversified real estate company, and its affiliates, who may
also perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1997, the Partnership owned 39 Properties. Of the 39
Properties, 34 are owned by the Partnership in fee simple, four are owned
through joint venture arrangements and one Property is owned through a tenancy
in common arrangement. See Item 1. Business - Joint Venture and Tenancy in
Common Arrangements. The Partnership is not permitted to encumber its Properties
under the terms of its partnership agreement. Reference is made to the Schedule
of Real Estate and Accumulated Depreciation filed with this report for a listing
of the Properties and their respective costs, including acquisition fees and
certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 18,000
to 329,000 square feet depending upon building size and local demographic
factors. Sites purchased by the Partnership are in locations zoned for
commercial use which have been reviewed for traffic patterns and volume.
2
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
State Number of Properties
----- --------------------
Alabama 2
Arizona 1
California 1
Colorado 2
Connecticut 1
Florida 2
Kansas 1
Louisiana 1
Massachusetts 1
Michigan 1
Mississippi 1
North Carolina 2
New Hampshire 2
New Mexico 2
Ohio 5
Oklahoma 2
South Carolina 2
Texas 8
Virginia 1
Washington 1
-------
TOTAL PROPERTIES: 39
=======
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes range from approximately
2,100 to 11,400 square feet. All buildings on Properties are freestanding and
surrounded by paved parking areas. Buildings are suitable for conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations. As of December 31, 1997, the Partnership had no plans for
renovation of the Properties. Depreciation expense is computed for buildings and
improvements using the straight line method using a depreciable life of 40 years
for federal income tax purposes. As of December 31, 1997, the aggregate cost
basis of the Properties owned by the Partnership (including its consolidated
joint ventures), and the unconsolidated joint ventures (including the Property
owned through a tenancy in common arrangement) for federal income tax purposes
was $32,903,294 and $3,449,716, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
---------------- --------------------
Black-Eyed Pea 1
Burger King 12
Denny's 7
Golden Corral 3
Hardee's 5
Jack in the Box 8
KFC 1
Quincy's 2
-------
TOTAL PROPERTIES 39
=======
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 1997, 1996, 1995, 1994, and 1993 all of the Properties
were occupied. The following is a schedule of the average annual rent for each
of the five years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
For the Year Ended December 31:
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------
Rental Revenues (1) $4,071,074 $4,033,108 $3,975,403 $4,009,745 $3,828,735
Properties 39 38 39 39 39
Average Rent per Unit $104,387 $106,134 $101,933 $102,814 $98,173
</TABLE>
(1) Rental revenues include the Partnership's share of rental
revenues from the four Properties owned through joint
venture arrangements and the one property owned through a
tenancy in common arrangement. Rental revenues have been
adjusted, as applicable, for any amounts for which the
Partnership has established an allowance for doubtful
accounts.
4
<PAGE>
The following is a schedule of lease expirations for leases in place as
of December 31, 1997 for each of the ten years beginning with 1998 and
thereafter.
<TABLE>
<CAPTION>
<S> <C>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
----------------------- ------------------ ------------------- --------------
1998 - - -
1999 - - -
2000 - - -
2001 - - -
2002 - - -
2003 - - -
2004 - - -
2005 - - -
2006 8 725,920 18.87%
2007 3 498,758 12.97%
Thereafter 28 2,621,894 68.16%
-------- ------------- --------------
Totals 39 3,846,572 100.00%
</TABLE>
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1997 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Golden Corral Corporation leases three Golden Corral restaurants with an
initial terms of 15 years (expiring in 2007) and average minimum base annual
rent of approximately $166,300 (ranging from approximately $157,300 to
$172,400).
Foodmaker, Inc. leases eight Jack in the Box restaurants with an initial
term of 18 years (expiring in 2010) and the average minimum base annual rent is
approximately $87,500 (ranging from approximately $63,600 to $103,400).
Burger King Corporation leases eight Burger King restaurants with an
initial term of 14 years (expiring in 2006) and average minimum base annual rent
of approximately $94,800 (ranging from approximately $73,200 to $124,700).
Flagstar Corporation leases five Hardee's restaurants, two Denny's
restaurants and two Quincy's restaurants with an initial term of 20 years
(expiring in 2012) and the average minimum base annual rent is approximately
$79,900 (ranging from approximately $57,100 to $116,000).
DenAmerica Corporation leases four Denny's restaurants and one Black-Eyed
Pea restaurant with an initial term of 20 years (expiring between 2012 and 2016)
and average minimum base annual rent of approximately $98,200 (ranging from
approximately $52,800 to $142,700).
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
At the time the Partnership elects to dispose of its Properties, other
than as a result of the exercise of tenant options to purchase Properties, the
Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
5
<PAGE>
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on August 20, 1991, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are triple-net leases, with the lessees generally responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1997, the Partnership owned 39 Properties, either directly or through joint
venture or tenancy in common arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended December
31, 1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $3,642,796, $3,601,714 and
$3,652,185 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash from operations during 1997, as compared to 1996, is
primarily a result of changes in income and expenses as described in "Results of
Operations" below, and the decrease during 1996, as compared to 1995, is
primarily a result of changes in the Partnership's working capital during each
of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
In November 1996, the Partnership sold its Property in Philadelphia,
Pennsylvania, for $1,050,000 and received net sales proceeds of $1,044,750,
resulting in a gain of $213,685 for financial reporting purposes. This Property
was originally acquired by the Partnership in September 1992, and had a cost of
approximately $877,900, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately
$166,900 in excess of its original purchase price. As of December 31, 1996, the
net sales proceeds of $1,044,750, plus accrued interest of $3,072, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional Property. The sale of this Property was
structured to qualify as a like-kind exchange transaction in accordance with
Section 1031 of the Internal Revenue Code. As a result, no gain was recognized
for federal income tax purposes. Therefore, the Partnership was not required to
distribute any of the net sales proceeds from the sale of this Property to
Limited Partners for the purpose of paying federal and state income taxes.
6
<PAGE>
In January 1997, the Partnership reinvested the net sales proceeds from
the 1996 sale of the Property in Philadelphia, Pennsylvania, in a Black-eyed Pea
Property located in Corpus Christi, Texas, with an affiliate of the General
Partners as tenants-in-common. In connection therewith, the Partnership and the
affiliate entered into an agreement whereby each co-venturer will share in the
profits and losses of the Property in proportion to its applicable percentage
interest. As of December 31, 1997, the Partnership owned a 72.5% interest in
this Property.
During 1996, the Partnership entered into an agreement with an unrelated
third party to sell the Burger King Property in Nashua, New Hampshire. The
General Partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the Property; however, as of February 28,
1998, the sale had not occurred.
None of the Properties owned by the Partnership, or the joint ventures or
the tenancy in common arrangement in which the Partnership owns an interest, is
or may be encumbered. Subject to certain restrictions on borrowing, however, the
Partnership may borrow funds but will not encumber any of the Properties in
connection with any such borrowing. The Partnership will not borrow for the
purpose of returning capital to the Limited Partners. The Partnership will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Partnership. The General Partners further have represented that
they will use their reasonable efforts to structure any borrowing so that it
will not constitute "acquisition indebtedness" for federal income tax purposes
and also will limit the Partnership's outstanding indebtedness to three percent
of the aggregate adjusted tax basis of its Properties. Affiliates of the General
Partners from time to time incur certain operating expenses on behalf of the
Partnership for which the Partnership reimburses the affiliates without
interest.
Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of Properties 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, CDs 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 partners. At December 31, 1997, the Partnership had $1,272,386
invested in such short-term
investments as compared to $1,225,860 at December 31, 1996. As of December 31,
1997, the average interest rate earned on the rental income deposited in demand
deposit accounts at commercial banks was approximately three percent annually.
The funds remaining at December 31, 1997, after payment of distributions and
other liabilities, will be used to meet the Partnership's working capital and
other needs.
7
<PAGE>
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.
Due to low operating expenses and ongoing cash flow, the General Partners
believe that the Partnership has sufficient working capital reserves at this
time. In addition, because all leases of the Partnership's Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining after
the payment of the operating expenses of the Partnership, to the extent that the
General Partners determine that such funds are available for distribution. Based
on cash from operations, and during the years ended December 31, 1996 and 1995,
cumulative excess operating reserves, the Partnership declared distributions to
the Limited Partners of $3,500,024, $3,540,024 and $3,540,023 for the years
ended December 31, 1997, 1996 and 1995, respectively. This represents a
distribution of $0.88 per Unit for the year ended December 31, 1997 and $0.89
per Unit for each of the years ended December 31, 1996 and 1995. The General
Partners anticipate that the Partnership will declare a special distribution to
the Limited Partners during the quarter ending March 31, 1998, representing
cumulative excess operating reserves. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, 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.
During 1997, 1996 and 1995, affiliates of the General Partners incurred
$83,747, $105,643 and $92,276, respectively, for certain operating expenses. As
of December 31, 1997 and 1996, the Partnership owed $6,648 and $2,121,
respectively, to affiliates for such amounts, accounting and administrative
services and management fees. As of February 28, 1998, the Partnership had
reimbursed the affiliates all such amounts. Other liabilities, including
distributions payable, decreased to $969,257 at December 31, 1997, from $999,977
at December 31, 1996, partially as the result of the Partnership's accruing a
special distribution payable to the Limited Partners of $40,000 at December 31,
1996, which was paid in January 1997. 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 years ended December 31, 1996 and 1995, the Partnership owned
and leased 35 wholly owned Properties (including one Property in Philadelphia,
Pennsylvania, which was sold in November 1996). During the year ended December
31, 1997, the Partnership owned and leased 34 wholly owned Properties. In
addition, during 1997, 1996 and 1995, the Partnership was a co-venturer in four
separate joint ventures that each owned and leased one Property, and during
1997, the Partnership owned and leased one Property with an affiliate as
tenants-in-common. As of December 31, 1997, the Partnership owned, either
directly or through joint venture arrangements, 39 Properties which are subject
to long-term, triple-net leases. The leases of the Properties provide for
minimum base annual rental amounts (payable in monthly installments) ranging
from approximately $45,600 to $183,600. All of the leases provide for percentage
rent based on sales in excess of a specified amount. In addition, some of the
leases provide that, commencing in specified lease years (generally the sixth
lease year), the annual base rent required under the terms of the lease will
increase. For further description of the Partnership's leases and Properties,
see Item 1. Business - Leases and Item 2.
Properties, respectively.
During the years ended December 31, 1997, 1996 and 1995, the
Partnership and its consolidated joint ventures, Denver Joint Venture and
CNL/Airport Joint Venture, earned $3,543,984, $3,615,977 and $3,609,385,
respectively, in rental income from operating leases and earned income from
direct financing leases. The decrease in rental and earned income during 1997 as
compared to 1996, is primarily attributable to the sale of the Property in
Philadelphia, Pennsylvania in November 1996, as described above in "Capital
Resources." In January 1997, the Partnership reinvested the net sales proceeds
in a Property in Corpus Christi, Texas, with an affiliate of the General
Partners, as described above in "Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Partnership also
earned $225,888, $251,312 and $200,198, respectively, in contingent rental
income. The decrease during 1997, as compared to 1996, is primarily due to the
sale of the Property in Philadelphia, Pennsylvania. The increase in contingent
rental income during 1996, as compared to 1995, is primarily due to an increase
in gross sales of certain restaurant properties whose leases require the payment
of contingent rental income.
8
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In addition, for the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $236,103, $118,211 and $118,384, respectively, attributable
to net income earned by unconsolidated joint ventures in which the Partnership
is a co-venturer. The increase in net income earned by unconsolidated joint
venture during 1997, as compared to 1996, is primarily attributable to the
Partnership investing in a Property in Corpus Christi, Texas, in January 1997,
with an affiliate of the General Partners as tenants-in-common, as described
above in "Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
five lessees (or group of affiliated lessees) of the Partnership and its
consolidated joint ventures, Golden Corral Corporation, Foodmaker, Inc., Burger
King Corporation, Den America and Flagstar Corporation, each contributed more
than ten percent of the Partnership's total rental income (including rental
income from the Partnership's consolidated joint ventures, the Partnership's
share of rental income from two Properties owned by unconsolidated joint
ventures and one Property owned with an affiliate as tenants-in-common). As of
December 31, 1997, Golden Corral Corporation was the lessee under leases
relating to three restaurants, Foodmaker, Inc. was the lessee under leases
relating to eight restaurants, Burger King Corporation was the lessee under
leases relating to eight restaurants, Flagstar Corporation was the lessee under
leases relating to nine restaurants, and DenAmerica Corporation was the lessee
under leases relating to five restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, these five lessees or groups of
affiliated lessees, each will continue to contribute more than ten percent of
the Partnership's total rental income during 1998 and subsequent years. In
addition, during at least one of the years ended December 31, 1997, 1996 and
1995 four Restaurant Chains, Golden Corral, Jack in the Box, Burger King and
Denny's, each accounted for more than ten percent of the Partnership's total
rental income (including rental income from the Partnership's consolidated joint
ventures and the Partnership's share of rental income from two Properties owned
by unconsolidated joint ventures and one Property owned with an affiliate as
tenants-in-common). In subsequent years, it is anticipated that these Restaurant
Chains each will continue to account for more than ten percent of the total
rental income to which the Partnership is entitled under the terms of its
leases. Any failure of these lessees or Restaurant Chains could materially
affect the Partnership's income.
Operating expenses, including depreciation and amortization expense, were
$703,459, $725,767 and $718,352 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997 as compared
to 1996 is primarily attributable to a decrease in depreciation expense as a
result of the sale of the Property in Philadelphia, Pennsylvania. The increase
in operating expenses during 1996, as compared to 1995,
is primarily the result of an increase in accounting and administrative
expenses associated with operating the Partnership and its Properties, and an
increase in insurance expense as a result of the General Partners' obtaining
contingent liability and property coverage for the Partnership beginning in May
1995.
The increase in operating expenses during 1996, as compared to 1995, was
partially offset by the Partnership receiving a state tax refund during 1996,
for state taxes paid in prior years and by a decrease in depreciation expense as
a result of the sale of the Property in Philadelphia, Pennsylvania, in November
1996, as described above in "Capital Resources."
As a result of the sale of the Property in Philadelphia, Pennsylvania, as
described above in "Capital Resources," the Partnership recognized a gain of
$213,685 for financial reporting purposes for the year ended December 31, 1996.
No Properties were sold during the years ended December 31, 1997 or 1995.
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on its computer package software. The
hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the General Partners do not expect this matter to materially impact
how the Partnership conducts business nor its current or future results of
operations or financial position.
The Partnership's leases as of December 31, 1997, are triple-net leases
and contain provisions that the General Partners believe mitigate the adverse
effect of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also may cause capital appreciation of the
Partnership's Properties. Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.
9
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
July, 1999.
CNL INCOME FUND XI, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
--------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
--------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
------------------------
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert A. Bourne President, Treasurer and July 29, 1999
- -------------------- Director (Principal Financial
Robert A. Bourne and Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer July 29, 1999
- ------------------------ and Director (Principal
James M. Seneff, Jr. Executive Officer)
<PAGE>
