<PAGE>
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, 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 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) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($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 4,000,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $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,
1998 is being amended to revise the disclosure under Item 1. Business and Item
2. Properties, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 8. Financial Statements and
Supplementary Data.
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. During 1998, the Partnership sold its
Property in Nashua, New Hampshire. As a result of these transactions, as of
December 31, 1998, the Partnership owned 38 Properties. The 38 Properties
include 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. In
January 1999, the Partnership reinvested a portion of the net sales proceeds
from the sale of the Property in Nashua, New Hampshire in a Property in Yelm,
Washington. In February 1999, the Partnership invested the remaining net sales
proceeds from the sale of the Property in Nashua, New Hampshire in a joint
venture arrangement, Portsmouth Joint Venture, with an affiliate of the General
Partners. The Partnership leases the Properties on a triple-net basis with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities.
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger. At a special meeting of the partners that is expected to be held in
the 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.
In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives. In deciding whether to sell Properties, the
General Partners will consider factors such as potential capital appreciation,
net cash flow and federal income tax considerations. Certain lessees also have
been granted options to purchase Properties, generally at the Property's then
fair market value after a specified portion of the lease term has elapsed. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property purchase options
granted to certain lessees.
2
<PAGE>
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, the
joint ventures in which the Partnership is a co-venturer and the property owned
with an affiliate as tenants-in-common 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 $191,900. The majority of
the leases provide for percentage rent, based on sales in excess of a specified
amount. In addition, some of the leases provide that, commencing in specified
lease years (generally 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 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. Fair market value will be determined through an appraisal by an
independent appraisal firm. 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.
During 1994, the leases relating to the Properties in Wadsworth and Kent,
Ohio were amended to provide for the payment of reduced annual base rent with no
scheduled rent increases. However, the lease amendments provided for lower
percentage rent breakpoints, as compared to the original lease agreements, a
change that was designed to result in higher percentage rent payments at any
time that percentage rent became payable. In accordance with a provision in the
amendments, as a result of the former tenant assigning the leases to a new
tenant during 1998, the rents under the assigned leases reverted back to those
required under the original lease agreements.
In January 1999, the Partnership reinvested the net sales proceeds from the
sale of the Property in Nashua, New Hampshire in a Burger King Property located
in Yelm, Washington. 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 1998, 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) Denny's, Inc. and Quincy's Restaurants, Inc.
(which are affiliated entities under common control of Advantica Restaurant
Group, Inc.) (hereinafter referred to as Advantica Restaurant Group, Inc.), 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, 1998,
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
seven restaurants, Advantica Restaurant Group, Inc. was the lessee under leases
relating to five 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 1999. 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 1998 (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 1999, 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
3
<PAGE>
is entitled under the terms of the leases. Any failure of these lessees or
Restaurant Chains could materially affect the Partnership's income if the
Partnership is not able to re-lease the Properties in a timely manner. 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 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 the
following 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 ventures 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, in February 1999, the Partnership entered into a joint venture
arrangement, Portsmouth, Joint Venture, with CNL Income Fund XVIII, Ltd., an
affiliate of the General Partners, to purchase and hold one restaurant Property.
The joint venture agreement provides for the Partnership and its joint venture
partner to share in all costs and benefits associated with the joint venture in
proportion to each partner's percentage interest in the joint venture. The
Partnership owns an approximate 43 percent interest in the profits and losses of
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 72.58 percent interest in this
Property.
4
<PAGE>
Each of the affiliates 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 Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties. CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases. For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one percent of the sum of gross rental
revenues from Properties wholly owned by the Partnership plus the Partnership's
allocable share of gross revenues of joint ventures in which the Partnership is
a co-venturer, but not in excess of competitive fees for comparable services.
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.
Employees
The Partnership has no employees. The officers of CNL Realty Corporation
and the officers and employees of CNL Fund Advisors, Inc. perform certain
services for the Partnership. In addition, the General Partners have available
to them the resources and expertise of the officers and employees of CNL Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1998, the Partnership owned 38 Properties. Of the 38
Properties, 33 are owned by the Partnership in fee simple, four are owned
through joint venture arrangements and one 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 for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses. This schedule was filed with the Partnership's Form 10-K for the year
ended December 31, 1998.
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.
5
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1998 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with the Partnership's Form 10-K for the year ended December
31, 1998.
<TABLE>
<CAPTION>
State Number of Properties
----- --------------------
<S> <C>
Alabama 2
Arizona 1
California 1
Colorado 2
Connecticut 2
Florida 2
Kansas 1
Louisiana 1
Massachusetts 1
Michigan 1
Mississippi 1
North Carolina 2
New Hampshire 1
New Mexico 2
Ohio 4
Oklahoma 2
South Carolina 2
Texas 8
Virginia 1
Washington 1
-------
TOTAL PROPERTIES: 38
=======
</TABLE>
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, 1998, the Partnership had no plans for
renovation of the Properties. Depreciation expense is computed for buildings and
improvements using the straight line method using depreciable lives of 40 years
for federal income tax purposes. As of December 31, 1998, the aggregate cost of
the Properties owned by the Partnership (including its consolidated joint
venture), and the unconsolidated joint ventures (including the Property owned
through a tenancy in common arrangement) for federal income tax purposes was
$31,502,465 and $3,846,023, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 1998 by Restaurant Chain.
<TABLE>
<CAPTION>
Properties Number of Properties
---------- --------------------
<S> <C>
Black-eyed Pea 1
Burger King 11
Denny's 7
Golden Corral 3
Hardee's 5
Jack in the Box 8
KFC 1
Quincy's 2
------
TOTAL PROPERTIES: 38
======
</TABLE>
6
<PAGE>
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, 1998, 1997, 1996, 1995, and 1994 all of the Properties were
occupied. The following is a schedule of the average annual rent for each of the
five years ended with December 31:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Rental Income (1) $4,064,778 $4,071,074 $4,033,108 $3,975,403 $4,009,745
Properties 38 39 38 39 39
Average per Unit $ 106,968 $ 104,387 $ 106,134 $ 101,933 $ 102,814
</TABLE>
(1) Rental income includes the Partnership's share of rental income from the
Properties owned through joint venture arrangements and the 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.
The following is a schedule of lease expirations for leases in place as of
December 31, 1998 for each of the ten years beginning with 1999 and thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
- ---------------------- ------------------ ------------------ ---------------------
<S> <C> <C> <C>
1999 -- -- --
2000 -- -- --
2001 -- -- --
2002 -- -- --
2003 -- -- --
2004 -- -- --
2005 -- -- --
2006 7 601,176 16.15%
2007 3 498,758 13.40%
2008 -- -- --
Thereafter 28 2,621,894 70.45%
------ --------- ------
Totals 38 3,721,828 100.00%
====== ========= ======
</TABLE>
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1998 (see Item 1. Business -Major
Tenants), are substantially the same as those described in Item 1. Business -
Leases.
7
<PAGE>
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 $96,300 (ranging from approximately $70,000 to $113,800).
Burger King Corporation leases seven Burger King restaurants with an
initial term of 14 years (expiring in 2006) and average minimum base annual rent
of approximately $90,500 (ranging from approximately $73,200 to $121,900).
Advantica Restaurant Group, Inc. leases one Hardee's restaurant, 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 $97,200 (ranging from approximately $71,800 to $129,900).
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 $109,000 (ranging from
approximately $67,500 to $153,800).
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.
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, 1998, the Partnership owned 38 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, 1998, 1997, and 1996, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $3,894,062, $3,642,796, and
$3,601,714 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase during 1998, as compared to 1997, is primarily a result of changes
in the Partnership's working capital and changes in income and expenses as
described in "Results of Operations" below, and 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.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
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,
8
<PAGE>
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.
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, 1998, the Partnership owned a 72.58% interest in
this Property.
In October 1998, the Partnership sold its Property in Nashua, New
Hampshire, for $1,748,000 and received net sales proceeds of $1,630,296,
resulting in a gain of $461,861 for financial reporting purposes. This Property
was originally acquired by the Partnership in 1992, and had a cost of
approximately $1,302,414, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $327,900 in excess of its original purchase price. As of December
31, 1998, the net sales proceeds of $1,630,296, plus accrued interest of
$10,640, were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional Property. The
Partnership anticipates that it will distribute amounts sufficient to enable the
Limited Partners to pay federal and state income taxes, if any (at a level
reasonably assumed by the General Partners), resulting from the sale.
In January 1999, the Partnership reinvested a portion of the net sales
proceeds it received from the sale of the property in Nashua, New Hampshire, in
a Burger King property located in Yelm, Washington, at an approximate cost of
$1,034,000. In addition, in February 1999, the Partnership reinvested the
remaining net sales proceeds it received from the sale of the property in
Nashua, New Hampshire, in a joint venture arrangement, Portsmouth Joint Venture,
with an affiliate of the General Partners, to purchase and hold one restaurant
property, at a total cost of approximately $584,100. The Partnership contributed
approximately $250,000 and has an approximate 43 percent interest in the profits
and losses of the joint venture.
None of the Properties owned by the Partnership, or the joint ventures or
tenancy in common arrangements 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 addition
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, 1998, the Partnership had $1,559,240
invested in such short-term investments as compared to $1,272,386 at December
31, 1997. As of December 31, 1998, 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, 1998,
after payment of distributions and other liabilities, will be used to meet the
Partnership's working capital and other needs.
9
<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, 1998 and 1996,
cumulative excess operating reserves, the Partnership declared distributions to
the Limited Partners of $3,660,024, $3,500,024, and $3,540,024 for the years
ended December 31, 1998, 1997, and 1996, respectively. This represents a
distribution of $0.92, $0.88, and $0.89 per Unit for the years ended December
31, 1998, 1997, and 1996, respectively. No amounts distributed to the Limited
Partners for the years ended December 31, 1998, 1997, and 1996, are required to
be or have been treated by the Partnership as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis.
During 1998, 1997, and 1996, affiliates of the General Partners incurred
$109,290, $83,747, and $105,643, respectively, for certain operating expenses.
As of December 31, 1998 and 1997, the Partnership owed $25,446 and $6,648,
respectively, to affiliates for such amounts, accounting and administrative
services and management fees. As of March 11, 1999, the Partnership had
reimbursed the affiliates all such amounts. Other liabilities, including
distributions payable, increased to $1,116,674 at December 31, 1998, from
$969,257 at December 31, 1997, partially as the result of the Partnership's
accruing a special distribution payable to the Limited Partners of $120,000 at
December 31, 1998, which was paid in January 1999 and an increase in rents paid
in advance at December 31, 1998. The General Partners believe that the
Partnership has sufficient cash on hand to meet its current working capital
needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During the year ended December 31, 1996, the Partnership and its
consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint Venture,
owned and leased 37 wholly owned Properties (including one Property in
Philadelphia, Pennsylvania, which was sold in November 1996). During the year
ended December 31, 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 year ended December 31, 1998, the Partnership
and its consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, owned and leased 37 wholly owned Properties (including one Property in
Columbus, Ohio exchanged for one Property in Danbury, Connecticut and one
Property in Nashua, New Hampshire, which was sold in October 1998). In addition,
during 1998, 1997, and 1996, the Partnership and its consolidated joint
ventures, Denver Joint Venture and CNL/Airport Joint Venture, was a co-venturer
in two separate joint ventures that each owned and leased one Property, and
during 1998 and 1997, the Partnership owned and leased one Property with an
affiliate as tenants-in-common. As of December 31, 1998, the Partnership owned,
either
10
<PAGE>
directly or through joint venture arrangements, 38 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 $191,900. The majority of the leases provide for
percentage rent based on sales in excess of a specified amount. In addition,
some of the leases provide that, commencing in specified lease years (generally
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, 1998, 1997, and 1996, the Partnership
and its consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, earned $3,537,605, $3,543,984, and $3,615,977, 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, 1998, 1997, and 1996, the Partnership also
earned $243,115, $225,888, and $251,312, respectively, in contingent rental
income. The increase in contingent rental income during 1998, as compared to
1997, is primarily due to an increase in gross sales of certain restaurant
Properties whose leases require the payment of contingent renal income. The
decrease during 1997, as compared to 1996, is primarily due to the sale of the
Property in Philadelphia, Pennsylvania.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $215,501, $236,103, and $118,211, respectively, attributable
to net income earned by unconsolidated joint ventures in which the Partnership
is a co-venturer. The decrease in net income earned by joint ventures during
1998, as compared to 1997, is primarily due to Ashland Joint Venture adjusting
estimated contingent rental amounts accrued at December 31, 1997 to actual
amounts billed during 1998. The increase in net income earned by unconsolidated
joint ventures 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 the year ended December 31, 1998, five lessees (or group of
affiliated lessees) of the Partnership and its consolidated joint ventures,
Golden Corral Corporation, Foodmaker, Inc., Burger King Corporation, DenAmerica,
and Advantica Restaurant Group, Inc., 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, 1998,
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
seven restaurants, Advantica Restaurant Group, Inc. was the lessee under leases
relating to five 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 tenants each will
continue to contribute more than ten percent of the Partnership's total rental
income during 1999. In addition, during the year ended December 31, 1998, 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 1999, 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 if the Partnership is not able to re-lease the Properties in a timely
manner.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $139,707, $62,440, and $61,403, respectively, in interest and
other income. The increase in interest and other income during 1998, as compared
to 1997, 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
11
<PAGE>
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 "Capital
Resources."
Operating expenses, including depreciation and amortization expense, were
$719,911, $703,459, and $725,767 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during 1998, as
compared to 1997, is primarily a result of the Partnership incurring $20,888 in
transaction costs relating to the General Partners retaining financial and legal
advisors to assist them in evaluating and negotiating the proposed Merger with
APF, as described 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.
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.
As a result of the sale of the Property in Nashua, New Hampshire, as
described above in "Capital Resources," the Partnership recognized a gain of
$461,861 for financial reporting purposes for the year ended December 31, 1998.
In addition, 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 year ended December
31, 1997.
The Partnership's leases as of December 31, 1998, 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.
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. As consideration for the Merger, APF has agreed to issue
4,394,196 APF Shares. 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 fair value of the Partnership's property portfolio and other
assets was $43,333,961 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 Limited
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.
Year 2000 Readiness Disclosure
Overview of Year 2000 Problem
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. The failure to accurately recognize the year
2000 could result in a variety of problems from data miscalculations to the
failure of entire systems.
12
<PAGE>
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information technology
systems. The General Partners and their affiliates 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 General Partners' affiliates 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 are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the General Partners and their affiliates formed a Year 2000
committee (the "Y2K 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 their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections,
interviews and tests to identify which of the systems used by the Partnership
could have a potential year 2000 problem.
The information system of the General Partners' affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the non-
information technology systems providers of the affiliates.
In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.
As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties. All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year 2000
compliant or will be year 2000 compliant prior to the year 2000. Although the
Y2K Team continues 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 third parties have
adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. The Y2K Team is in the process of evaluating the
responses and expects to complete this process by October 31, 1999. The
Partnership has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.
13
<PAGE>
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades of the hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the General Partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
The cost for these upgrades and other remedial measures is the
responsibility of the General Partners and their affiliates. The General
Partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The General Partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems. Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information or non-
information technology systems used by the Partnership is not expected to have a
material impact on the results of operations of the Partnership. Even if such
systems failed, the payment of rent under the Partnership's leases would not be
affected. In addition, the Y2K Team is expected to correct any Y2K problems
within the control of the General Partners and their affiliates before the year
2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Partnership, the Y2K Team will
develop a contingency plan if deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership. This could result in the
inability of the Partnership to accurately identify its Limited Partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the General Partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which the General
Partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant. The General Partners and their affiliates would 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 results of operations of the Partnership.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such financial institutions may be temporarily
unavailable. The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the General
Partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues. The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis. The General
Partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.
14
<PAGE>
Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses. The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000. The General Partners cannot be assured
that the tenants have addressed all possible year 2000 issues. The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.
The General Partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The General
Partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the General Partners will
assess the remedies available to the Partnership under its lease agreements.
Item 8. Financial Statements and Supplementary Data
15
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
Page
----
Report of Independent Accountants 17
Financial Statements:
Balance Sheets 18
Statements of Income 19
Statements of Partners' Capital 20
Statements of Cash Flows 21
Notes to Financial Statements 23
16
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund XI, Ltd.
In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund XI, Ltd. (a Florida limited partnership) at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the index appearing under item 14(a)(2) presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and the financial statement schedule are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 1, 1999, except for the second paragraph of Note 11 for which the date
is March 11, 1999.
17
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
------
Land and buildings on operating leases, less
accumulated depreciation $21,683,785 $23,561,017
Net investment in direct financing leases 6,786,286 6,611,661
Investment in joint ventures 2,521,613 2,567,786
Cash and cash equivalents 1,559,240 1,272,386
Restricted cash 1,640,936 --
Receivables, less allowance for doubtful
accounts $5,820 in 1998 132,311 119,575
Prepaid expenses 12,335 13,363
Accrued rental income 1,645,062 1,517,726
Other assets 122,024 122,024
----------- -----------
$36,103,592 $35,785,538
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 14,461 $ 6,508
Accrued and escrowed real estate
taxes payable 15,138 19,410
Distributions payable 995,006 875,006
Due to related parties 25,446 6,648
Rents paid in advance and deposits 92,069 68,333
----------- -----------
Total liabilities 1,142,120 975,905
Minority interests 503,860 501,401
Partners' capital 34,457,612 34,308,232
----------- -----------
$36,103,592 $35,785,538
=========== ===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases $2,644,418 $2,702,558 $2,765,327
Earned income from direct financing
Leases 893,187 841,426 850,650
Contingent rental income 243,115 225,888 251,312
Interest and other income 139,707 62,440 61,403
---------- ---------- ----------
3,920,427 3,832,312 3,928,692
---------- ---------- ----------
Expenses:
General operating and administrative 154,434 148,380 164,642
Professional services 34,140 32,077 30,984
Management fees to related parties 39,393 37,974 37,293
Real estate taxes 2,858 -- --
State and other taxes 24,262 25,779 14,650
Depreciation and amortization 443,936 459,249 478,198
Transaction costs 20,888 -- --
---------- ---------- ----------
719,911 703,459 725,767
---------- ---------- ----------
Income Before Minority Interests in
Income of Consolidated Joint
Ventures, Equity in Earnings of
Unconsolidated Joint Ventures and
Gain on Sale of Land and Buildings 3,200,516 3,128,853 3,202,925
Minority Interests in Income of
Consolidated Joint Ventures (68,474) (69,877) (70,116)
Equity in Earnings of Unconsolidated
Joint Ventures 215,501 236,103 118,211
Gain on Sale of Land and Buildings 461,861 -- 213,685
---------- ---------- ----------
Net Income $3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Allocation of Net Income:
General partners $ 34,815 $ 32,951 $ 33,356
Limited partners 3,774,589 3,262,128 3,431,349
---------- ---------- ----------
$3,809,404 $3,295,079 $3,464,705
========== ========== ==========
Net Income Per Limited Partner Unit $ 0.94 $ 0.82 $ 0.86
========== ========== ==========
Weighted Average Number of
Limited Partner Units Outstanding 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------------------- ------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs
------------- ----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1,000 $ 108,925 $ 40,000,000 $ (11,515,062) $10,783,633 $(4,790,000)
Distributions to limited
partners ($0.89 per
limited partners unit) -- -- -- (3,540,024) -- --
Net income -- 33,356 -- -- 3,431,349 --
------------- ----------- ------------- ------------- ----------- -----------
Balance, December 31, 1996 1,000 142,281 40,000,000 (15,055,086) 14,214,982 (4,790,000)
Distributions to limited
partners ($0.88 per
limited partners unit) -- -- -- (3,500,024) -- --
Net income -- 32,951 -- -- 3,262,128 --
------------- ----------- ------------- ------------- ----------- -----------
Balance, December 31, 1997 1,000 175,232 40,000,000 (18,555,110) 17,477,110 (4,790,000)
Distributions to limited
partners ($0.92 per
limited partners unit) -- -- -- (3,660,024) -- --
Net income -- 34,815 -- -- 3,774,589 --
------------- ----------- ------------- ------------- ----------- -----------
Balance, December 31, 1998 $ 1,000 $ 210,047 $ 40,000,000 $ (22,215,134) $21,251,699 $(4,790,000)
============= =========== ============= ============= =========== ===========
<CAPTION>
Total
----------
<S> <C>
Balance, December 31, 1995 $34,588,496
Distributions to limited
partners ($0.89 per
limited partners unit) (3,540,024)
Net income 3,464,705
-----------
Balance, December 31, 1996 34,513,177
Distributions to limited
partners ($0.88 per
limited partners unit) (3,500,024)
Net income 3,295,079
-----------
Balance, December 31, 1997 34,308,232
Distributions to limited
partners ($0.92 per
limited partners unit) (3,660,024)
Net income 3,809,404
-----------
Balance, December 31, 1998 $34,457,612
===========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 3,826,352 $ 3,585,979 $ 3,657,138
Distributions from unconsolidated joint
ventures 262,843 250,497 148,375
Cash paid for expenses (247,138) (237,312) (251,408)
Interest received 52,005 43,632 47,609
Net cash provided by operating ----------- ----------- -----------
activities 3,894,062 3,642,796 3,601,714
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings 1,630,296 -- 1,044,750
Investment in joint ventures (1,169) (1,044,750) --
Decrease (increase) in restricted cash (1,630,296) 1,044,750 (1,044,750)
----------- ----------- -----------
Net cash used in investing activities (1,169) -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners (3,540,024) (3,540,024) (3,540,024)
Distributions to holders of minority
interests (66,015) (56,246) (58,718)
----------- ----------- -----------
Net cash used in financing activities (3,606,039) (3,596,270) (3,598,742)
----------- ----------- -----------
Net Increase in Cash and Cash Equivalents 286,854 46,526 2,972
Cash and Cash Equivalents at Beginning of Year 1,272,386 1,225,860 1,222,888
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 1,559,240 $ 1,272,386 $ 1,225,860
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income $3,809,404 $3,295,079 $3,464,705
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 443,936 458,660 476,198
Amortization -- 589 2,000
Gain on sale of land and buildings (461,861) -- (213,685)
Minority interests in income of
consolidated joint ventures 68,474 69,877 70,116
Equity in earnings of unconsolidated
joint ventures, net of distributions 47,342 14,394 30,164
Decrease (increase) in receivables (23,376) (23,957) 25,855
Decrease (increase) in prepaid
expenses 1,028 (136) 151
Decrease in net investment in direct
financing leases 90,236 74,706 62,366
Increase in accrued rental income (127,336) (260,223) (296,439)
Increase in accounts payable and
accrued expenses 3,681 2,143 4,280
Increase (decrease) in due to related
parties 18,798 4,527 (4,386)
Increase (decrease) in rents paid in
advance and deposits 23,736 7,137 (19,611)
---------- ---------- ----------
Total adjustments 84,658 347,717 137,009
---------- ---------- ----------
Net Cash Provided by Operating Activities $3,894,062 $3,642,796 $3,601,714
========== ========== ==========
Supplemental Schedule of Non-Cash
Financing Activities:
Land and building under operating lease
exchanged for land and building under
operating lease $ 718,930 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at
December 31 $ 995,006 $ 875,006 $ 915,006
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund XI, Ltd. (the
-----------------------------------
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
General Partner. The general partners have responsibility for managing the
day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the acquisition
--------------------------------
of land and buildings at cost, including acquisition and closing costs.
Land and buildings are leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating
expenses relating to the property, including property taxes, insurance,
maintenance and repairs. The leases are accounted for using either the
direct financing or the operating methods. Such methods are described
below:
Direct financing method - The leases accounted for using
the direct financing method are recorded at their net
investment (which at the inception of the lease generally
represents the cost of the asset) (Note 4). Unearned income
is deferred and amortized to income over the lease terms so
as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is
charged to operations as incurred. Buildings are
depreciated on the straight-line method over their
estimated useful lives of 30 years. When scheduled rentals
vary during the lease term, income is recognized on a
straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the
property is placed in service.
23
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date. Whenever a tenant
defaults under the terms of its lease, or events or changes
in circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership
either reserves or writes-off the cumulative accrued rental
income balance.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases,
plus any accrued rental income, are removed from the accounts and gains or
losses from sales are reflected in income. The general partners of the
Partnership review properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. The general partners determine whether an
impairment in value has occurred by comparing the estimated future
undiscounted cash flows, including the residual value of the property, with
the carrying cost of the individual property. If an impairment is
indicated, the assets are adjusted to the fair value. Although the general
partners have made their best estimate of these factors based on current
conditions, it is reasonably possible that changes could occur in the near
term which could adversely affect the general partners' estimate of net
cash flows expected to be generated from its properties and the need for
asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance
for doubtful accounts, which is netted against receivables and accrued
rental income, and to decrease rental or other income or increase bad debt
expense for the current period, although the Partnership continues to
pursue collection of such amounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership accounts for its 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.
The Partnership's investments in Ashland Joint Venture and Des Moines Real
Estate Joint Venture, and a property in Corpus Christi, Texas, for which
the property is held as tenants-in-common, are accounted for using the
equity method since the Partnership shares control with affiliates which
have the same General Partners.
24
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
Cash and Cash Equivalents - The Partnership considers all highly liquid
-------------------------
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts. The Partnership limits investment of temporary cash investments
to financial institutions with high credit standing; therefore, the
Partnership believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Income Taxes - Under Section 701 of the Internal Revenue Code, all income,
------------
expenses and tax credit items flow through to the partners for tax
purposes. Therefore, no provision for federal income taxes is provided in
the accompanying financial statements. The Partnership is subject to
certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment.
Use of Estimates - The general partners of the Partnership have made a
----------------
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. The more significant use of management estimates
relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
2. Leases:
------
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards No.
13, "Accounting for Leases." Some of the leases are classified as operating
leases and some of the leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the building
portions of the property leases are accounted for as direct financing
leases while the land portions of
25
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
2. Leases - Continued:
------------------
the majority of these leases are operating leases. Substantially all leases
are for 14 to 20 years and provide for minimum and contingent rentals. In
addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage.
The lease options generally allow tenants to renew the leases for two to
five successive five-year periods subject to the same terms and conditions
as the initial lease. Most leases also allow the tenant to purchase the
property at fair market value after a specified portion of the lease has
elapsed.
3. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land $11,607,426 $12,269,964
Buildings 12,666,144 13,746,182
----------- -----------
24,273,570 26,016,146
Less accumulated depreciation (2,589,785) (2,455,129)
----------- -----------
$21,683,785 $23,561,017
=========== ===========
</TABLE>
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.
26
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
3. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
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 $461,861 for financial reporting
purposes. This property was originally acquired by the Partnership in 1992
at a cost of approximately $1,302,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold this
property for a total of approximately $327,900 in excess of its original
purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended
December 31, 1998, 1997, and 1996, the Partnership recognized $127,336,
$260,233 and $296,439, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
1999 $ 2,426,198
2000 2,426,198
2001 2,435,203
2002 2,486,388
2003 2,644,398
Thereafter 16,656,009
-----------
$29,074,394
===========
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during the
initial lease terms. In addition, this table does not include any amounts
for future contingent rentals which may be received on the leases based on
a percentage of the tenant's gross sales.
27
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
4. Net Investment in Direct Financing Leases:
-----------------------------------------
The following lists the components of the net investment in direct
financing leases at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Minimum lease payments
Receivable $13,985,977 $13,834,907
Estimated residual values 2,210,329 2,144,114
Less unearned income (9,410,020) (9,367,360)
----------- -----------
Net investment in direct financing
Leases $ 6,786,286 $ 6,611,661
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1998:
1999 $ 988,575
2000 988,575
2001 988,575
2002 999,775
2003 1,019,879
Thereafter 9,000,598
-----------
$13,985,977
===========
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future
periods (see Note 3).
5. Investment in Joint Ventures:
----------------------------
The Partnership has a 62.16% and a 76.6% interest in the profits and losses
of Ashland Joint Venture and Des Moines Real Estate Joint Venture,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
28
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
----------------------------------------
In January 1997, the Partnership acquired a 72.58% interest in a Black-eyed
Pea property in Corpus Christi, Texas, as tenants-in-common with an
affiliate of the general partners. The Partnership accounts for its
investment in this property using the equity method since the Partnership
shares control with an affiliate, and amounts relating to its investment
are included in investment in joint ventures.
Ashland Joint Venture, Des Moines Real Estate Joint Venture and the
Partnership and affiliate, as tenants-in-common, each own and lease one
property to an operator of national fast-food restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings on operating
leases, less accumulated
depreciation $3,427,681 $3,511,507
Cash 1,109 621
Receivables -- 21,638
Prepaid expenses 8,290 6,939
Accrued rental income 130,585 99,429
Liabilities -- 466
Partners' capital 3,567,665 3,639,668
Revenues 399,305 430,923
Net income 300,036 334,962
</TABLE>
The Partnership recognized income totalling $215,501, $236,103, and
$118,211 for the years ended December 31, 1998, 1997, and 1996,
respectively, from these joint ventures.
6. Restricted Cash:
---------------
As of December 31, 1998, the net sales proceeds of $1,630,296 from the sale
of the property in Nashua, New Hampshire, plus accrued interest of $10,640,
were being held in an interest-bearing escrow account pending the release
of funds by the escrow agent to acquire an additional property (See Note
11).
29
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
7. Allocations and Distributions:
-----------------------------
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of properties, are allocated 99 percent to
the limited partners and one percent to the general partners. Distributions
of net cash flow are made 99 percent to the limited partners and one
percent to the general partners; provided, however, that the one percent of
net cash flow to be distributed to the general partners is subordinated to
receipt by the limited partners of an aggregate, ten percent, cumulative,
noncompounded annual return on their invested capital contributions (the
"Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties not in
liquidation of the Partnership, to the extent distributed, will be
distributed first to the limited partners in an amount sufficient to
provide them with their Limited Partners' 10% Return, plus the return of
their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners.
Any gain from the sale of a property not in liquidation of the Partnership
is, in general, allocated in the same manner as net sales proceeds are
distributable. Any loss from the sale of a property is, in general,
allocated first, on a pro rata basis, to partners with positive balances in
their capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will
be used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves
that may be deemed necessary for any anticipated or unforeseen liabilities
or obligations of the Partnership, iii) third, to pay all of the
Partnership's liabilities, if any, to the general and limited partners, iv)
fourth, after allocations of net income, gains and/or losses, to distribute
to the partners with positive capital accounts balances, in proportion to
such balances, up to amounts sufficient to reduce such positive balances to
zero, and v) thereafter, any funds remaining shall then be distributed 95
percent to the limited partners and five percent to the general partners.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
declared distributions to the limited partners of $3,660,024, $3,500,024
and $3,540,024, respectively. No distributions have been made to the
general partners to date.
30
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. Income Taxes:
------------
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting purposes $3,809,404 $3,295,079 $3,464,705
Depreciation for tax reporting purposes less
than (in excess of) depreciation for
financial reporting purposes 2,899 (43,077) (39,035)
Gain on sale of land and building for financial
reporting purposes in excess of gain for tax
reporting purposes (461,861) -- (213,685)
Direct financing leases recorded as operating
leases for tax reporting purposes 90,236 74,706 62,366
Equity in earnings of unconsolidated joint
ventures for financial reporting purposes in
excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes (5,906) (13,296) (606)
Capitalization of transaction costs for tax
reporting purposes 20,888 -- --
Accrued rental income (127,336) (260,223) (296,439)
Rents paid in advance 23,236 22,436 (19,611)
Allowance for doubtful accounts 5,820 (14,746) (8,114)
Minority interests in timing differences of
consolidated joint ventures (44,316) 14,430 15,933
---------- ---------- ----------
Net income for federal income tax purposes $3,313,064 $3,075,309 $2,965,514
========== ========== ==========
</TABLE>
31
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions:
--------------------------
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL
Fund Advisors, Inc. The other individual general partner, Robert A.
Bourne, serves as treasurer, director and vice chairman of the board of CNL
Fund Advisors, Inc. During the years ended December 31, 1998, 1997, and
1996, CNL Fund Advisors, Inc. (hereinafter referred to as the "Affiliate")
performed certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership
agreed to pay the Affiliate a management fee of one percent of the sum of
gross revenues from properties wholly owned by the Partnership and the
Partnership's allocable share of gross revenues from joint ventures. The
management fee, which will not exceed fees which are competitive for
similar services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliate.
The Partnership incurred management fees of $39,393, $37,974, and $37,293
for the years ended December 31, 1998, 1997, and 1996, respectively.
The Affiliate is also entitled to receive a deferred, subordinated real
estate disposition fee, payable upon the sale of one or more properties
based on the lesser of one-half of a competitive real estate commission or
three percent of the sales price if the Affiliate provides a substantial
amount of services in connection with the sale. However, if the sales
proceeds are reinvested in a replacement property, no such real estate
disposition fees will be incurred until such replacement property is sold
and the net sales proceeds are distributed. The payment of the real estate
disposition fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital contributions.
No deferred, subordinated real estate disposition fees have been incurred
since inception.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
provided accounting and administrative services to the Partnership on a
day-to-day basis. The Partnership incurred $101,423, $88,667, and $95,845
for the years ended December 31, 1998, 1997, and 1996, respectively, for
such services.
32
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions - Continued:
--------------------------------------
During 1997, the Partnership and an affiliate of the general partners
acquired a property as tenants-in-common for a purchase price of $1,441,057
(of which the Partnership contributed $1,044,750 or 72.50%) from CNL BB
Corp., an affiliate of the general partners. CNL BB Corp. had purchased
and temporarily held title to this property in order to facilitate the
acquisition of the property by the Partnership and the affiliate. The
purchase price paid by the Partnership and the affiliate represented the
costs incurred by CNL BB Corp. to acquire and carry the property, including
closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,446
and $6,648, respectively.
10. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's
share of rental and earned income from the unconsolidated joint ventures
and the property held as tenants-in-common with an affiliate of the general
partners), for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Foodmaker, Inc. $768,032 $768,032 $768,032
Burger King Corporation
and BK Acquisition, Inc. 695,427 733,620 712,334
Golden Corral Corporation 564,104 538,871 538,355
DenAmerica Corporation 536,779 489,623 N/A
Advantica Restaurant Group,
Inc. (Denny's, Inc. and
Quincy's Restaurants, Inc.,
during the year ended
December 31, 1998) 473,726 N/A N/A
Flagstar Enterprises, Inc. (and
Denny's, Inc. and Quincy's
Restaurants, Inc. during the
years ended December 31, 1997
and 1996) N/A 780,502 774,347
</TABLE>
33
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
10. Concentration of Credit Risk - Continued:
-----------------------------------------
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent
of the Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the property held as tenants-in-common
with an affiliate of the general partners), for each of the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Burger King $1,144,250 $1,198,027 $1,271,606
Denny's 898,908 854,141 747,341
Jack in the Box 768,032 768,032 768,032
Golden Corral Family
Steakhouse Restaurants 564,103 538,871 538,355
</TABLE>
The information denoted by N/A indicates that for each period presented,
the tenant and the chains did not represent more than ten percent of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant
chains could significantly impact the results of operations of the
Partnership if the Partnership is not able to re-lease the Properties in a
timely manner.
11. Subsequent Events:
------------------
In January 1999, the Partnership reinvested a portion of the net sales
proceeds it received from the sale of the property in Nashua, New
Hampshire, in a Burger King property located in Yelm, Washington, at an
approximate cost of $1,034,000. In connection therewith, the Partnership
entered into a long term, triple-net lease with terms substantially the
same as its other leases.
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
4,394,196 shares of its common stock, par value $0.01 per shares (the "APF
Shares"). In order to assist the general partners in evaluating the
34
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
11. Subsequent Events - Continued:
-----------------------------
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 fair value of the Partnership's property
portfolio and other assets was $43,333,961 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, limited partners holding in excess of
50% of the Partnership's outstanding limited partnership interests must
approve the Merger prior to consummation of the transaction. The general
partners intend to recommend that the limited partners of the Partnership
approve the Merger. In connection with their recommendation, the general
partners will solicit the consent of the limited partners at the special
meeting. If the limited partners reject the Merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of
"For" votes and the general partners will bear the portion of such
transaction costs based upon the percentage of "Against" votes and
abstentions.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
October, 1999.
CNL INCOME FUND XI, LTD.
CNL REALTY CORPORATION
General Partner
By: /s/ Robert A. Bourne
----------------------------------
ROBERT A. BOURNE, President
ROBERT A. BOURNE
General Partner
By: /s/ Robert A. Bourne
----------------------------------
ROBERT A. BOURNE
JAMES M. SENEFF, JR.
General Partner
By: /s/ James M. Seneff, Jr.
----------------------------------
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert A. Bourne President, Treasurer and Director October 28, 1999
- ------------------------------------
Robert A. Bourne (Principal Financial and Accounting
Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director October 28, 1999
- ------------------------------------
James M. Seneff, Jr. (Principal Executive Officer)
</TABLE>
