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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 0-23974
CNL INCOME FUND XIV, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3143096
(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 4,500,000 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
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The Form 10-K of CNL Income Fund XIV, Ltd. for the year ended December 31,
1998 is being amended to revise the disclosure under Item 1. Business, 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 XIV, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on September 25, 1992. 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 August 27, 1993, the
Partnership offered for sale up to $45,000,000 of limited partnership interests
(the "Units") (4,500,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
March 17, 1993. The offering terminated on February 22, 1994, at which date the
maximum proceeds of $45,000,000 had been received from investors who were
admitted to the Partnership as limited partners ("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
$39,606,055 and were used to acquire 54 Properties, including 18 Properties
consisting of land only and four Properties owned by joint ventures in which the
Partnership is a co-venturer, to pay acquisition fees totalling $2,475,000 to an
affiliate of the General Partners and to establish a working capital reserve for
Partnership purposes. During the year ended December 31, 1995, the tenant of
the Checkers Property in Knoxville, Tennessee, and the Checkers Property in
Dallas, Texas, exercised its option in accordance with the lease agreements to
substitute two other Properties for the Knoxville, Tennessee and Dallas, Texas
Properties. The Partnership sold the Knoxville and Dallas Properties to the
tenant and used the net sales proceeds to acquire two Checkers Properties in
Coral Springs and St. Petersburg, Florida. In addition, during the year ended
December 31, 1996, Wood-Ridge Real Estate Joint Venture, a joint venture in
which the Partnership is a co-venturer with an affiliate of the General
Partners, sold its two Properties to the tenant. The joint venture reinvested
the majority of the net sales proceeds in four Boston Market Properties (one of
which consisted of only land) and one Golden Corral Property. During the year
ended December 31, 1997, the Port of Palm Bay took possession of the Property in
Riviera Beach, Florida through a total right of way taking. In addition, during
the year ended December 31, 1997, Wood Ridge Real Estate Joint Venture
reinvested the remaining proceeds from the sales of the two Properties in 1996,
in a Taco Bell Property in Anniston, Alabama. In addition, the Partnership
entered into a joint venture arrangement, CNL Kingston Joint Venture, with
affiliates of the General Partners. During the year ended December 31, 1998,
the Partnership sold one Property in Madison, Alabama and two Properties in
Richmond, Virginia, and reinvested these proceeds along with the proceeds from
the right of way taking in December 1997 of the Property in Riviera Beach,
Florida, in a Property in Fayetteville, North Carolina, and in a joint venture
arrangement, Melbourne Joint Venture with an affiliate of the General Partners.
As a result of the above transactions, as of December 31, 1998, the Partnership
owned 57 Properties. The 57 Properties include 15 wholly owned Properties
consisting of land only and interests in ten Properties owned by joint ventures
in which the Partnership is a co-venturer. The lessee of the 15 wholly owned
Properties consisting of only land owns the buildings currently on the land and
has the right, if not in default under the lease, to remove the buildings from
the land at the end of the lease terms. The Properties are leased 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
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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.
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. Substantially all of the leases of the Properties owned
by the Partnership and the joint ventures in which the Partnership is a co-
venturer provide for initial terms ranging from 15 to 20 years (the average
being approximately 19 years) and expire between 2007 and 2018. The leases are,
in general, 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 $18,900 to $203,600. The majority of
the leases provide for percentage rent, based on sales in excess of a specified
amount. In addition, the majority of the leases provide that, commencing in
specified lease years (generally the sixth or ninth 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 for the 15 wholly owned Properties consisting of only land are
substantially the same as those described above except that the leases relate
solely to the land associated with the Property, with the tenant owning the
buildings currently on the land and having the right, if not in default under
the lease, to remove the buildings from the land at the end of the lease term.
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the General Partners, to construct
and hold one restaurant Property. The lease terms for this Property are
substantially the same as the Partnership's other leases as described above in
the first two paragraphs of this section.
In October 1998, the Partnership reinvested the net sales proceeds from the
sales of several Properties, in a Property located in Fayetteville, North
Carolina. The lease terms for this Property are substantially the same as the
Partnership's other leases, as described above in the first two paragraphs of
this section.
During June 1998 and in January 1999, three tenants, Long John Silver's,
Inc., Finest Foodservice, L.L.C., and BC Superior, L.L.C., filed for bankruptcy
and rejected the leases relating to six (four Long John Silver's and two Boston
Markets) of their eleven leases (including two Properties held by Woodridge Real
Estate Joint Venture) and ceased making rental payments to the Partnership on
the rejected leases. In December 1998, January and February 1999, the
Partnership entered into new leases for three of the six vacant Properties. In
connection therewith, the tenant for each Property has agreed to pay for all
costs necessary to convert these Properties into different restaurant concepts.
Conversion of these Properties is expected to be completed early in 1999. The
lease terms for each Property are substantially the same as the Partnership's
other leases as described above. The Partnership will not recognize rental and
earned income from the remaining three vacant Properties until new tenants for
these Properties are located or until the Properties are sold and the proceeds
from such sales are reinvested in additional Properties. While the tenants have
not rejected or affirmed the remaining five leases, there can be no assurance
that some or all of these leases will not be
3
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rejected in the future. As of March 11, 1999, the Partnership has continued
receiving rental payments relating to the five leases not rejected by the
tenants. The lost revenues resulting from the three remaining vacant Properties,
as described above, and the possible rejection of the remaining five leases
could have an adverse effect on the results of operations of the Partnership if
the Partnership is not able to re-lease the Properties in a timely manner. The
General Partners are currently seeking either new tenants or purchasers for the
remaining three Properties.
Major Tenants
During 1998, five lessees of the Partnership, Flagstar Enterprises, Inc.,
Foodmaker, Inc., Long John Silver's, Inc., Checkers Drive-In Restaurants, Inc.,
and Golden Corral Corporation, each contributed more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from ten Properties owned by joint ventures). As of December 31, 1998,
Flagstar Enterprises, Inc. was the lessee under leases relating to six
restaurants, Foodmaker, Inc. was the lessee under leases relating to six
restaurants, Long John Silver's, Inc. was the lessee under leases relating to
five restaurants (excluding four restaurants for which this tenant rejected the
leases as a result of filing for bankruptcy, as described above), Checkers
Drive-In Restaurants, Inc. was the lessee under leases relating to 15
restaurants, and Golden Corral Corporation was the lessee under leases relating
to four restaurants. It is anticipated that, based on the minimum rental
payments required by the leases, that Flagstar Enterprises, Inc., Foodmaker,
Inc., Checkers Drive-In Restaurants, Inc., and Golden Corral Corporation each
will continue to contribute more than ten percent of the Partnership's total
rental income in 1999. In addition, six Restaurant Chains, Hardee's, Denny's,
Jack in the Box, Long John Silver's, Checkers, and Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), each accounted for more than ten
percent of the Partnership's total rental income during 1998 (including the
Partnership's share of rental income from ten Properties owned by joint
ventures). During 1998, Long John Silver's, Inc. filed for bankruptcy, as
described above. In 1999, it is anticipated that Hardee's, Denny's, Jack in the
Box, Checkers, and Golden Corral each will account for more than ten percent of
the total rental income to which the Partnership is entitled under the terms of
the leases. Any failure of these lessees or Restaurant Chains could materially
affect the Partnership's income 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 Arrangements
The Partnership has entered into the following joint venture arrangements:
Attalla Joint Venture and Salem Joint Venture, each with CNL Income Fund XIII,
Ltd., an affiliate of the General Partners, for each joint venture to purchase,
construct, and hold one Property, CNL Kingston Joint Venture with CNL Income
Fund XVII, Ltd., an affiliate of the General Partners, to purchase, construct,
and hold one Property, and Melbourne Joint Venture with CNL Income Fund VI,
Ltd., an affiliate of the General Partners, to construct and hold one restaurant
Property. In addition, the Partnership has entered into a joint venture
arrangement, Wood-Ridge Real Estate Joint Venture, with CNL Income Fund XV,
Ltd., an affiliate of the General Partners, to purchase and hold six Properties.
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 a 50 percent interest in Attalla Joint Venture, a 72.2%
interest in Salem Joint Venture, a 39.94% interest in CNL Kingston Joint
Venture, a 50 percent interest in Melbourne Joint Venture, and a 50 percent
interest in Wood-Ridge 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. The affiliates are
limited partnerships organized pursuant to the laws of the State of Florida.
Wood Ridge Real Estate Joint Venture, Attalla Joint Venture, and Salem
Joint Venture each have an initial term of 30 years and CNL Kingston Joint
Venture, and Melbourne Joint Venture each have an initial term of 20 years and,
after the expiration of the initial term, continues in existence from year to
year unless terminated at the option of either of the joint venturers or by an
event of dissolution. Events of dissolution include the bankruptcy, insolvency
or termination of any joint venturer, sale of the Property owned by the joint
venture unless agreed to by mutual agreement of the Partnership and its joint
venture partners to reinvest the sales proceeds in replacement Properties, and
by mutual agreement of the Partnership and its joint venture partners to
dissolve the joint venture.
4
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The Partnership shares management control equally with an affiliate of the
General Partners for Attalla Joint Venture, Wood-Ridge Real Estate Joint
Venture, Salem Joint Venture, CNL Kingston Joint Venture, and Melbourne 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 partner, 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 Attalla Joint Venture, Wood-Ridge Real
Estate Joint Venture, Salem Joint Venture, CNL Kingston Joint Venture, and
Melbourne Joint Venture is distributed 50 percent, 50 percent, 72.2%, 39.94%,
and 50 percent, respectively, to the Partnership and the balance is distributed
to each of the other joint venture partners. 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.
The use of joint venture 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
arrangements also provides the Partnership with increased diversification of its
portfolio among a greater number of properties.
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 had 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 57 Properties. Of the 57
Properties, 47 are owned by the Partnership in fee simple and ten are owned
through joint venture arrangements. See Item 1. Business - Joint Venture
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.
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Description of Properties
Land. The Partnership's Property sites range from approximately 15,900 to
100,100 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.
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
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<S> <C>
Alabama 4
Arizona 3
Colorado 1
Florida 9
Georgia 5
Kansas 2
Louisiana 1
Minnesota 1
Missouri 1
Mississippi 1
North Carolina 8
Nevada 1
Ohio 5
South Carolina 1
Tennessee 5
Texas 9
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TOTAL PROPERTIES: 57
===========
</TABLE>
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. However, the
buildings located on the 15 Checkers Properties owned by the Partnership and the
Boston Market Property owned by Wood-Ridge Real Estate Joint Venture are owned
by the tenants. The buildings generally are rectangular and are constructed
from various combinations of stucco, steel, wood, brick and tile. The sizes of
the buildings owned by the Partnership 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 and joint ventures for federal
income tax purposes was $34,382,479 and $7,187,628, respectively.
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The following table lists the Properties owned by the Partnership as of
December 31, 1998 by Restaurant Chain.
<TABLE>
<CAPTION>
Restaurant Chain Number of Properties
---------------- --------------------
<S> <C>
5 & Diner 1
Bennigan's 1
Big Boy 1
Boston Market 4
Burger King 1
Checkers 15
Denny's 6
East Side Mario's 1
El Ranchito Restaurant 1
Golden Corral 4
Hardee's 6
Jack in the Box 6
Long John Silver's 8
Taco Bell 2
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TOTAL PROPERTIES: 57
============
</TABLE>
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, 93% of the Properties were occupied. At December 31,
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
December 31:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Rental Income (1) $ 3,805,764 $ 4,283,030 $ 4,347,586 $ 4,376,790 $ 3,178,699
Properties (2) 57 58 57 54 53
Average per Unit $ 66,768 $ 73,845 $ 76,273 $ 81,052 $ 59,975
</TABLE>
(1) Rental income includes the Partnership's share of rental income from the
Properties owned through joint venture arrangements. Rental revenues have
been adjusted, as applicable, for any amounts for which the Partnership has
established an allowance for doubtful accounts.
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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 -- -- --
2007 1 76,992 1.98%
2008 2 336,389 8.67%
Thereafter 50 3,467,179 89.35%
------ ----------- --------
Totals (1) 53 3,880,560 100.00%
====== =========== ========
</TABLE>
(1) Excludes four Properties which were vacant at December 31, 1998.
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.
Flagstar Enterprises, Inc. leases six Hardee's restaurants. The initial
term of each lease is 20 years (expiring in 2013) and the average minimum base
annual rent is approximately $69,500 (ranging from approximately $59,100 to
$81,800).
Foodmaker, Inc. leases six Jack in the Box restaurants. The initial term of
each lease is 18 years (expiring in 2011) and the average minimum base annual
rent is approximately $85,300 (ranging from approximately $62,700 to $103,200).
Long John Silver's, Inc. leases five Long John Silver's restaurants
(excluding four other Properties which were rejected by this tenant as described
above in Item 1. Business -- Leases). The initial term of each lease is 20 years
(expiring in 2014) and the average minimum base annual rent is approximately
$79,500 (ranging from approximately $50,500 to $90,000).
Checkers Drive-In Restaurants, Inc. leases 15 Checkers restaurants. The
initial term of each lease is 20 years (expiring between 2014 and 2015) and the
average minimum base annual rent is approximately $33,800 (ranging from
approximately $18,900 to $54,500). The tenant owns the buildings currently on
the land and has the right, if not in default under the leases, to remove the
buildings from the land at the end of the lease term.
In addition, Golden Corral Corporation leases four Golden Corral
restaurants. The initial term of each lease is 15 years (expiring between 2008
and 2011) and the average minimum base annual rent is approximately $143,000
(ranging from approximately $108,400 to $203,600).
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.
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PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on September 25, 1992, 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 generally triple-net leases, with the lessee responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of
December 31, 1998, the Partnership owned 57 Properties, either directly or
through joint venture 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 $3,514,544, $3,606,190, and
$3,706,296 for the years ended December 31, 1998, 1997, and 1996, respectively.
The decrease in cash from operations during 1998 and 1997, each as compared to
the previous year, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Partnership's
working capital during each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.
In September 1996, Wood-Ridge Real Estate Joint Venture, a joint venture in
which the Partnership owns a 50 percent interest, sold its two Properties to the
tenant for $5,020,878 and received net sales proceeds of $5,001,180, resulting
in a gain to the joint venture of approximately $261,100 for financial reporting
purposes. These Properties were originally acquired by Wood-Ridge Real Estate
Joint Venture in September 1994 and had a combined, total cost of approximately
$4,302,500, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the joint venture sold these properties for approximately $698,700 in
excess of their original purchase price. In October 1996, Wood-Ridge Real
Estate Joint Venture reinvested $4,404,046 of the net sales proceeds in five
Properties. In January 1997, the joint venture reinvested $502,598 of the
remaining net sales proceeds in an additional Property. During 1997, the
Partnership and the other joint venture partner each received approximately
$52,000, representing a return of capital, for the remaining uninvested net
sales proceeds.
In September 1997, the Partnership entered into a joint venture
arrangement, CNL Kingston Joint Venture, with an affiliate of the Partnership
which has the same General Partners, to construct and hold one restaurant
Property. As of December 31, 1998, the Partnership owned a 39.94% interest in
the profits and losses of the joint venture.
In January 1998, the Partnership sold its Property in Madison, Alabama and
two Properties in Richmond, Virginia, to third parties for a total of $1,667,462
and received net sales proceeds of $1,606,702, resulting in a total gain of
$70,798 for financial reporting purposes. These Properties were originally
acquired by the Partnership in 1993 and 1994, and had costs totaling
approximately $1,393,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these Properties for a
total of $213,300 in excess of their original purchase prices. In April 1998,
the Partnership reinvested a portion of the net sales proceeds from the sale of
the Property in Madison, Alabama in a joint venture arrangement, as described
below. The Partnership distributed 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 these sales.
In April 1998, the Partnership reached an agreement to accept $360,000 for
the Property in Riviera Beach, Florida, which was taken through a right of way
taking in December 1997. The Partnership had received preliminary sales
proceeds of $318,592 as of December 31, 1997. Upon agreement of the final sales
price of $360,000, and receipt of the remaining sales proceeds of $41,408, the
Partnership recognized a gain of $41,408 for financial reporting purposes. This
Property was originally acquired by the Partnership in 1994 and had a cost of
approximately $276,400, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold this Property for a
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total of approximately $83,600 in excess of its original purchase price. In
October 1998, the Partnership reinvested the net sales proceeds from the right
of way taking of the Property in Riviera Beach, Florida in a Property in
Fayetteville, North Carolina, as described below.
In addition, in April 1998, the Partnership reinvested a portion of the net
sales proceeds from the sale of the Property in Madison, Alabama, as described
above, in a joint venture arrangement, Melbourne Joint Venture, with an
affiliate of the General Partners, to construct and hold one restaurant
Property, at a total cost of $1,052,552. During 1998, the Partnership
contributed amounts to purchase land and pay for construction costs relating to
the joint venture and has agreed to contribute additional amounts in 1999 for
additional construction costs. When funding is completed, the Partnership
expects to have an approximate 50 percent interest in the profits and losses of
the joint venture. As of December 31, 1998, the Partnership had a 50 percent
interest in the profits and losses of this joint venture.
In October 1998, the Partnership reinvested approximately $1,537,000 of the
net sales proceeds it received from the sales of the Properties in Richmond,
Virginia, the right of way taking of the Property in Riviera Beach, Florida, and
a portion of the net sales proceeds it received from the sale of the Property in
Madison, Alabama, along with additional funds held as cash and cash equivalents
at December 31, 1997, in a Property located in Fayetteville, North Carolina.
The Partnership acquired the Property from an affiliate of the General Partners.
The affiliate had purchased and temporarily held title to the Property in order
to facilitate the acquisition of the Property by the Partnership. The purchase
price paid by the Partnership represented the costs incurred by the affiliate to
acquire the Property, including closing costs.
None of the Properties owned by the Partnership, or the joint ventures in
which the Partnership owns an interest, is or may be encumbered. Subject to
certain restrictions on borrowing, however, the Partnership may borrow funds but
will not encumber any of the Properties in connection with any such borrowing.
The Partnership will not borrow for the purpose of returning capital to the
Limited Partners. The Partnership will not borrow under arrangements that would
make the Limited Partners liable to creditors of the Partnership. The General
Partners further have represented that they will use their reasonable efforts to
structure any borrowing so that it will not constitute "acquisition
indebtedness" for federal income tax purposes and also will limit the
Partnership's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its Properties. Affiliates of the General Partners from
time to time incur certain operating expenses on behalf of the Partnership for
which the Partnership reimburses the affiliates without interest.
Currently, rental income from the Partnership's Properties and net sales
proceeds from the sale of Properties, pending reinvestment in additional
Properties, are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks, CDs and
money market accounts with less than a 30-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or make
distributions to partners. At December 31, 1998, the Partnership had $949,056
invested in such short-term investments as compared to $1,285,777 at December
31, 1997. The decrease in cash is primarily attributable to the Partnership
investing a portion of the amounts held at December 31, 1997 in a Property in
Fayetteville, North Carolina, as described above. 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 the payment of distributions and
other liabilities, will be used to meet the Partnership's working capital and
other needs. Total liabilities at December 31, 1998, to the extent they exceed
cash and cash equivalents at December 31, 1998, will be paid from future cash
from operations, and in the event the General Partners elect to make additional
contributions, from future General Partner contributions.
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.
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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 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 to cause the Partnership to maintain additional reserves if, in their
discretion, they determine such reserves are required to meet the Partnership's
working capital needs.
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 primarily on current and future cash from operations, the Partnership
declared distributions to the Limited Partners of $3,712,520, $3,712,520 and
$3,712,522 for the years ended December 31, 1998, 1997, and 1996, respectively.
This represents distributions of $0.83 per Unit for each of the years ended
December 31, 1998, 1997, and 1996. No amounts distributed or to be distributed
to the Limited Partners for the years ended 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 of 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, the affiliates incurred on behalf of the
Partnership $113,352, $87,695, and $94,152, respectively, for certain operating
expenses. At December 31, 1998 and 1997, the Partnership owed $25,432 and
$7,853, respectively, to affiliates for such amounts and 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 $1,037,003 at December 31, 1998,
from $987,614 at December 31, 1997, primarily as a result of an increase in
rents paid in advance at December 31, 1998. Liabilities, at December 31, 1998,
to the extent they exceed cash and cash equivalents at December 31, 1998, will
be paid from future cash from operations.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
The Partnership owned and leased 50 wholly owned Properties during 1998,
1997, and 1996 (including one Property in Riviera Beach, Florida which was
condemned through a total right of way taking in December 1997 and two
Properties in Richmond, Virginia and one Property in Madison, Alabama, each sold
during the year ended December 31, 1998). In addition, during 1996, the
Partnership was a co-venturer in three joint ventures that owned and leased nine
Properties (including two Properties in Wood-Ridge Real Estate Joint Venture,
which were sold in September 1996), during 1997, the Partnership was a co-
venture in four separate joint ventures that owned and leased nine Properties,
and during 1998, the Partnership was a co-venturer in five separate joint
ventures that owned and leased ten Properties. As of December 31, 1998, the
Partnership owned, either directly or through joint venture arrangements, 57
Properties which are, in general, 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 $18,900 to $203,600. All of
the leases provide for percentage rent based on sales in excess of a specified
amount. In addition, the majority of the leases provide that, commencing in
specified lease years (generally the sixth or ninth 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
earned $3,359,955, $3,911,527, and $3,987,525, respectively, in rental income
from operating leases (net of adjustments to accrued rental income) and earned
income from direct financing leases from Properties wholly owned by the
Partnership.
The decrease in rental and earned income during 1998, as compared to 1997,
is primarily attributable to a decrease of approximately $212,300 due to the
fact that in June 1998, Long John Silver's, Inc. filed for bankruptcy and
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<PAGE>
rejected the leases relating to four of the nine Properties leased by Long John
Silver's, Inc. As a result, this tenant ceased making rental payments on the
four rejected leases. The Partnership has continued receiving rental payments
relating to the leases not rejected by the tenant. In conjunction with the four
rejected leases, during 1998, the Partnership wrote off approximately $265,000
of accrued rental income (non-cash accounting adjustments relating to the
straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles) relating to these four
Properties. The Partnership has since entered into new leases, each with a new
tenant, for two of the four vacant Properties. In connection therewith, the
tenant for each Property has agreed to pay for all costs necessary to convert
these Properties into different restaurant concepts. Conversion of these
Properties is expected to be completed early in 1999, at which point rental
payments are expected to commence. The General Partners are currently seeking
either replacement tenants or purchasers for the two remaining, vacant
Properties. The Partnership will not recognize any rental and earned income
from these Properties until replacement tenants for these Properties are
located, or until the Properties are sold and the proceeds from such sales are
reinvested in additional Properties. While Long John Silver's, Inc. has not
rejected or affirmed the remaining five leases, there can be no assurance that
some or all of these leases will be rejected in the future. The lost revenues
resulting from the two remaining vacant Properties, as described above, and the
possible rejection of the remaining five leases could have an adverse effect on
the results of operations of the Partnership, if the Partnership is not able to
re-lease these Properties in a timely manner.
In addition, rental and earned income decreased by approximately $162,600
in 1998, as compared to 1997, as a result of the 1998 sales of the Properties in
Madison, Alabama and Richmond, Virginia and the 1997 right of way taking of the
Property in Riviera Beach, Florida. The decrease in rental and earned income was
partially offset by the fact that in October 1998, the Partnership reinvested
the majority of the net sales proceeds from the sale of the above Properties in
a Property in Fayetteville, North Carolina, as described above in "Capital
Resources." In addition, the decrease during 1998 is partially offset by an
increase in rental income relating to the Property in Akron, Ohio, as described
below, being operational for a full year in 1998 as compared to a partial year
in 1997.
The decrease in rental and earned income during 1997, as compared to 1996,
was primarily attributable to the fact that during May 1997, the temporary
operator of the Property in Akron, Ohio, ceased restaurant operations and
vacated the Property. The Partnership ceased recording rental income and wrote
off the related allowance for doubtful accounts. The Partnership entered into a
long-term, triple-net lease for this Property with the operator of an Arlington
Big Boy in September 1997, and rental income commenced in December 1997.
The decrease in rental and earned income during 1997 as compared to 1996,
was partially due to the fact that the Partnership wrote off accrued rent
relating to the Property in Madison, Alabama to adjust the carrying value of the
asset to the net proceeds received from the sale of this Property in January
1998.
During the years ended December 31, 1998, 1997, and 1996, the Partnership
also earned $63,776, $21,617, and $7,014, respectively, in contingent rental
income. The increase in contingent rental income during 1998 and 1997, each as
compared to the previous year, is primarily attributable to increased gross
sales of certain restaurant Properties requiring the payments of contingent
rental income.
In addition, for the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $317,654, $309,879, and $459,137, respectively, attributable
to net income earned by joint ventures in which the Partnership is a co-
venturer. The increase in net income earned by joint ventures during 1998, as
compared to 1997, is primarily attributable to the fact that CNL Kingston Joint
Venture was operational for a full year in 1998, as compared to a partial year
in 1997. The decrease in net income earned by joint ventures during 1997 as
compared to 1996, is primarily attributable to the fact that in September 1996,
Wood-Ridge Real Estate Joint Venture, in which the Partnership owns a 50 percent
interest, recognized a gain of approximately $261,100 for financial reporting
purposes as a result of the sale of its Properties in September 1996, as
described above in "Capital Resources."
During the year ended December 31, 1998, five lessees (or group of
affiliated lessees) of the Partnership, Flagstar Enterprises, Inc., Foodmaker,
Inc., Long John Silver's, Inc., Checkers Drive-In Restaurants, Inc., and Golden
Corral Corporation, each contributed more than ten percent of the Partnership's
total rental income (including the Partnership's share of rental income from ten
Properties owned by joint ventures). As of December 31, 1998, Flagstar
Enterprises, Inc. was the lessee under leases relating to six restaurants,
Foodmaker, Inc. was the lessee under leases relating to six restaurants, Long
John Silver's, Inc. was the lessee under leases relating to five restaurants
(excluding the
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<PAGE>
four leases rejected by this tenant, as described above), Checkers Drive-In
Restaurants, Inc. was the lessee under leases relating to 15 restaurants, and
Golden Corral Corporation was the lessee under leases relating to four
restaurants. It is anticipated that based on the minimum rental payments
required by the leases, that Flagstar Enterprises, Inc., Foodmaker, Inc.,
Checkers Drive-In Restaurants, Inc., and Golden Corral Corporation each will
continue to contribute more than ten percent of the Partnership's total rental
income in 1999. In addition, during the year ended December 31, 1998, six
Restaurant Chains, Hardee's, Denny's, Jack in the Box, Long John Silver's,
Checkers, and Golden Corral, each accounted for more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from ten Properties owned by joint ventures). During 1998, Long John
Silver's, Inc. filed for bankruptcy, as described above. In 1999, it is
anticipated that Hardee's, Denny's, Jack in the Box, Checkers, and Golden Corral
each will account for more than ten percent of the total rental income to which
the Partnership is entitled under the terms of the leases. Any failure of these
lessees or Restaurant Chains could materially affect the Partnership's income if
the Partnership is not able to re-lease the Properties in a timely manner.
In addition, during the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $90,425, $47,287, and $56,377, respectively in interest and
other income. The increase in interest and other income during 1998, as
compared to 1997, is primarily due to an increase in interest income earned on
net sales proceeds relating to the sales of several Properties during 1998
described above, pending the reinvestment of the net sales proceeds in
additional Properties.
Operating expenses, including depreciation and amortization expense, were
$707,774, $602,753, and $586,710 for the years ended December 31, 1998, 1997,
and 1996, respectively. The increase in operating expenses during the year ended
December 31, 1998, as compared to the year ended December 31, 1997, is partially
attributable to the fact that the Partnership accrued insurance and real estate
tax expenses as a result of Long John Silver's, Inc. filing for bankruptcy and
rejecting the leases relating to four Properties in June 1998, as described
above. In addition, the increase in operating expenses during 1998, is partially
attributable to an increase in depreciation expense due to the fact that during
1998, the Partnership reclassified these assets from net investment in direct
financing leases to land and buildings on operating leases. In accordance with
Statement of Financial Accounting Standards No. 13, "Accounting for Leases," the
Partnership recorded the reclassified assets at the lower of original cost,
present fair value, or present carrying amount, which resulted in a loss on
termination of direct financing lease of $21,873 for financial reporting
purposes during the year ended December 31, 1998. No such loss was recorded
during 1997 and 1996. The Partnership has since entered into new leases, each
with a new tenant, for two of the four Properties, as described above. The new
tenants are responsible for real estate taxes, insurance and maintenance
relating to their respective Properties; therefore, the General Partners do not
anticipate the Partnership will incur these expenses for these two Properties in
the future. However, the Partnership will continue to incur certain expenses,
such as real estate taxes, insurance and maintenance relating to the two
remaining, vacant Properties until new tenants or purchasers are located. The
Partnership is currently seeking either new tenants or purchasers for these
Properties.
In addition, the increase in operating expenses for 1998, is also partially
due to the fact that the Partnership incurred $25,231 in transaction costs
related 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 increase in operating expenses during 1997, as compared to 1996, was
primarily attributable to the fact that the Partnership recorded bad debt
expense of $10,500 during 1997 relating to the Property in Akron, Ohio. Due to
the fact that the temporary operator ceased operating the Property in May, 1997,
as described above in "Capital Resources," the General Partners ceased further
collection efforts of these past due amounts.
As a result of the former tenant of the Property in Akron, Ohio, defaulting
under the terms of its lease during 1994 and the Partnership leasing the
Property to temporary operators who subsequently ceased operating the Property,
the Partnership incurred real estate taxes during the years ended December 31,
1998, 1997, and 1996. The Partnership entered into a long-term, triple-net
lease for this Property with the operator of an Arlington Big Boy in September
1997, and rental income commenced in December 1997. The new tenant is
responsible for real estate taxes; therefore, the General Partners do not
anticipate the Partnership will incur these expenses in the future.
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As a result of the sales of several Properties and the receipt of proceeds
from the right of way taking of the Property in Riviera Beach, Florida, as
described above in "Capital Resources," the Partnership recognized gains
totaling $112,206 for financial reporting purposes during the year ended
December 31, 1998. No Properties were sold during 1997 and 1996.
At December 31, 1998, the Partnership recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating to a
Long John Silver's Property whose lease was rejected by the tenant, as described
above. The tenant of this Property filed for bankruptcy and ceased payment of
rents under the terms of its lease agreement. The allowance represents the
difference between the carrying value of the Property at December 31, 1998 and
the estimated net realizable value for the Property.
The Partnership's leases as of December 31, 1998, are, in general, 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
4,313,041 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 $42,435,559 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.
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
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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.
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.
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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.
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
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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
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CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONTENTS
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<TABLE>
Page
----
<S> <C>
Report of Independent Accountants 19
Financial Statements:
Balance Sheets 20
Statements of Income 21
Statements of Partners' Capital 22
Statements of Cash Flows 23
Notes to Financial Statements 25
</TABLE>
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Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund XIV, 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 XIV, 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
January 22, 1999, except for Note 11 for which the date is March 11, 1999
19
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------- -----------------
ASSETS
------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance
for loss on building $ 26,509,264 $ 25,217,725
Net investment in direct financing leases 7,300,102 9,041,485
Investment in joint ventures 3,813,175 3,271,739
Cash and cash equivalents 949,056 1,285,777
Restricted cash -- 318,592
Receivables, less allowance for doubtful
accounts of $1,105 in 1998 62,824 19,912
Prepaid expenses 8,389 7,915
Organization costs, less accumulated
amortization of $10,000 and $8,599 -- 1,401
Accrued rental income less allowance for
doubtful accounts of $12,622 and $6,295 1,895,349 1,820,078
---------------- -----------------
$ 40,538,159 $ 40,984,624
================ =================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 2,577 $ 10,258
Accrued and escrowed real estate taxes
payable 18,198 19,570
Distributions payable 928,130 928,130
Due to related parties 25,432 7,853
Rents paid in advance and deposits 88,098 29,656
---------------- -----------------
Total liabilities 1,062,435 995,467
Partners' capital 39,475,724 39,989,157
---------------- -----------------
$ 40,538,159 $ 40,984,624
================ =================
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND XIV, 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 $ 2,792,931 $ 2,872,283 $ 2,953,895
Adjustments to accrued rental income (277,319) -- --
Earned income from direct financing leases 844,343 1,017,627 1,026,616
Contingent rental income 63,776 21,617 7,014
Interest and other income 90,425 47,287 56,377
------------- ------------- -------------
3,514,156 3,958,814 4,043,902
------------- ------------- -------------
Expenses:
General operating and administrative 168,184 154,654 162,163
Professional services 34,309 29,746 24,138
Bad debt expense -- 10,500 --
Management fees to related parties 37,430 38,626 38,785
Real estate taxes 17,435 7,192 3,426
State and other taxes 22,498 21,874 18,109
Loss on termination of direct financing lease 21,873 -- --
Depreciation and amortization 380,814 340,161 340,089
Transaction costs 25,231 -- --
------------- ------------- -------------
707,774 602,753 586,710
------------- ------------- -------------
Income Before Equity in Earnings of Joint Ventures,
Gain on Land and Building from Right of Way
Taking, Gain on Sale of Land and Building, and
Provision for Loss on Building 2,806,382 3,356,061 3,457,192
Equity in Earnings of Joint Ventures 317,654 309,879 459,137
Gain on Land and Building from Right of Way
Taking 41,408 -- --
Gain on Sale of Land and Building 70,798 -- --
Provision for Loss on Building (37,155) -- --
------------- ------------- -------------
Net Income $ 3,199,087 $ 3,665,940 $ 3,916,329
============= ============= =============
Allocation of Net Income:
General partners $ 31,093 $ 36,659 $ 39,163
Limited partners 3,167,994 3,629,281 3,877,166
------------- ------------- -------------
$ 3,199,087 $ 3,665,940 $ 3,916,329
============= ============= =============
Net Income Per Limited Partner Unit $ 0.70 $ 0.81 $ 0 .86
============= ============= =============
Weighted Average Number of Limited Partner
Units Outstanding 4,500,000 4,500,000 4,500,000
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND XIV, 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
Contributions Earnings Contributions Distributions Earnings
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1,000 $ 69,818 $ 45,000,000 $ (6,710,883) $ 6,855,940
Distributions to limited
partners ($0.83 per
limited partner unit) -- -- -- (3,712,522) --
Net income -- 39,163 -- -- 3,877,166
------------- ------------- ------------- ------------- ------------
Balance, December 31, 1996 1,000 108,981 45,000,000 (10,423,405) 10,733,106
Distributions to limited
partners ($0.83 per
limited partner unit) -- -- -- (3,712,520) --
Net income -- 36,659 -- -- 3,629,281
------------- ------------- ------------- ------------- ------------
Balance, December 31, 1997 1,000 145,640 45,000,000 (14,135,925) 14,362,387
Distributions to limited
partners ($0.83 per
limited partner unit) -- -- -- (3,712,520) --
Net income -- 31,093 -- -- 3,167,994
------------- ------------- ------------- ------------- ------------
Balance, December 31, 1998 $ 1,000 $ 176,733 $ 45,000,000 $ (17,848,445) $ 17,530,381
============= ============= ============= ============= ============
<CAPTION>
--------------
Syndication
Costs Total
-------------- --------------
<S> <C> <C>
Balance, December 31, 1995 $ (5,383,945) $ 39,831,930
Distributions to limited
partners ($0.83 per
limited partner unit) -- (3,712,522)
Net income -- 3,916,329
-------------- --------------
Balance, December 31, 1996 (5,383,945) 40,035,737
Distributions to limited
partners ($0.83 per
limited partner unit) -- (3,712,520)
Net income -- 3,665,940
-------------- --------------
Balance, December 31, 1997 (5,383,945) 39,989,157
Distributions to limited
partners ($0.83 per
limited partner unit) -- (3,712,520)
Net income -- 3,199,087
-------------- --------------
Balance, December 31, 1998 $ (5,383,945) $ 39,475,724
============== ==============
</TABLE>
See accompanying notes to statements.
22
<PAGE>
CNL INCOME FUND XIV, 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 $ 3,391,042 $ 3,501,064 $ 3,572,793
Distributions from joint ventures 343,684 308,220 340,299
Cash paid for expenses (293,428) (243,326) (250,885)
Interest received 73,246 40,232 44,089
--------------- --------------- ---------------
Net cash provided by operating
activities 3,514,544 3,606,190 3,706,296
--------------- --------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building 1,606,702 -- --
Proceeds received from right of way taking 41,408 318,592 --
Additions to land and buildings on
operating leases (605,712) -- --
Investment in direct financing leases (931,237) -- --
Investment in joint ventures (568,498) (121,855) (7,500)
Return of capital from joint venture -- 51,950 --
Decrease (increase) in restricted cash 318,592 (318,592) --
--------------- --------------- ---------------
Net cash used in investing activities (138,745) (69,905) (7,500)
--------------- --------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (3,712,520) (3,712,520) (3,712,522)
--------------- --------------- ---------------
Net cash used in financing activities (3,712,520) (3,712,520) (3,712,522)
--------------- --------------- ---------------
Net Decrease in Cash and Cash Equivalents (336,721) (176,235) (13,726)
Cash and Cash Equivalents at Beginning of Year 1,285,777 1,462,012 1,475,738
--------------- --------------- ---------------
Cash and Cash Equivalents at End of Year $ 949,056 $ 1,285,777 $ 1,462,012
=============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
CNL INCOME FUND XIV, 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 $ 3,199,087 $ 3,665,940 $ 3,916,329
-------------- -------------- --------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Bad debt expense -- 10,500 --
Loss on termination of direct
financing lease 21,873 -- --
Depreciation 378,381 337,180 337,181
Amortization 2,433 2,981 2,908
Equity in earnings of joint ventures,
net of distributions 26,030 (1,659) (118,889)
Gain on land and building from right of way
taking (41,408) -- --
Gain on sale of land and building (70,798) -- --
Provision for loss on building 37,155 -- --
Decrease in net investment in direct
financing leases 82,359 83,787 74,798
Increase in receivables (38,232) (6,935) (13,946)
Decrease (increase) in prepaid
expenses (474) 328 (4,802)
Increase in accrued rental income (148,845) (471,287) (491,221)
Increase (decrease) in accounts
payable and accrued expenses (9,038) 12,017 (8,408)
Increase (decrease) in due to related
parties 17,579 6,202 (5,218)
Increase (decrease) in rents paid in
advance and deposits 58,442 (32,864) 17,564
-------------- -------------- --------------
Total adjustments 315,457 (59,750) (210,033)
-------------- -------------- --------------
Net Cash Provided by Operating Activities $ 3,514,544 $ 3,606,190 $ 3,706,296
============== ============== ==============
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31 $ 928,130 $ 928,130 $ 928,130
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
CNL INCOME FUND XIV, 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 XIV, 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.
25
<PAGE>
CNL INCOME FUND XIV, 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 their 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' best
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 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 interests
----------------------------
in Attalla Joint Venture, Wood-Ridge Real Estate Joint Venture, Salem Joint
Venture, Melbourne Joint Venture, and CNL Kingston Joint Venture using the
equity method since the Partnership shares control with affiliates which
have the same general partners.
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.
26
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
1. Significant Accounting Policies - Continued:
-------------------------------------------
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 institution with high credit standing; therefore, the
Partnership believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Organization Costs - Organization costs were amortized over five years
------------------
using the straight-line method.
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 areas requiring the 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.
Reclassification - Certain items in the prior years' financial statements
----------------
have been reclassified to conform to 1998 presentation. These
reclassifications had no effect on partners' capital or net income.
27
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
2. Leases:
------
The Partnership leases its land or land and buildings primarily 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 the
majority of the leases are operating leases. Substantially all leases are
for 15 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 $ 16,195,936 $ 16,425,914
Buildings 12,024,577 10,087,524
--------------- ---------------
28,220,513 26,513,438
Less accumulated depreciation (1,674,094) (1,295,713)
--------------- ---------------
26,546,419 25,217,725
Less allowance for loss on building (37,155) --
--------------- ---------------
$ 26,509,264 $ 25,217,725
=============== ===============
</TABLE>
During the year ended December 31, 1998, the Partnership sold its property
in Madison, Alabama and two properties in Richmond, Virginia, to third
parties for a total of $1,667,462 and received net sales proceeds of
$1,606,702, resulting in a total gain of $70,798 for financial reporting
purposes. These properties were originally acquired by the Partnership in
1993 and 1994, and had costs totalling approximately $1,393,400, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold these properties for a total of approximately $213,300 in
excess of their original purchase prices.
28
<PAGE>
CNL INCOME FUND XIV, 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 addition, in April 1998, the Partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was taken
through a right of way taking in December 31, 1997. The Partnership had
received preliminary sales proceeds of $318,592 as of December 31, 1997.
Upon agreement of the final sales price of $360,000, and receipt of the
remaining sales proceeds of $41,408, the Partnership recognized a gain of
$41,408 for financial reporting purposes. This property was originally
acquired by the Partnership in 1994 and had a cost of approximately
$276,400, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold this property for a total of
approximately $83,600 in excess of its original purchase price.
In October 1998, the Partnership reinvested approximately $1,537,000 of the
net sales proceeds it received from the sales of the properties in
Richmond, Virginia and the right of way taking of the property in Riviera
Beach, Florida, and a portion of the net sales proceeds it received from
the sale of the property in Madison, Alabama, in a property located in
Fayetteville, North Carolina.
At December 31, 1998, the Partnership recorded a provision for loss on
building in the amount of $37,155 for financial reporting purposes relating
to a Long John Silver's Property. The tenant of this Property filed for
bankruptcy and ceased payment of rents under the terms of its lease
agreement. The allowance represents the difference between the carrying
value of the Property at December 31, 1998 and the estimated net realizable
value for the Property.
Generally, the 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
$148,845 (net of $6,327 in reserves and $277,319 in write-offs), $471,287
(net of $6,295 in reserves), and $491,221, respectively, of such rental
income.
29
<PAGE>
CNL INCOME FUND XIV, 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:
--------------------------------------------------
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 2,486,272
2000 2,538,562
2001 2,557,759
2002 2,615,117
2003 2,632,784
Thereafter 27,438,256
----------------
$ 40,268,750
================
</TABLE>
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.
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 $ 14,282,003 $ 18,621,827
Estimated residual values 2,373,313 2,842,002
Less unearned income (9,355,214) (12,422,344)
----------------- -----------------
Net investment in direct financing
leases $ 7,300,102 $ 9,041,485
================= =================
</TABLE>
30
<PAGE>
CNL INCOME FUND XIV, 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 - Continued:
-----------------------------------------------------
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1998:
<TABLE>
<S> <C>
1999 $ 898,054
2000 899,947
2001 902,770
2002 911,239
2003 914,901
Thereafter 9,755,092
----------------
$ 14,282,003
================
</TABLE>
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).
In January 1998, the Partnership sold its property in Madison, Alabama, for
which the building portion had been classified as a direct financing lease.
In connection therewith, the gross investment (minimum lease payments
receivable and the estimated residual value) and unearned income relating
to the building were removed from the accounts (see Note 3).
In June 1998, four of the Partnership's leases with Long John Silver's,
Inc. were rejected in connection with the tenant filing for bankruptcy. As
a result, the Partnership reclassified these assets from net investment in
direct financing leases to land and buildings on operating leases. In
accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," in June 1998, the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying amount, which resulted in a loss on termination of direct
financing lease of $21,873 for financial reporting purposes.
5. Investment in Joint Ventures:
----------------------------
The Partnership owns a 50 percent, a 72.2% and a 50 percent interest in the
profits and losses of Attalla Joint Venture, Salem Joint Venture and Wood-
Ridge 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.
31
<PAGE>
CNL INCOME FUND XIV, 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, Wood-Ridge Real Estate Joint Venture reinvested $502,598
of the remaining net sales proceeds, from the 1996 sales of two properties,
in a Taco Bell property in Anniston, Alabama. During the year ended
December 31, 1997, the Partnership and the other joint venture partner had
each received approximately $52,000, representing a return of capital, for
the remaining uninvested net sales proceeds. As of December 31, 1998, the
Partnership owned a 50 percent interest in the profits and losses of this
joint venture.
In September 1997, the Partnership entered into a joint venture
arrangement, CNL Kingston Joint Venture, with an affiliate of the general
partners, to construct and hold one restaurant property. In connection
therewith, the Partnership contributed amounts to CNL Kingston Joint
Venture to fund construction costs relating to the property owned by the
joint venture. As of December 31, 1998, the Partnership owned a 39.94%
interest in the profits and losses of the joint venture. The Partnership
accounts for its investment in this joint venture under the equity method
since the Partnership shares control with an affiliate.
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property, at a total cost of $1,052,552.
During 1998, the Partnership contributed amounts to purchase land and pay
for construction costs relating to the joint venture and has agreed to
contribute additional amounts in 1999 for additional construction costs.
As of December 31, 1998, the Partnership owned a 50 percent interest in the
profits and losses of this joint venture. When funding is complete, the
Partnership expects to have an approximate 50 percent interest in the
profits and losses of the joint venture. The Partnership accounts for its
investment in this joint venture under the equity method since the
Partnership shares control with an affiliate.
32
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
5. Investment in Joint Ventures - Continued:
----------------------------------------
As of December 31, 1998, Attalla Joint Venture, Salem Joint Venture, CNL
Kingston Joint Venture, and Melbourne Joint Venture each owned and leased
one property, and Wood-Ridge Real Estate Joint Venture owned and leased
six properties, to operators of fast-food or family-style restaurants. The
following presents the joint ventures' condensed financial information at
December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Land and buildings on operating
leases, less accumulated
depreciation $ 6,913,765 $ 6,008,240
Net investment in direct financing
lease 360,790 364,479
Cash 87,922 13,842
Receivables 47,545 2,571
Accrued rental income 194,526 150,621
Other assets 1,055 1,257
Liabilities 171,590 231,061
Partners' capital 7,434,013 6,309,949
Revenues 750,147 712,004
Net income 615,127 588,835
</TABLE>
The Partnership recognized income totalling $317,654, $309,879, and
$459,137 for the years ended December 31, 1998, 1997, and 1996,
respectively, from these joint ventures.
6. Restricted Cash:
---------------
In December 1997, the Partnership received preliminary sales proceeds of
$318,592 for the property in Riviera Beach, Florida which was taken through
a right of way taking. In October 1998, the Partnership reinvested these
proceeds in a property in Fayetteville, North Carolina (see Note 3).
33
<PAGE>
CNL INCOME FUND XIV, 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 sales 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 a 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 sale of properties, in liquidation of
the Partnership 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 the partners with positive capital account 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 each of the years ended December 31, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,712,520 and during the
year ended December 31, 1996, the Partnership declared distributions to the
limited partners of $3,712,522. No distributions have been made to the
general partners to date.
34
<PAGE>
CNL INCOME FUND XIV, 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 $ 3,199,087 $ 3,665,940 $ 3,916,329
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes (77,202) (130,766) (130,766)
Direct financing leases recorded as
operating leases for tax reporting
purposes 82,359 83,787 74,798
Gain on sale of land and building for tax
reporting purposes in excess of gain
for financial reporting purposes 94,442 -- --
Gain on land and building from right of way
taking deferred for tax reporting purposes (41,408) -- --
Allowance for loss on building 37,155 -- --
Equity in earnings of joint ventures for
financial reporting purposes less than
(in excess of) equity in earnings of joint
ventures for tax reporting purposes 35,645 3,109 (174,253)
Capitalization of transaction costs for tax
reporting purposes 25,231 -- --
Allowance for doubtful accounts 1,105 -- --
Accrued rental income (148,845) (471,287) (491,221)
Loss on lease termination of direct
financing lease 21,873 -- --
Rents paid in advance 53,442 (32,864) 17,564
Other 1,034 (21,988) 23,878
----------------- ----------------- ------------------
Net income for federal income tax
purposes $ 3,283,918 $ 3,095,931 $ 3,236,329
================= ================= ==================
</TABLE>
35
<PAGE>
CNL INCOME FUND XIV, 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 directors
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.
All or any portion of the management fee not taken as to any fiscal year
shall be deferred without interest and may be taken in such other fiscal
year as the Affiliates shall determine. The Partnership incurred
management fees of $37,430, $38,626, and $38,785 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 net 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 Limited Partners' 10% Return plus their invested 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 $110,618, $89,910, and $96,082
for the years ended December 31, 1998, 1997, and 1996, respectively, for
such services.
36
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
9. Related Party Transactions - Continued:
---------------------------------------
During 1998, the Partnership acquired a property for a purchase price of
approximately $1,537,000 from CNL First Corp., an affiliate of the general
partners. CNL First Corp. had purchased and temporarily held title to this
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the
costs incurred by CNL First Corp. to acquire and carry the property,
including closing costs.
The due to related parties at December 31, 1998 and 1997, totalled $25,432
and $7,853, respectively.
10. Concentration of Credit Risk:
----------------------------
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, 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
joint ventures) for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Long John Silver's, Inc. $ 634,121 $ 850,159 $ 853,992
Checkers Drive-In
Restaurants, Inc. 628,816 724,612 732,941
Foodmaker, Inc. 574,481 562,725 556,100
Golden Corral Corporation 534,624 520,911 476,350
Flagstar Enterprises, Inc. 427,801 483,606 498,655
Denny's, Inc. N/A 379,767 380,939
</TABLE>
37
<PAGE>
CNL INCOME FUND XIV, 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 joint ventures)
for each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Long John Silver's $ 634,121 $ 850,159 $ 853,992
Checkers Drive-in
Restaurants 628,816 724,612 732,941
Denny's 625,101 618,154 615,021
Jack in the Box 574,481 562,725 556,100
Golden Corral Family
Steakhouse Restaurants 534,624 520,911 476,350
Hardee's 427,801 483,606 498,655
</TABLE>
The information denoted by N/A indicates that for each period presented,
the tenant or group of affiliated tenants 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 lessee or restaurant chain contributing
more than ten percent of the Partnership's revenues 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.
In June 1998, Long John Silver's, Inc. filed for bankruptcy and rejected
the leases relating to four of its nine leases and ceased making rental
payments to the Partnership on the rejected leases. The Partnership will
not recognize any rental and earned income from these Properties until new
tenants for these Properties are located, or until the Properties are sold
and the proceeds from such sales are reinvested in additional Properties.
While Long John Silver's, Inc. has not rejected or affirmed the remaining
five leases, there can be no assurance that some or all of these leases
will not be rejected in the future. The lost revenues resulting from the
four leases that were rejected, as described above, and the possible
rejection of the remaining five leases could have an adverse effect on the
results of operations of the Partnership if the Partnership is not able to
re-lease these properties in a timely manner. The Partnership entered into
new leases, each with a new tenant, for two of the four rejected leases.
38
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
11. Subsequent Event:
----------------
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
4,313,041 shares of its common stock, par value $0.01 per shares (the "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 $42,435,559 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.
39
<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 XIV, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
---------------------------
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
---------------------------
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
---------------------------
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<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>
