<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
-------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _______________
Commission file number 0-26216
CNL INCOME FUND XV, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3198888
(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 ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 4,000,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is
no market value for such Units. Each Unit was originally sold at $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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The Form 10-K of CNL Income Fund XV, 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 XV, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on September 2, 1993. 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 February 23, 1994, the
Partnership offered for sale up to $40,000,000 of limited partnership interests
(the "Units") (4,000,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
February 23, 1994. The offering terminated on September 1, 1994, at which date
the maximum offering proceeds of $40,000,000 had been received from investors
who were admitted to the Partnership as limited partners (the "Limited
Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food and family-style restaurant chains
(the "Restaurant Chains"). Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$35,200,000 and were used to acquire 45 Properties, including 15 Properties
consisting of only land and two Properties owned by a joint venture in which the
Partnership is a co-venturer, to pay acquisition fees totalling $2,200,000 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
two Checkers Properties in Knoxville, Tennessee, and one Checkers Property in
Leavenworth, Kansas, which consisted of land only, exercised its option in
accordance with the lease agreements to substitute other Properties for these
three Properties. The Partnership sold the two Properties in Knoxville,
Tennessee, and the Property in Leavenworth, Kansas, and used the net sales
proceeds to acquire two Checkers Properties, consisting of land only, located in
Orlando and Bradenton, Florida. During the year ended December 31, 1996, the
Partnership acquired a Property in Clinton, North Carolina, with affiliates of
the General Partners as tenants-in-common. 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, 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, during the year ended December 31,
1998, the Partnership acquired a Property in Fort Myers, Florida, with an
affiliate of the General Partners as tenants-in-common. As a result of the
above transactions, as of December 31, 1998, the Partnership owned 50
Properties. The 50 Properties include 14 wholly owned Properties consisting of
only land, six Properties owned by a joint venture in which the Partnership is a
co-venturer and two Properties owned with affiliates as tenants-in-common. The
lessee of the 14 wholly owned Properties consisting of only land 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 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 approve the
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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. The leases of the Properties owned by the Partnership,
the joint venture in which the Partnership is a co-venturer and the Properties
owned with affiliates as tenants-in-common, provide for initial terms ranging
from 15 to 20 years (the average being 19 years) and expire between 2009 and
2018. Generally, the leases are on a triple-net basis, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. The leases of the Properties provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $22,500 to
$190,600. 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.
In June 1998, October 1998 and January 1999, three tenants, Long John
Silvers, Inc., Finest Foodservice, LLP, and B.C. Superior, LLC, respectively,
filed for bankruptcy and rejected the leases relating to six of their ten leases
(including two Properties held by Wood-Ridge Real Estate Joint Venture) and
ceased making rental payments to the Partnership relating to those leases that
were rejected. The Partnership will not recognize rental and earned income from
these six 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. As of March 11, 1999, the Partnership has continued
receiving rental payments on the Properties that have not been rejected. While
Long John Silver's has not rejected or affirmed their remaining four leases,
there can be no assurance that some or all of the leases will not be rejected in
the future. The lost revenues resulting from the six leases that were rejected,
as described above, and the possible rejection of the remaining four leases
could have an adverse effect on the results of operations of the Partnership if
the Partnership is unable to re-lease these Properties in a timely manner. In
February 1999, the Partnership entered into a new lease for one of the six
Properties whose leases were rejected, with a new tenant. The lease terms for
this Property are substantially the same as the Partnership's other leases as
described above. The General Partners are currently seeking either new tenants
or purchasers for the remaining five Properties.
Major Tenants
During 1998, five lessees of the Partnership, Flagstar Enterprises, Inc.,
Checkers Drive-In Restaurants, Inc., Long John Silver's, Inc., Foodmaker, 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 six Properties owned by a joint venture and two Properties owned
with affiliates as tenants-in-common). As of December 31, 1998, Flagstar
Enterprises, Inc. was the lessee under leases relating to eight restaurants,
Checkers Drive-In Restaurants, Inc. was the lessee under leases relating to 14
restaurants, Long John Silver's, Inc. was the lessee under leases relating to
four
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restaurants (excluding four restaurants for which Long John Silver's rejected
the leases as a result of filing for bankruptcy as described above), Foodmaker,
Inc. was the lessee under leases relating to four restaurants and Golden Corral
Corporation was the lessee under leases relating to five restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
Flagstar Enterprises, Inc., Checkers Drive-In Restaurants, Inc., Foodmaker,
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, five
Restaurant Chains, Hardee's, Checkers Drive-In Restaurants, Long John Silver's,
Golden Corral Family Steakhouse Restaurants ("Golden Corral") and Jack in the
Box, 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 six
Properties owned by a joint venture and two Properties owned with affiliates as
tenants-in-common). In 1999, it is anticipated that Hardee's, Checkers Drive-In
Restaurants, Golden Corral, and Jack in the Box each will continue to account
for more than ten percent of the total rental income to which the Partnership is
entitled under the terms of 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, as
described above. No single tenant or group of affiliated tenants lease
Properties with an aggregate carrying value in excess of 20 percent of the total
assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
In August 1994, the Partnership entered into a joint venture arrangement,
Wood-Ridge Real Estate Joint Venture with CNL Income Fund XIV, Ltd., an
affiliate of the General Partners to purchase and hold two Properties. The
affiliate is a limited partnership organized pursuant to the laws of the State
of Florida. In September 1996, Wood-Ridge Real Estate Joint Venture sold its
two Properties to the tenant and as of December 31, 1997, had reinvested the
majority of the net sales proceeds in six replacement Properties. The joint
venture distributed the remaining net sales proceeds to the Partnership and its
co-venture partner on a pro-rata basis during 1997. The joint venture
arrangement provides for the Partnership and its joint venture partner to share
in all costs and benefits associated with the joint venture in accordance with
their respective percentage interests in the joint venture. The Partnership has
a 50% interest in Wood-Ridge Real Estate Joint Venture. The Partnership and its
joint venture partner are also jointly and severally liable for all debts,
obligations and other liabilities of the joint venture.
Wood-Ridge Real Estate Joint Venture has an initial term of 30 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 partner to reinvest the sales proceeds in replacement Properties, and by
mutual agreement of the Partnership and its joint venture partner to dissolve
the joint venture.
The Partnership shares management control equally with an affiliate of the
General Partners for Wood-Ridge Real Estate Joint Venture. The joint venture
agreement restricts 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 Wood-Ridge Real Estate Joint Venture is
distributed 50 percent to each joint venture partner. Any liquidation proceeds,
after paying joint venture debts and liabilities and funding reserves for
contingent liabilities, will be distributed first to the joint venture partners
with positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter in proportion to each joint venture
partner's percentage interest in the joint venture.
In January 1996, the Partnership entered into an agreement to hold a Golden
Corral Property as tenants-in-common, with CNL Income Fund IV, Ltd., CNL Income
Fund VI, Ltd., and CNL Income Fund X, Ltd., each of which is an affiliate of the
General Partners. The agreement provides for the Partnership and the affiliates
to share in the profits and losses of the Property in proportion to each co-
tenant's percentage interest. The Partnership owns a 16 percent interest in
this Property.
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In June 1998, the Partnership entered into an agreement to hold a
Bennigan's Property as tenants-in-common, with CNL Income Fund VI, Ltd., an
affiliate of the General Partners. The agreement provides for the Partnership
and the affiliate to share in the profits and losses of the Property in
proportion to each co-tenant's percentage interest. The Partnership owns a 15
percent interest in this Property.
Each of the affiliates is a limited partnership organized pursuant to the
laws of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties. CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases. For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one percent of the sum of gross rental
revenues from Properties wholly owned by the Partnership plus the Partnership's
allocable share of gross revenues of joint ventures in which the Partnership is
a co-venturer, but not in excess of competitive fees for comparable services.
The management agreement continues until the Partnership no longer owns an
interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Employees
The Partnership has no employees. The officers of CNL Realty Corporation
and the officers and employees of CNL Fund Advisors, Inc. perform certain
services for the Partnership. In addition, the General Partners have available
to them the resources and expertise of the officers and employees of CNL Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1998, the Partnership owned 50 Properties. Of the 50
Properties, 42 are owned by the Partnership in fee simple, six are owned through
one joint venture arrangement and two are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses. This schedule was filed with the Partnership's Form 10-K for the year
ended December 31, 1998.
Description of Properties
Land. The Partnership's Property sites range from approximately 15,600 to
137,700 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.
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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 1
California 3
Florida 10
Georgia 4
Kentucky 1
Minnesota 1
Missouri 1
Mississippi 1
North Carolina 6
New Jersey 1
New Mexico 1
Ohio 2
Oklahoma 2
Pennsylvania 2
South Carolina 5
Tennessee 4
Texas 4
Virginia 1
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TOTAL PROPERTIES: 50
========
</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 14 Checkers Properties owned by the Partnership and one
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 1,500 to 11,000
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 (including
the Properties owned through tenancy in common arrangements) for federal income
tax purposes was $32,521,622 and $6,778,303, 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>
Bennigan's 1
Boston Market 4
Checkers 14
Denny's 2
East Side Mario's 1
Golden Corral 5
Hardee's 7
Jack in the Box 4
Long John Silver's 9
Quincy's 1
Taco Bell 1
Wendy's 1
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TOTAL PROPERTIES: 50
=========
</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, 88% 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) $3,461,756 $3,906,700 $3,905,897 $3,838,766 $1,140,187
Properties 50 49 48 44 43
Average per Unit $ 69,235 $ 79,729 $ 81,373 $ 87,245 $ 26,516
</TABLE>
(1) Rental income includes the Partnership's share of rental income from the
Properties owned through a joint venture arrangement and the Properties
owned through tenancy in common 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 -- -- --
2008 -- -- --
Thereafter 45 3,416,232 100.00%
--------- ----------- ----------
Totals (1) 45 3,416,232 100.00%
========= =========== ==========
</TABLE>
(1) Excludes five 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 Corporation leases seven Hardee's restaurants. The initial term
of each lease is 20 years (expiring between 2013 and 2014) and the average
minimum base annual rent is approximately $73,800 (ranging from approximately
$62,900 to $87,800).
Checkers Drive-In Restaurants, Inc. leases 14 Checkers Drive-In Restaurants
("Checkers"). The initial term of each of its leases is 20 years (expiring
between 2014 and 2015) and the average minimum base annual rent is approximately
$42,900 (ranging from approximately $22,500 to $63,100). The leases for the 14
Checkers Properties consist of only land. The tenant 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 term.
Long John Silver's, Inc. leases four Long John Silver's restaurants
(excluding four other Properties which were rejected by this tenant as described
above in Item 1. Business -- Leases) with an initial term of 20 years (expiring
in 2014) and the average minimum base annual rent is approximately $74,400
(ranging from approximately $60,400 to $92,900).
Foodmaker, Inc. leases four Jack in the Box restaurants. The initial term
of each lease is 18 years (expiring in 2012) and the average minimum base annual
rent is approximately $91,100 (ranging from approximately $71,000 to $102,200).
In addition, Golden Corral Corporation leases five Golden Corral
restaurants. The initial term of each lease is 15 years (expiring between 2009
and 2011) and the average minimum base annual rent is approximately $136,900
(ranging from approximately $88,000 to $190,600).
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 2, 1993, 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 lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of
December 31, 1998, the Partnership owned 50 Properties, either directly or
through joint venture or tenancy in common arrangements.
Capital Resources
Currently, the Partnership's primary source of capital is 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 $3,216,728, $3,306,595 and $3,434,682 for the years ended
December 31, 1998, 1997 and 1996, respectively. The decrease in cash from
operations during 1998, as compared to 1997, and the decrease during 1997, as
compared to 1996, 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.
In January 1996, the Partnership invested in a Golden Corral Property
located in Clinton, North Carolina, with affiliates of the General Partners as
tenants-in-common. In connection therewith, the Partnership and its affiliates
entered into an agreement whereby each co-venturer will share in the profits and
losses of the Property in proportion to its applicable percentage interest. As
of December 31, 1998, the Partnership owned a 16 percent interest in this
Property.
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. As of December 31, 1998, the Partnership had received approximately
$52,000, representing its pro-rata share of the uninvested net sales proceeds.
In June 1998, the Partnership invested in a Bennigan's Property located in
Fort Myers, Florida, with an affiliate of the General Partners as tenants-in-
common. In connection therewith, the Partnership and its affiliate entered into
an agreement whereby each co-venturer will share in the profits and losses of
the Property in proportion to its applicable percentage interest. As of
December 31, 1998, the Partnership owned a 15 percent interest in this Property.
None of the Properties owned by the Partnership, or the joint venture or
tenancy in common arrangements in which the Partnership owns an interest, is or
may be encumbered. Subject to certain restrictions on borrowing, however, the
Partnership may borrow funds but will not encumber any of the Properties in
connection with any such borrowing. The Partnership will not borrow for the
purpose of returning capital to the Limited Partners. The Partnership will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Partnership. The General Partners further have represented
that they will use their reasonable efforts to structure any borrowing so that
it will not constitute "acquisition indebtedness" for federal income tax
purposes and also will limit the Partnership's outstanding indebtedness to three
percent of the aggregate adjusted tax basis of its Properties. Affiliates of
the General Partners from time to time incur certain operating expenses on
behalf of the Partnership for which the Partnership reimburses the affiliates
without interest.
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Currently, cash reserves and 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
$1,214,444 invested in such short-term investments as compared to $1,614,708 at
December 31, 1997. The decrease in cash and cash equivalents during 1998, is
primarily due to the fact that in June 1998 the Partnership invested in a
Bennigan's Property as tenants-in-common with an affiliate of the General
Partners and due to the fact that the Partnership declared and paid a special
distribution of cumulative excess operating reserves to the Limited Partners of
$200,000 during 1998. As of December 31, 1998, the average interest rate earned
on the rental income deposited in demand deposit accounts at commercial banks
was approximately three percent annually. The funds remaining at December 31,
1998, after payment of distributions and other liabilities, will be used to meet
the Partnership's working capital and other needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash and
leasing them under triple-net leases to operators who generally meet specified
financial standards minimizes the Partnership's operating expenses. The General
Partners believe that the leases will continue to generate cash flow in excess
of operating expenses.
Due to low operating expenses and ongoing cash flow, the General Partners
believe that the Partnership has sufficient working capital reserves at this
time. In addition, because all leases of the Partnership's Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs. The General Partners have the
right 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
on cash from operations and for the years ended December 31, 1998 and 1996,
cumulative operating reserves, the Partnership declared distributions to the
Limited Partners of $3,400,000, $3,200,000 and $3,280,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. This represents distributions of
$0.85, $0.80, and $0.82 per Unit for the years ended December 31, 1998, 1997 and
1996, respectively. No amounts distributed or to be distributed to the Limited
Partners for the years ended December 31, 1998, 1997 or 1996 are required to be
or have been treated by the Partnership as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis.
During 1998, 1997 and 1996, the affiliates incurred on behalf of the
Partnership $98,978, $78,821 and $86,714, respectively, for certain operating
expenses. As of December 31, 1998 and 1997, the Partnership owed $23,337 and
$4,311, respectively, to related parties for such amounts, accounting and
administrative services and management fees. As of March 11, 1999, the
Partnership had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, increased to $869,817 at December 31, 1998,
from $818,009 at December 31, 1997, primarily as a result of an increase in
rents paid in advance at December 31, 1998. The General Partners believe that
the Partnership has sufficient cash on hand to meet its current working capital
needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
10
<PAGE>
Results of Operations
The Partnership owned and leased 42 wholly owned Properties during 1996,
1997, and 1998. In addition, during 1996, the Partnership was a co-venturer in
one joint venture that owned and leased seven Properties (including two
Properties in Wood-Ridge Real Estate Joint Venture, which were sold in September
1996) and the Partnership owned and leased one Property with affiliates, as
tenants-in-common. During 1997, the Partnership was a co-venturer in one joint
venture that owned and leased six Properties and owned and leased one Property
with affiliates as tenants-in-common. During 1998, the Partnership owned and
leased one additional Property with an affiliate as tenants-in-common. As of
December 31, 1998, the Partnership owned, either directly or through joint
venture arrangements, 50 Properties, which are generally subject to long-term,
triple-net leases. The leases of the Properties provide for minimum base annual
rental payments (payable in monthly installments) ranging from approximately
$22,500 to $190,600. 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 from the
sixth or the 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 $3,130,205, $3,586,791, and $3,596,466, 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 due to a decrease in rental and earned income of
approximately $197,700 due to the fact that, in June 1998, Long John Silver's,
Inc., filed for bankruptcy and rejected the leases relating to four of the eight
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 the year ended
December 31, 1998, the Partnership wrote off approximately $250,600 of accrued
rental income (non-cash accounting adjustment relating to the straight-lining of
future scheduled rent increases over the lease term in accordance with generally
accepted accounting principles). The General Partners are currently seeking
either new tenants or purchasers for these Properties. The Partnership will not
recognize 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 four leases, there can
be no assurance that some or all of the 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 four leases could
have an adverse effect on the results of operations of the Partnership if the
Partnership is unable to re-lease these Properties in a timely manner.
During the years ended December 31, 1998, 1997 and 1996, the Partnership
also earned $41,463, $25,791, and $23,318, respectively, in contingent rental
income. Contingent rental income for the year ended December 31, 1998, as
compared to 1997, increased primarily as a result of increased gross sales of
certain restaurant Properties that are subject to leases requiring payment of
contingent rental income.
In addition, for the years ended December 31, 1998, 1997 and 1996, the
Partnership earned $236,553, $239,249 and $392,862, respectively, attributable
to net income earned by joint ventures in which the Partnership is a co-
venturer. 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." The joint venture reinvested the
majority of the net sales proceeds in five Properties in October 1996 and one
Property in January 1997, therefore, the sale of the two Properties did not have
a material adverse effect on operations.
During the year ended December 31, 1998, five lessees of the Partnership,
Flagstar Enterprises, Inc., Checkers Drive-In Restaurants, Inc., Long John
Silver's, Inc., Foodmaker, 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 six Properties owned by a joint
venture and two Properties owned with affiliates as tenants-in-common). As of
December 31, 1998, Flagstar Enterprises, Inc. was the lessee under leases
relating to eight restaurants, Checkers Drive-
11
<PAGE>
In Restaurants, Inc. was the lessee under leases relating to 14 restaurants,
Long John Silver's, Inc. was the lessee under leases relating to four
restaurants (excluding the four leases rejected by the tenant as described
above), Foodmaker, Inc. was the lessee under leases relating to four restaurants
and Golden Corral Corporation was lessee under leases relating to five
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, Flagstar Enterprises, Inc., Checkers Drive-In
Restaurants, Foodmaker, 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, five Restaurant
Chains, Hardee's, Checkers Drive-In Restaurants, Long John Silver's, Golden
Corral and Jack in the Box, each accounted for more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from six Properties owned by a joint venture and two Properties owned
with affiliates as tenants-in-common). In 1999, it is anticipated that Hardee's,
Checker's Drive-In Restaurants, Golden Corral and Jack in the Box each will
continue to account for more than ten percent of the total rental income to
which the Partnership is entitled under the terms of 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.
Operating expenses, including depreciation and amortization expense, were
$547,636, $473,109, and $483,551 for the years ended December 31, 1998, 1997 and
1996, respectively. The increase in operating expenses during 1998, as compared
to 1997, is partially attributable to the fact that the Partnership accrued
insurance and real estate taxes as a result of Long John Silver's, Inc. filing
for bankruptcy and rejecting the leases relating to four Properties in June
1998. In addition, the increase in operating expenses during the year ended
December 31, 1998, is partially attributable to an increase in depreciation
expense due to the fact that during the year ended December 31, 1998, the
Partnership reclassified these assets from net investment in direct financing
leases to land and buildings on operating leases. The Partnership will continue
to incur certain expenses, such as real estate taxes, insurance and maintenance
relating to these Properties with rejected leases until replacement tenants or
purchasers are located. The Partnership is currently seeking either replacement
tenants or purchasers for these Properties.
The increase in operating expenses for 1998, is also partially due to the
fact that the Partnership incurred $23,196 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 decrease in operating
expenses during 1997, as compared to 1996, is primarily attributable to a
decrease in accounting and administrative expenses associated with operating the
Partnership and its Properties.
During the year ended December 31, 1998, the Partnership established an
allowance for loss on land and buildings of $280,907 for financial reporting
purposes relating to two of the four Long John Silver's Properties whose leases
were rejected by the tenant, as described above. The loss represents the
difference between the carrying value of the Properties at December 31, 1998 and
the current estimated net realizable value for these Properties. No such
allowance was established during the years ended December 31, 1997 and 1996.
The Partnership's leases as of December 31, 1998, are triple-net leases and
contain provisions that the General Partners believe mitigate the adverse effect
of inflation. Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also may cause capital appreciation of the
Partnership's Properties. Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.
Proposed Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF. As consideration for the Merger, APF has agreed to issue
3,733,901 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 was
$36,726,950 as of December 31, 1998. The APF Shares are
12
<PAGE>
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 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
13
<PAGE>
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.
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
14
<PAGE>
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 Partners cannot be assured
that the tenants have addressed all possible year 2000 issues. The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.
The General Partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The General
Partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the General Partners will
assess the remedies available to the Partnership under its lease agreements.
Item 8. Financial Statements and Supplementary Data
15
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 17
Financial Statements:
Balance Sheets 18
Statements of Income 19
Statements of Partners' Capital 20
Statements of Cash Flows 21
Notes to Financial Statements 23
</TABLE>
16
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
CNL Income Fund XV, 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 XV, 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 27, 1999, except for the second paragraph of Note 10 for which the date
is March 11, 1999.
17
<PAGE>
CNL INCOME FUND XV, 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 land and building $23,173,909 $22,145,138
Net investment in direct financing leases 7,589,694 9,264,307
Investment in joint ventures 2,743,450 2,561,816
Cash and cash equivalents 1,214,444 1,614,708
Receivables, less allowance for doubtful
accounts of $849 in 1998 62,465 26,888
Prepaid expenses 9,627 7,633
Organization costs, less accumulated
amortization of $9,549 and $7,548 451 2,452
Accrued rental income 1,565,014 1,422,781
------------------ -----------------
$36,359,054 $37,045,723
================== =================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Accounts payable $ 592 $ 6,991
Accrued and escrowed real estate
taxes payable 16,019 6,158
Distributions payable 800,000 800,000
Due to related parties 23,337 4,311
Rents paid in advance 53,206 4,860
------------------ -----------------
Total liabilities 893,154 822,320
Partners' capital 35,465,900 36,223,403
------------------ -----------------
$36,359,054 $37,045,723
================== =================
</TABLE>
18
<PAGE>
CNL INCOME FUND XV, 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 $2,443,550 $2,527,261 $2,527,261
Adjustments to accrued rental income (250,631) -- --
Earned income from direct
financing leases 937,286 1,059,530 1,069,205
Contingent rental income 41,463 25,791 23,318
Interest and other income 62,819 56,183 55,964
---------------- ---------------- ----------------
3,234,487 3,668,765 3,675,748
---------------- ---------------- ----------------
Expenses:
General operating and administrative 137,794 135,714 149,388
Professional services 26,208 24,526 19,881
Management fees to related parties 33,990 35,321 35,126
Real estate taxes 16,797 -- --
State and other taxes 27,763 29,200 30,924
Depreciation and amortization 281,888 248,348 248,232
Transaction costs 23,196 -- --
---------------- ---------------- ----------------
547,636 473,109 483,551
---------------- ---------------- ----------------
Income Before Equity in Earnings
of Joint Ventures and Provision for
Loss on Land and Buildings 2,686,851 3,195,656 3,192,197
Equity in Earnings of Joint Ventures 236,553 239,249 392,862
Provision for Loss on Land and Buildings (280,907) -- --
---------------- ---------------- ----------------
Net Income $2,642,497 $3,434,905 $3,585,059
================ ================ ================
Allocation of Net Income:
General partners $ 28,218 $ 34,349 $ 35,851
Limited partners 2,614,279 3,400,556 3,549,208
---------------- ---------------- ----------------
$2,642,497 $3,434,905 $3,585,059
================ ================ ================
Net Income Per Limited Partner Unit $ 0.65 $ 0.85 $ 0.89
================ ================ ================
Weighted Average Number of Limited
Partner Units Outstanding 4,000,000 4,000,000 4,000,000
================ ================ ================
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
-------------------------------
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Partners Limited Partners
-------------------------- ----------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $1,000 $ 46,211 $40,000,000 $ (4,085,947) $ 4,512,175 $(4,790,000) $35,683,439
Distributions to limited
partners ($0.82 per
limited partner unit) -- -- -- (3,280,000) -- -- (3,280,000)
Net income -- 35,851 -- -- 3,549,208 -- 3,585,059
------------- ----------- ------------- ------------- ------------ ------------ ------------
Balance, December 31, 1996 1,000 82,062 40,000,000 (7,365,947) 8,061,383 (4,790,000) 35,988,498
Distributions to limited
partners ($0.80 per
limited partner unit) -- -- -- (3,200,000) -- -- (3,200,000)
Net income -- 34,349 -- -- 3,400,556 -- 3,434,905
------------- ----------- ------------- ------------- ------------ ------------ ------------
Balance, December 31, 1997 1,000 116,411 40,000,000 (10,565,947) 11,461,939 (4,790,000) 36,223,403
Distributions to limited
partners ($0.85 per
limited partner unit) -- -- -- (3,400,000) -- -- (3,400,000)
Net income -- 28,218 -- -- 2,614,279 -- 2,642,497
------------- ----------- ------------- ------------- ------------ ------------ ------------
Balance, December 31, 1998 $1,000 $144,629 $40,000,000 $(13,965,947) $14,076,218 $(4,790,000) $35,465,900
============= =========== ============= ============= ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
CNL INCOME FUND XV, 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 $ 3,143,119 $ 3,228,741 $ 3,378,973
Distributions from joint ventures 271,075 249,318 259,407
Cash paid for expenses (252,042) (218,106) (246,748)
Interest received 54,576 46,642 43,050
------------ ------------- -------------
Net cash provided by operating activities 3,216,728 3,306,595 3,434,682
------------ ------------- -------------
Cash Flows from Investing Activities:
Investment in joint ventures (216,992) -- (129,939)
Return of capital from joint venture -- 51,950 --
------------ ------------- -------------
Net cash provided by (used in) investing
activities (216,992) 51,950 (129,939)
------------ ------------- -------------
Cash Flows from Financing Activities:
Distributions to limited partners (3,400,000) (3,280,000) (3,200,000)
------------ ------------- -------------
Net cash used in financing activities (3,400,000) (3,280,000) (3,200,000)
------------ ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (400,264) 78,545 104,743
Cash and Cash Equivalents at Beginning of Year 1,614,708 1,536,163 1,431,420
------------ ------------- -------------
Cash and Cash Equivalents at End of Year $ 1,214,444 $ 1,614,708 $ 1,536,163
============ ============= =============
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
CNL INCOME FUND XV, 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 $ 2,642,497 $ 3,434,905 $ 3,585,059
------------------ ------------------ ------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 279,051 245,563 245,563
Amortization 2,837 2,785 2,669
Equity in earnings of joint ventures, net of
distributions 34,522 10,069 (133,455)
Provision for loss on land and buildings 280,907 -- --
Decrease (increase) in receivables (33,427) 3,288 58,013
Decrease in net investment in direct
financing leases 85,884 87,508 77,834
Increase in prepaid expenses (1,994) (584) (4,234)
Increase in accrued rental income (142,233) (431,079) (431,654)
Increase in accounts payable and accrued
expenses 3,462 1,515 1,972
Increase (decrease) in due to related parties 16,876 2,956 (6,880)
Increase (decrease) in rents paid in
advance 48,346 (50,331) 39,795
------------------ ------------------ ------------------
Total adjustments 574,231 (128,310) (150,377)
------------------ ------------------ ------------------
Net Cash Provided by Operating Activities $ 3,216,728 $ 3,306,595 $ 3,434,682
================== ================== ==================
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at December 31 $ 800,000 $ 800,000 $ 880,000
================== ================== ==================
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
CNL INCOME FUND XV, 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 XV, Ltd. (the
-----------------------------------
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
General Partner. The general partners have responsibility for managing the
day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the acquisition
--------------------------------
of land and buildings at cost, including acquisition and closing costs.
Land and buildings are leased to unrelated third parties on a triple-net
basis, whereby the tenant is generally responsible for all operating
expenses relating to the property, including property taxes, insurance,
maintenance and repairs. The leases are accounted for using either the
direct financing or the operating methods. Such methods are described
below:
Direct financing method - The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset)
(Note 4). Unearned income is deferred and amortized to income over
the lease terms so as to produce a constant periodic rate of return on
the Partnership's net investment in the leases.
Operating method - Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as
rentals are earned and depreciation is charged to operations as
incurred. Buildings are depreciated on the straight-line method over
their estimated useful lives of 30 years. When scheduled rentals vary
during the lease term, income is recognized on a straight-line basis
so as to produce a constant periodic rent over the lease term
commencing on the date the property is placed in service.
23
<PAGE>
CNL INCOME FUND XV, 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 change 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 Wood-Ridge Real Estate Joint Venture and properties in Clinton, North
Carolina and Fort Myers, Florida, held as tenants-in-common with
affiliates, 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.
24
<PAGE>
CNL INCOME FUND XV, 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 institutions 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.
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 are 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 these
leases are operating leases. Substantially all leases are for 15 to 20
years and provide for minimum and contingent rentals. In addition,
generally the tenant pays all property taxes and assessments, fully
maintains the interior and
25
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
2. Leases - Continued:
------------------
exterior of the building and carries insurance coverage for public
liability, property damage, 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 $15,579,852 $15,579,852
Buildings 8,955,616 7,366,887
--------------- ---------------
24,535,468 22,946,739
Less accumulated depreciation (1,080,652) (801,601)
--------------- ---------------
23,454,816 22,145,138
Less allowance for loss on
land and buildings (280,907) --
--------------- ---------------
$23,173,909 $22,145,138
=============== ===============
</TABLE>
During the year ended December 31, 1998, the Partnership established an
allowance for loss on land and buildings of $280,907 for financial
reporting purposes relating to two of the four Long John Silver's
properties whose leases were rejected by the tenant as a result of the
tenant filing for bankruptcy. The loss represents the difference between
the carrying value of the properties at December 31, 1998 and the current
estimated net realizable value for these properties.
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
$142,233 (net of $250,631 in write-offs), $431,079, and $431,654,
respectively, of such rental income.
26
<PAGE>
CNL INCOME FUND XV, 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 $ 2,079,263
2000 2,205,272
2001 2,208,745
2002 2,239,958
2003 2,255,872
Thereafter 24,476,132
-----------------
$35,465,242
=================
</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 $ 15,275,632 $ 19,905,444
Estimated residual values 2,460,656 2,873,859
Less unearned income (10,146,594) (13,514,996)
----------------- ----------------
Net investment in direct financing
leases $ 7,589,694 $ 9,264,307
================= ================
</TABLE>
27
<PAGE>
CNL INCOME FUND XV, 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 $ 922,497
2000 925,241
2001 930,728
2002 953,085
2003 958,440
Thereafter 10,585,641
-----------------
$ 15,275,632
=================
</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).
During the year ended December 31, 1998, four of the eight 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 the Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying amount. No losses on the termination of direct financing
leases were recorded for financial reporting purposes.
5. Investment in Joint Ventures:
----------------------------
The Partnership has a 50 percent interest in the profits and losses of
Wood-Ridge Real Estate Joint Venture. The remaining interest in this joint
venture is held by an affiliate of the Partnership which has the same
general partners. The Partnership also has a 16 percent interest in a
Property in Clinton, North Carolina, with affiliates of the Partnership
that has the same general partners, as tenants-in-common. The Partnership
accounts for its investment in this property using the equity method since
the Partnership shares control with affiliates, and amounts relating to its
investment are included in investment in joint ventures.
28
<PAGE>
CNL INCOME FUND XV, 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 net sales proceeds from the sale of two properties during 1996 in
one property. As of December 31, 1998, the Partnership had received
approximately $52,000, representing its pro-rata share of the uninvested
net sales proceeds. As of December 31, 1998, the Partnership owned a 50
percent interest in the profits and losses of the joint venture.
In June 1998, the Partnership acquired a property in Fort Myers, Florida,
with an affiliate of the general partners as tenants-in-common. In
connection therewith, the Partnership contributed an amount to acquire a 15
percent interest in such property. The Partnership accounts for its
investment in this property using the equity method since the Partnership
shares control with affiliates, and amounts relating to its investment are
included in investment in joint ventures.
Wood-Ridge Real Estate Joint Venture owns and leases six properties to
operators of national fast-food or family-style restaurants. The
Partnership and affiliates, as tenants-in-common in two separate
tenancy-in-common arrangements, each own and lease one property to an
operator of national fast-food or family-style restaurants. The following
presents the combined, condensed financial information for all of the
Partnership's investments in joint ventures at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Land and buildings on operating leases,
less accumulated depreciation $6,063,237 $5,563,722
Net investment in direct financing lease 826,780 --
Cash 87,245 10,890
Receivables 1,677 5,923
Accrued rental income 96,768 74,001
Other assets 857 1,078
Liabilities 69,285 18,195
Partners' capital 7,007,279 5,637,419
Revenues 705,002 650,354
Net income 579,480 522,611
</TABLE>
The Partnership recognized income totalling $236,553, $239,249 and $392,862
for the years ended December 31, 1998, 1997 and 1996, respectively, from
these entities.
29
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
6. Allocations and Distributions:
-----------------------------
Generally, all net income and 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 shall be subordinated
to receipt by the limited partners of an aggregate, eight percent,
cumulative, noncompounded annual return on their invested capital
contributions (the "Limited Partners' 8% 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' 8% 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 liquidating sale of properties, will
be used in the following order: i) first to pay and discharge all of the
Partnership's liabilities to creditors, ii) second, to establish reserves
that may be deemed necessary for any anticipated or unforeseen liabilities
or obligations of the Partnership, iii) third, to pay all of the
Partnership's liabilities, if any, to the general and limited partners, iv)
fourth, after allocations of net income, gains and/or losses, to distribute
to the partners with positive capital accounts balances, in proportion to
such balances, up to amounts sufficient to reduce such positive balances to
zero, and v) thereafter, any funds remaining shall then be distributed 95
percent to the limited partners and five percent to the general partners.
During the years ended December 31, 1998, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,400,000, $3,200,000
and $3,280,000, respectively. No distributions have been made to the
general partners to date.
30
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997 and 1996
7. 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 $2,642,497 $3,434,905 $3,585,059
purposes
Depreciation for tax reporting
purposes in excess of depreciation (126,518) (160,007) (160,007)
for financial reporting purposes
Direct financing leases recorded as
operating leases for tax reporting 85,884 87,508 77,834
purposes
Allowance for loss on land and 280,907 -- --
buildings
Equity in earnings of joint ventures
for tax reporting purposes in
excess of (less than) equity in
earnings of joint ventures for 33,872 23,823 (158,836)
financial reporting purposes
(142,233) (431,079) (431,654)
Accrued rental income
48,346 (50,331) 39,795
Rents paid in advance
Capitalization of transaction costs for
tax reporting purposes 23,196 -- --
1,686 (670) 2,127
Other ------------- ------------- --------------
Net income for federal income tax $2,847,637 $2,904,149 $2,954,318
purposes ============= ============= ==============
</TABLE>
31
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997, and 1996
8. Related Party Transactions:
--------------------------
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the majority stockholder of CNL
Fund Advisors, Inc. The other individual general partner, Robert A.
Bourne, serves as treasurer, director and vice chairman of the board of CNL
Fund Advisors, Inc. During the years ended December 31, 1998, 1997, and
1996, CNL Fund Advisors, Inc. (hereinafter referred to as the "Affiliate")
performed certain services for the Partnership, as described below.
During the years ended December 31, 1998, 1997, and 1996, the Affiliate
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership
agreed to pay the Affiliate a management fee of one percent of the sum of
gross revenues from properties wholly owned by the Partnership and the
Partnership's allocable share of gross revenues from joint ventures. The
management fee, which will not exceed fees which are competitive for
similar services in the same geographic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliate.
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 Affiliate shall determine. The Partnership incurred management
fees of $33,990, $35,321 and $35,126 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 8% Preferred 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 of
the general partners provided accounting and administrative services to the
Partnership on a day-to-day basis. The Partnership incurred $92,573,
$78,051 and $87,265 for the years ended December 31, 1998, 1997 and 1996,
respectively, for such services.
The due to related parties at December 31, 1998 and 1997, totalled $23,337
and $4,311, respectively.
32
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997 and 1996
9. 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>
Checkers Drive-In Restaurants, Inc. $719,308 $716,905 $723,558
Golden Corral Corporation 595,343 582,600 531,775
Flagstar Enterprises, Inc. (and
Quincy's Restaurants, Inc. for the
years ended December 31, 1997 541,527 635,413 638,042
and 1996)
Long John Silver's, Inc. 510,187 710,325 714,804
Foodmaker, Inc. 417,426 417,426 417,426
</TABLE>
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 rental and earned income from joint ventures) for
each of the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Checkers Drive-In Restaurants $719,308 $716,905 $723,558
Golden Corral Family Steakhouse
Restaurants 595,343 582,600 531,775
Long John Silver's 573,104 773,265 777,743
Hardee's 541,527 543,889 546,037
Jack in the Box 417,426 417,426 417,426
</TABLE>
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of
restaurant concepts, default by any one of these lessees or restaurant
chains could significantly impact the results of operations of the
Partnership if the Partnership is not able to re-lease the properties in a
timely manner.
33
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997 and 1996
9. Concentration of Credit Risk - Continued:
----------------------------------------
In June 1998, the tenant of eight of the Long John Silver's Properties
filed for bankruptcy and rejected the leases relating to four Properties.
The rental income relating to these Properties will terminate until new
tenants or buyers for the Properties are located. While Long John
Silver's, Inc. has not rejected or affirmed the remaining four leases,
there can be no assurance that some of all of the 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 four leases could have an adverse effect on the results of
operations of the Partnership if the Partnership is unable to re-lease
these Properties in a timely manner.
10. Subsequent Events:
-----------------
In January 1999, a Boston Market tenant rejected its lease and ceased
making rental payments related to this lease.
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
3,733,901 shares of its common stock, par value $0.01 per share (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 $36,726,950 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
34
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
Years Ended December 31, 1998, 1997 and 1996
10. Subsequent Events - Continued:
-----------------------------
Merger prior to consummation of the transaction. The general partners
intend to recommend that the limited partners of the Partnership approve
the Merger. In connection with their recommendation, the general partners
will solicit the consent of the limited partners at the special meeting.
If the limited partners reject the Merger, the Partnership will bear the
portion of the transaction costs based upon the percentage of "For" votes
and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
October, 1999.
CNL INCOME FUND XV, 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
- ------------------------------------ (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director October 28, 1999
- ------------------------------------ (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
