<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Check the appropriate box:
[X] Filed by the Registrant
[_] Filed by a Party other than the Registrant
[X] Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only
(as permitted by Rule 14a-
6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CNL AMERICAN PROPERTIES FUND, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, of the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
400 East South Street Suite 500
Orlando, Florida 32801 Tel: 407-650-1000 800-522-3863
----------------
Notice of Special Meeting of Stockholders
To Be Held , 1999
----------------
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of CNL
AMERICAN PROPERTIES FUND, INC. ("APF") will be held at 10:30 a.m. local time,
on , 1999 at the CNL Management Center at 450 East South Street, Suite
101, Orlando, Florida, for the following purposes:
(a) to approve an amendment and restatement of APF's Articles of
Incorporation which (i) increases the number of authorized shares of
APF's common stock from 125,000,000 to 275,000,000 shares;
(ii) modifies certain provisions to reflect that APF is becoming
internally advised; and (iii) effects certain other modifications that
APF believes are desirable in connection with listing APF's common
stock for trading on the New York Stock Exchange, including
modifications to conform APF's articles more closely to the articles of
incorporation of other publicly-traded real estate investment trusts;
and
(b) to transact such other business as may properly come before the meeting
or any adjournment thereof.
Stockholders of record at the close of business on , 1999 will be
entitled to notice of, and to vote at, the meeting or at any adjournment
thereof.
Stockholders are cordially invited to attend the meeting in person. WHETHER
OR NOT YOU NOW PLAN TO ATTEND THE MEETING, YOU ARE ASKED TO COMPLETE, DATE,
SIGN AND MAIL PROMPTLY THE ENCLOSED PROXY FOR WHICH A POSTAGE PAID RETURN
ENVELOPE IS PROVIDED. IT IS IMPORTANT THAT YOUR SHARES BE VOTED. IF YOU DECIDE
TO ATTEND THE MEETING YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.
By Order of the Board of Directors,
-------------------------------------
Lynn E. Rose
Secretary
, 1999
Orlando, Florida
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE PROXY STATEMENT
OF CNL AMERICAN PROPERTIES FUND, INC.
Q: What is the proposal I am being asked to vote upon?
A: We, the Board of Directors of CNL American Properties Fund, Inc. (APF), are
requesting that you approve a proposal to amend and restate APF's Articles
of Incorporation. The proposed amendments and our reasons for recommending
them are described in detail in this Proxy Statement and a copy of the
proposed amended and restated Articles (the Restated Articles) is attached
as an exhibit to this Proxy Statement.
Q: Why do APF's Articles of Incorporation need to be amended?
A: For two reasons. First, to facilitate consummation of certain acquisitions
that we believe will increase stockholder value. As a result of these
acquisitions, APF will become a full-service restaurant real estate
investment trust (REIT) and will become one of the largest triple-net lease
REITs in the United States. Following the acquisitions, APF will be able to
offer a complete range of restaurant property services to operators of
national and regional restaurant chains from triple-net leasing and mortgage
financing to site selection, construction management and build-to-suit
development.
Second, upon consummation of these acquisitions, APF intends to list its
common stock (the APF Shares) on the New York Stock Exchange (NYSE) and
become a publicly-traded REIT. Certain of the amendments we are proposing
will modify APF's existing Articles of Incorporation to provide APF with
the greater degree of operational flexibility that is characteristic of
other publicly-traded REITs.
Q: Am I voting on the acquisitions or listing?
A: No. Stockholder approval is not required for the acquisitions or for
listing.
Q: Does the Board of Directors of APF recommend that I vote in favor of the
proposal?
A: Yes. We unanimously recommend that you vote "FOR" the proposal.
Q: What are the acquisitions that APF is making?
A: APF is making the following three acquisitions:
. APF will become internally advised and will acquire complete acquisition,
development and in-house management functions by acquiring its external
advisor, CNL Fund Advisors, Inc. (the Advisor). Because APF has had no
employees since its inception, the Advisor has provided these functions
on behalf of APF and has been responsible for the day-to-day operations
of APF, including raising capital, investment analysis, acquisitions, due
diligence, asset management and accounting services. The acquisition of
the Advisor also will provide APF with restaurant development
capabilities including site selection, construction management and build-
to-suit development.
. To increase its financing capabilities and expand its mortgage loan
portfolio, APF will acquire CNL Financial Corp. and CNL Financial
Services, Inc. (the CNL Restaurant Financial Services Group). The CNL
Restaurant Financial Services Group makes and services mortgage loans
(and, as described below, "securitizes" a portion of such loans) to
operators of national and regional restaurant chains comparable to the
restaurant chain operators that currently are tenants of APF.
. To increase the size of its restaurant property portfolio, APF will seek
to acquire 18 CNL Income Funds (the Funds), which are limited
partnerships that currently own, in the aggregate, 621 restaurant
properties similar to the types of restaurant properties in which
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APF invests. If APF acquires the Advisor, the CNL Restaurant Financial
Services Group and all of the Funds, it expects to have total assets of
approximately $1.5 billion at the time those acquisitions are consummated
and it will own or hold a mortgage interest in more than 1,400 restaurant
properties.
The Information Memorandum that is attached as an exhibit to this Proxy
Statement explains in detail the terms of the acquisitions and the
background of and reasons for them.
Q: How will the Restated Articles differ from APF's existing Articles of
Incorporation?
A: If approved, the Restated Articles:
. will increase the number of APF Shares
that APF is authorized to issue from 125,000,000 to 275,000,000 shares;
. will modify certain provisions to reflect that APF is becoming internally
advised as a result of its acquisition of the Advisor; and
. will effect certain other modifications to APF's existing Articles that
APF believes are desirable in connection with listing the APF Shares for
trading on the NYSE, including modifications designed to make APF's
Articles more comparable to the articles of other publicly-traded REITs.
Q: When will the APF Shares be listed for trading on the New York Stock
Exchange?
A: APF will seek to have the APF Shares begin trading on the NYSE concurrently
with the consummation of the acquisition by APF of the Funds.
In an effort to obtain a greater following by the investment banking
analyst community, concurrently with or shortly following the Fund
acquisitions and NYSE listing, and assuming market conditions permit, APF
intends to offer APF Shares to the public pursuant to an underwritten
public offering. APF has not yet determined how many APF Shares will be
offered for sale in the public offering or when the offering will commence.
Q: When do you expect the acquisitions to be completed?
A: We plan to complete the acquisition of the Advisor and the CNL Restaurant
Financial Services Group as soon as practicable. Because APF already has a
sufficient number of authorized APF Shares to consummate these
acquisitions, they may be completed before the Restated Articles are
approved. The acquisitions of the Funds, on the other hand, are subject to
approval of the Restated Articles by a majority of the APF stockholders
because APF does not currently have a sufficient number of authorized APF
Shares to complete those acquisitions. Further, the acquisitions of the
Funds are subject to the approval by the holders of a majority of the units
of limited partnership interests of each Fund. A special meeting of the
limited partners of the Funds is scheduled to be held on , 1999 for the
purpose of voting on the Fund acquisitions. If the Restated Articles are
approved, the acquisitions of the Funds will occur as soon as practicable
following the approval by the limited partners of the Funds.
It is expected that the acquisitions of the Funds will occur in the fourth
quarter of 1999. In no event will the acquisitions of the Advisor, the CNL
Restaurant Financial Services Group or the Funds be consummated later than
December 31, 1999.
Q: Why is APF acquiring the Advisor?
A: The principal reasons are as follows:
. APF is acquiring the Advisor, in part, because investment analysts
specializing in REITs have emphasized in recent years their strong
preference for internally-advised REITs. These analysts believe that the
nature of the relationship between externally-advised REITs (which APF is
currently) and their external advisors is susceptible to conflicts of
interest, most of which can be avoided through self-administration. For
these reasons, we believe that the marketplace undervalues externally-
advised REITs and that investors and analysts will
ii
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view an internally-managed structure more favorably.
. The Advisor currently is entitled to various fees for providing
management, acquisition, development and other services to APF, including
fees that are determined in part based on the cost basis of APF's assets.
Upon the acquisition of the Advisor, the operations of the Advisor will
become part of the business of APF and, accordingly, APF will cease to
pay such fees. While APF will assume the costs associated with the
provision of these services, we believe that due to the substantial
growth in APF's asset base, APF will experience long-term cost savings as
a result of the acquisition.
. The acquisition of the Advisor also will enable APF to provide restaurant
development services which include site selection, construction
management and build-to-suit development. The acquisition of those
capabilities will provide APF with an additional pool of restaurant
chains and restaurant chain operators to whom it can offer triple-net
lease and mortgage loan financing.
Q: Why is APF not internally advised now?
A: Historically, APF did not have a large enough asset base to provide the
economies of scale needed to support efficiently the extensive general and
administrative expenses of an internal management team. We believe that
APF's asset base has now grown sufficiently large to support such an
infrastructure efficiently.
Q: Why is APF acquiring the CNL Restaurant Financial Services Group?
A: Although APF currently has the ability to make mortgage loans, the
acquisition of the CNL Restaurant Financial Services Group will permit APF
to expand its financing capabilities to include securitization
transactions. APF also will acquire the CNL Restaurant Financial Services
Group's existing mortgage loan portfolio, including the servicing rights
for such portfolio, and will assume the warehouse lines of credit used
previously by them in providing such financial services.
We believe that APF's ability to offer a full range of financial products
to operators of national and regional restaurant chains will increase the
pool of available customers for its products and will enable APF to
position itself to become a preferred provider of restaurant financing
options to restaurant chain operators. As such, we believe the acquisition
of the CNL Restaurant Financial Services Group will allow APF to compete
more effectively with other restaurant REITs.
Q: What are securitization transactions and why would APF engage in them?
A: The CNL Restaurant Financial Services Group "securitizes" mortgage loans. A
mortgage loan securitization involves combining a group of mortgage loans
into a pool, creating securities that are backed by the combined pool and
then issuing those securities to investors. The CNL Restaurant Financial
Services Group makes loans and securitizes them by selling them to a
special purpose entity which issues certificates representing beneficial
interests in the pool of mortgage loans. The CNL Restaurant Financial
Services Group receives from a securitization (i) the net proceeds (less a
placement fee and other offering expenses) from the sale of the
certificates, (ii) income in the form of the "spread" between the interest
that is earned on the securitized mortgage loans (less transaction fees and
expenses and any portfolio losses) and the interest earned on the
certificates sold to third parties and (iii) fees for servicing mortgage
loans that have been securitized. The CNL Restaurant Financial Services
Group usually retains a subordinated interest in the mortgage loans, which
because it is subordinated, generally will bear interest at a higher rate
than the mortgage loans. Further, by eliminating the securitized mortgage
loans from its balance sheet, the securitization transactions also reduce
the CNL Restaurant Financial Services Group's equity requirements.
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<PAGE>
We believe that the expansion of APF's financing capabilities to include
securitization transactions will enable APF to access more financing
opportunities and, ultimately, to increase cash available for distributions
to the APF stockholders. We also believe that securitization transactions
may permit APF to obtain additional capital with greater ease and at a
lower cost at times when market conditions are not suitable for raising
funds on economically attractive terms through the issuance of APF's equity
or debt securities.
Q: Why is APF acquiring the Funds?
A: We believe that the acquisition of the Funds ultimately will result in
greater earnings for APF which, in turn, is expected to increase the market
value of APF's shares and cash distributions to APF's stockholders. We
believe that this will occur for the following reasons:
. We believe that the public market valuations of the equity securities of
many publicly-traded real estate companies, including REITs that focus on
the restaurant industry, are based, in part, on the growth potential of
such companies and have historically exceeded the net book values of
their real estate assets. We believe that the increase in the size of
APF's restaurant property portfolio will provide APF greater access to
both debt and equity capital necessary for funding its operations and
consummating acquisitions and financings on economically attractive
terms.
. We also believe that the acquisitions will generate cost savings based on
the economies of scale resulting from APF's larger restaurant property
portfolio.
. Finally, we believe the increase in the size of APF's restaurant property
portfolio will increase the probability of broader coverage of APF by
financial analysts who cover REIT stocks generally. Broader coverage by
financial analysts potentially may enhance the value of the APF Shares
and increase the volume of trading in the APF Shares, which would
increase their liquidity.
Q: Who owns the Funds?
A: The Funds were formed from 1985 to 1995 by affiliates of CNL Group, Inc., an
affiliate of APF. James M. Seneff, Jr., APF's Chairman and Chief Executive
Officer, Robert A. Bourne, APF's Vice Chairman and Treasurer, and CNL Realty
Corporation are the general partners of each of the Funds.
Q: How will APF's stockholders benefit from the acquisitions?
A: We believe that transforming APF into a full-service REIT will benefit APF's
stockholders in three principal ways.
. First, we believe that APF's ability to provide full-service restaurant
property services will give it a competitive advantage over other REITs
that typically provide a more limited array of services to their
prospective restaurant owners and operators.
. Second, we believe that internal restaurant property service capabilities
(including management, acquisition, development and expanded financing
capabilities) will improve APF's performance through increased control
over functions that are important to the growth of its business.
. Third, for the reasons outlined in the paragraphs above, we believe the
acquisitions will increase the value of APF's shares following listing on
the NYSE.
Q: How much will these acquisitions cost APF?
A: APF will acquire the Advisor, the CNL Restaurant Financial Services Group
and the Funds generally in exchange for APF Shares. APF is paying a total of
12,300,000 APF Shares for the Advisor and the CNL Restaurant Financial
Services Group. (APF has allocated 7,600,000 of such shares for the
acquisition of the Advisor and 4,700,000 of such shares for the acquisition
of the CNL Restaurant Financial Services Group.) If all 18 Funds are
acquired, APF will pay, in the aggregate, up to 61,000,000 APF Shares for
them, before the payment by the Funds of certain acquisition expenses.
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Q: Why might APF not acquire all 18 of the Funds?
A: The acquisition of each Fund must be approved by a majority in interest of
the limited partners of such Fund. Thus, we cannot be certain that APF will
acquire a Fund until after the votes have been counted.
Q: Are the acquisitions of the Advisor and the CNL Restaurant Financial
Services Group subject to approval by their stockholders?
A: No. The stockholders of both the Advisor and the CNL Restaurant Financial
Services Group have already approved the acquisitions of their companies.
Q: How did APF determine that the acquisitions are in my best interests?
A: The Board of Directors of APF first established a Special Committee
consisting of the three independent members of the Board to evaluate
alternatives for increasing stockholder value. To assist them in their
evaluation, the Special Committee engaged the independent investment
banking firms of Merrill Lynch and Salomon Smith Barney as its financial
advisors. Based upon discussions with Merrill Lynch and Salomon Smith
Barney, the Special Committee has determined that making the acquisitions,
together with listing the APF Shares on the NYSE, is the strategic
alternative that will most likely maximize stockholder value. In support of
its determination, the Special Committee received two separate fairness
opinions from Merrill Lynch stating that the aggregate consideration to be
paid by APF for the Advisor and the CNL Restaurant Financial Services Group
and for the Funds, respectively, is fair to APF from a financial point of
view.
Q: What is the dollar value of an APF Share?
A: Because the APF Shares are not listed on the NYSE at this time, the value
of an APF Share is uncertain because there is no established trading market
for the APF Shares. For purposes of the acquisitions, APF has assigned the
APF Shares a value of $10.00 per share, the price at which APF sold APF
Shares in three previous public offerings, the most recent of which was
completed in December 1998. Accordingly, based on that value, APF will pay
$123 million for the Advisor and the CNL Restaurant Financial Services
Group and, if all the Funds are acquired, up to an aggregate of $610
million for the Funds (before the payment by the Funds of certain
acquisition expenses).
Q: Will any of APF's affiliates benefit from the acquisitions?
A: As the sole stockholders of the CNL Group Inc., the majority stockholder of
the Advisor, Mr. Seneff and his wife will receive as consideration for
their indirect ownership interest in the Advisor 4,905,040 of the APF
Shares allocated by the Board for the acquisition of the Advisor. Mr.
Seneff individually will receive an additional 2,518,303 APF Shares as
consideration for the acquisition by APF of his interest in the CNL
Restaurant Financial Services Group. In addition, Mr. Bourne will receive
1,216,000 and 760,216 APF Shares to be paid by APF as consideration for his
interests in the Advisor and the CNL Restaurant Financial Services Group,
respectively.
As general partners of the Funds, Mr. Seneff and Mr. Bourne have ownership
interests in each Fund. They will be entitled to receive their pro rata
portion of the APF Shares paid for each Fund in accordance with the terms of
the relevant partnership agreement. Messrs. Seneff and Bourne will receive an
estimated aggregate of 273,499 APF Shares in exchange for their general
partner interests if all of the Funds are acquired. Furthermore, as directors
of APF they will be entitled to receive performance-based incentives,
including stock options, under APF's 1999 Performance Incentive Plan or any
other option, incentive compensation or similar plan approved by APF's
stockholders.
Q: What are the potential risks of the acquisitions?
A: There are a number of potential risks to the stockholders of APF associated
with the
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acquisitions. We believe that these risks, which are detailed in the
Information Memorandum that accompanies the enclosed Proxy Statement, are
justified by the anticipated benefits to stockholders.
Q: Who can vote on the proposal to adopt the Restated Articles?
A: APF stockholders at the close of business on the record date of ,
1999 are entitled to vote at the Special Meeting.
Approval of the proposal to adopt the Restated Articles requires the
affirmative vote of the holders of a majority of the outstanding APF Shares.
A majority vote in favor of the proposal will be binding on you even if you
have voted against the proposal.
Q: When and where is the Special Meeting of Stockholders?
A: The Special Meeting to vote on the proposal will be held at 10:30 a.m. on
, 1999 at the CNL Management Center at 450 East South Street,
Suite 101, Orlando, Florida.
Q: Must I attend the Special Meeting to vote on the proposal?
A: No. To vote without attending the Special Meeting, simply indicate on the
enclosed proxy card how you want to vote, and sign and mail it in the
enclosed return envelope as soon as possible, so that at the Special
Meeting your APF Shares may be voted "For" or "Against" the proposal to
adopt the Restated Articles. If you sign and send in your proxy card and do
not indicate how you want to vote, you will be counted as having voted in
favor of the proposal. If you do not send in your card or you abstain from
voting, it will count as being unvoted and will have the same effect as a
vote "Against" the proposal.
Q: Can I change my vote after I mail my proxy card?
A: Yes, you can change your vote at any time before your proxy is counted at
the Special Meeting. You can do this in three ways: first, you can send us
a written statement that you would like to revoke your proxy; second, you
can send us a new proxy card; or third, you can attend the Special Meeting
and vote in person. Any revocation or new proxy card should be sent to
Corporate Election Services, P.O. Box 125, Pittsburgh, PA, 15230-012, our
vote tabulator.
Q: Who can help answer my questions?
A: If you have more questions about the acquisitions or would like to request
any additional information, you should contact our solicitation firm which
we hired to assist us in answering your questions and administering the
Special Meeting:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 207-3159
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CNL AMERICAN PROPERTIES FUND, INC.
400 East South Street, Suite 500
Orlando, Florida 32801
Tel: 407-650-1000
800-522-3863
-----------------------
PROXY STATEMENT
-----------------------
This Proxy Statement is furnished by the Board of Directors of CNL American
Properties Fund, Inc., a Maryland corporation ("APF"), in connection with the
solicitation by management of proxies to be voted at a special meeting of
stockholders to be held on , 1999 (the "Special Meeting"), and at any
adjournment thereof, for the purposes set forth in the accompanying notice of
such meeting. All stockholders of record at the close of business on , 1999
(the "Record Date"), will be entitled to vote at the Special Meeting.
Any proxy, if received in time, properly signed and not revoked, will be
voted at such meeting in accordance with the directions of the stockholder. If
no directions are specified, the proxy will be voted FOR the proposal set forth
in this Proxy Statement. Any stockholder giving a proxy has the power to revoke
it at any time before it is exercised. A proxy may be revoked (1) by delivery
of a written statement that the proxy is revoked, (2) by delivery, at the
Special Meeting or otherwise, of a subsequent proxy executed by the person
executing the prior proxy or (3) by attendance at the Special Meeting and
voting in person. Any revocation or new proxy card should be sent to Corporate
Election Services, P.O. Box 125, Pittsburgh, PA, 15230-012.
Votes cast in person or by proxy at the Special Meeting will be tabulated
and a determination will be made as to whether or not a quorum is present. APF
will treat abstentions as shares that are present and entitled to vote for
purposes of determining the presence or absence of a quorum, but as unvoted for
purposes of determining the approval of any matter submitted to the
stockholders. If a broker submits a proxy indicating that it does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will not be considered as present and entitled to vote with
respect to such matter.
Solicitation of proxies will be primarily by mail. However, directors,
officers and other employees of APF also may solicit proxies, for no additional
compensation, by telephone or telegram or in person. All of the expenses of
preparing, assembling, printing and mailing the materials used in the
solicitation of proxies will be paid by APF. Arrangements may be made with
brokerage houses and other custodians, nominees and fiduciaries to forward
soliciting materials, at the expense of APF, to the beneficial owners of shares
held of record by such persons. In addition, APF has engaged D. F. King & Co.,
Inc., a professional proxy solicitation firm, to aid in the solicitation of
proxies at a fee estimated to be approximately $95,000 plus reimbursement of
reasonable out-of-pocket costs and expenses. APF has agreed to indemnify D.F.
King & Co, Inc. against certain liabilities that it may incur arising out of
the services it provides in connection with the Special Meeting.
As of the Record Date, 74,696,927 shares of APF's common stock, par value
$.01 per share (the "APF Shares"), were outstanding. Each APF Share entitles
the holder thereof to one vote on each of the matters to be voted upon at the
Special Meeting. As of the Record Date, officers and directors of APF
beneficially owned in the aggregate less than 1% of the outstanding APF Shares.
It is anticipated that this Proxy Statement and the enclosed proxy first
will be mailed to stockholders on or about , 1999.
<PAGE>
PROPOSAL TO APPROVE AN AMENDMENT AND RESTATEMENT OF
APF'S ARTICLES OF INCORPORATION
On March 11, 1999, the Board of Directors of APF (the "Board") unanimously
approved a proposal to amend and restate APF's existing Articles of
Incorporation (the "Existing Articles"), and directed that such proposal be
submitted to the APF stockholders for their approval. If approved, the amended
and restated Articles of Incorporation (the "Restated Articles"):
. will increase the number of APF Shares that APF is authorized to issue
from 125,000,000 to 275,000,000 shares;
. will modify certain provisions to reflect that APF is becoming
internally advised as a result of its proposed acquisition of CNL Fund
Advisors, Inc., its external advisor (the "Advisor"); and
. will effect certain other modifications to the Existing Articles that
APF believes are desirable in connection with the proposed listing of
the APF Shares for trading on the New York Stock Exchange ("NYSE"),
including modifications to conform APF's Articles more closely to the
articles of incorporation of other publicly-traded REITs.
The text of the proposed Restated Articles is set forth in Exhibit A to this
Proxy Statement and a marked version of the Existing Articles, which shows the
modifications proposed to be made, is set forth in Exhibit B to this Proxy
Statement.
The Board has determined it to be in the best interests of APF and its
stockholders to adopt the Restated Articles. The Board unanimously recommends
that stockholders vote "FOR" the proposal to adopt the Restated Articles.
Approval of the proposal to adopt the Restated Articles requires the
affirmative vote of the holders of a majority of the outstanding APF Shares
entitled to vote thereon. Proxies will be voted for approval of the Restated
Articles unless stockholders designate otherwise. It is expected that the
consummation of APF's acquisition of the Advisor and the CNL Restaurant
Financial Services Group (discussed below) will occur prior to (or at the
latest concurrently with) such time as the Restated Articles become effective,
which will occur upon their filing with the Maryland Department of Assessments
and Taxation. APF will seek to have the APF Shares begin trading on the NYSE
concurrently with the consummation of the acquisition by APF of the CNL Income
Funds (also discussed below).
The paragraphs below describe the amendments to the Existing Articles that
will be made if the Restated Articles are approved by the stockholders and the
reasons that the Board has proposed such amendments.
Increase in the Number of Authorized Shares
General. If the Restated Articles are approved, the number of APF Shares
that APF is authorized to issue will increase from 125,000,000 to 275,000,000
shares. The principal purpose for the increase in authorized APF Shares is to
permit APF to have sufficient shares to consummate contemplated acquisitions
(collectively, the "Acquisitions") that the Board believes will increase
stockholder value. As a result of these Acquisitions, APF will become a full-
service REIT which has the ability to offer to operators of national and
regional restaurant chains a complete range of restaurant development and
financing options. The Acquisitions consist of:
. Acquisition of Advisor. APF will become internally advised and acquire
complete acquisition, development and in-house management functions by
acquiring the Advisor. Because APF has had no employees since its
inception, the Advisor has provided these functions on behalf of APF and
has been responsible for the day-to-day operations of APF, including
raising capital, investment analysis, acquisitions, due diligence, asset
management and accounting services. The acquisition of the Advisor also
will provide APF with restaurant development capabilities, including
site selection, construction management and build-to-suit development.
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. Acquisition of CNL Restaurant Financial Services Group. To increase its
financing capabilities and expand its mortgage loan portfolio, APF will
acquire CNL Financial Corp. and CNL Financial Services, Inc. (together,
the "CNL Restaurant Financial Services Group"). The CNL Restaurant
Financial Services Group makes and services mortgage loans (and, as
described below, "securitizes" a portion of such loans) to operators of
national and regional restaurant chains comparable to the restaurant
chain operators that currently are tenants of APF.
. Acquisition of CNL Income Funds. To increase the size of its restaurant
property portfolio, APF will seek to acquire 18 CNL Income Funds (the
"Funds"), which are limited partnerships that owned, as of September 30,
1998 and in the aggregate, 621 restaurant properties similar to the
types of restaurant properties in which APF invests. If APF acquires the
Adviser, the CNL Restaurant Financial Services Group and all of the
Funds, it expects to have total assets of approximately $1.5 billion at
the time those acquisitions are consummated and it will own or hold a
mortgage interest in more than 1,400 restaurant properties, making it
one of the largest triple-net lease REITs in the United States.
The principal components of the Acquisitions are summarized below and the
terms of the Acquisitions and the background of and reasons for them are
discussed in detail in the Information Memorandum that is attached as Exhibit C
to this Proxy Statement. The APF stockholders are not being asked to, and are
not required to, approve the Acquisitions themselves. However, the acquisition
of the Funds is subject to approval of the Restated Articles by the holders of
a majority of the APF Shares because APF does not currently have a sufficient
number of authorized APF Shares to complete those acquisitions.
Merger Agreements and Consideration. APF has entered into a merger agreement
with the stockholders of each of the Advisor and the CNL Restaurant Financial
Services Group and merger agreements with the general partners (the "General
Partners") of each of the Funds. The Advisor and the CNL Restaurant Financial
Services Group will be merged into newly-formed, wholly-owned subsidiaries of
APF, and the Funds will be merged with and into CNL APF Partners, L.P., an
existing, wholly-owned subsidiary of APF through which APF will conduct its
business after the Acquisitions have been consummated. The merger agreements
were negotiated and executed following the recommendation of a special
committee of the Board, which is comprised of the three independent members of
APF's Board (the "Special Committee"), and the unanimous vote in favor of the
Acquisitions of the members of the full Board.
The merger agreements provide that the purchase price payable by APF to the
stockholders of the Advisor and the CNL Restaurant Financial Services Group
will consist of 12,300,000 APF Shares (with the Board having allocated
7,600,000 of such APF Shares as the consideration paid to the Advisor and
4,700,000 of such APF Shares as the consideration paid to the CNL Restaurant
Financial Services Group) and that if all of the Funds are acquired, up to an
aggregate of 61,000,000 APF Shares (before the payment by the Funds of certain
acquisition expenses) will be issued to the partners of the Funds. Because the
APF Shares are not listed at this time, the value of an APF Share is uncertain.
For purposes of the Acquisitions, the APF Shares have been assigned a value of
$10.00 per share, the price at which APF sold APF Shares in three previous
public offerings, the most recent of which was completed in December 1998.
Accordingly, based on that value, APF will pay $123 million for the Advisor and
the CNL Restaurant Financial Services Group and, if all the Funds are acquired,
up to an aggregate of $610 million for them (before payment by the Funds of
certain acquisition expenses).
The acquisition of each Fund is subject to the approval by the holders of a
majority of units of limited partnership interest of each fund. A special
meeting of the limited partners of the Funds is scheduled to be held on ,
1999 for the purpose of voting on the acquisitions. The stockholders of both
the Advisor and the CNL Restaurant Financial Services Group have already
approved the acquisitions of their companies.
APF plans to complete the acquisition of the Advisor and the CNL Restaurant
Financial Services Group as soon as practicable. Of the 125,000,000 APF Shares
authorized for issuance under the Existing Articles,
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<PAGE>
74,696,927 APF Shares have been issued and are outstanding. Because APF already
has a sufficient number of authorized APF Shares available to consummate these
acquisitions, they may be completed before the Restated Articles are approved.
The acquisitions of the Funds, on the other hand, are subject to approval of
the Restated Articles by the APF stockholders because APF does not currently
have a sufficient number of authorized APF Shares to complete those
acquisitions. Consequently, the merger agreements relating to the Funds are
conditioned on approval by the APF stockholders of the Restated Articles.
Assuming approval of the Restated Articles by APF stockholders, the acquisition
of the Funds will occur as soon as practicable following the approval by the
limited partners of the Funds. It is expected that the acquisitions of the
Funds will be consummated in the fourth quarter of 1999. In no event will the
Acquisitions be consummated later than December 31, 1999.
APF does not currently know the exact number of APF Shares that will be
required for the Acquisitions, because the total number of APF Shares that will
be issued in connection with the acquisitions of the Funds will depend on the
number of Funds and the particular Funds that are acquired, which will not be
determined until the limited partners of the Funds have voted on the
acquisitions. In addition, the limited partners of the Funds that are acquired
will have the option to elect to receive, in exchange for their limited
partnership interests, alternative consideration consisting of a combination of
cash and APF Callable Notes (the "Cash/Notes Option"), rather than APF Shares.
The number of APF Shares issued to a particular Fund will be reduced to the
extent its limited partners elect to receive the Cash/Notes Option.
Assuming that the Acquisitions will require 73,300,000 APF Shares (before
the payment by the Funds of certain acquisition expenses), APF will have up to
approximately 127,000,000 remaining authorized but unissued APF Shares
following the consummation of the Acquisitions. These remaining authorized APF
Shares would provide APF with flexibility to raise additional equity capital
from time to time, as consideration for future acquisitions or for a variety of
other corporate purposes. Shortly following the Acquisitions and in connection
with listing the APF Shares for trading on the NYSE ("Listing"), APF intends to
offer APF Shares to the public pursuant to an underwritten public offering, if
market conditions are suitable. APF has not yet determined how many APF Shares
will be offered for sale in the public offering or exactly when the offering
will commence. Other than the issuance of APF Shares pursuant to the
Acquisitions, the issuance of APF Shares to the directors, officers and
employees of APF pursuant to the terms of APF's 1999 Performance Incentive Plan
and the proposed public offering of APF Shares, APF does not have any current
plan to issue any of the additional APF Shares to be authorized.
Summary of the Acquisitions. The determination to proceed with the
Acquisitions and Listing was made following many months of deliberation and
based on the advice of Merrill Lynch, Pierce, Fenner & Smith, Incorporated
("Merrill Lynch") and Salomon Smith Barney Holdings, Inc. ("Salomon Smith
Barney"), independent investment banking firms engaged by the Special Committee
as its financial advisors. Based upon the advice of Merrill Lynch and Salomon
Smith Barney, the Special Committee determined that making the Acquisitions and
Listing are the strategic alternatives that will most likely maximize
stockholder value. In support of its determination, APF has obtained two
separate fairness opinions from Merrill Lynch which state that the number of
APF Shares payable by APF for the Advisor and the CNL Restaurant Financial
Services Group and for the Funds, respectively, is fair to APF from a financial
point of view. The chronology of the deliberations of the Board and the Special
Committee, the factors that they considered in determining to recommend the
Acquisitions and Listing, the various alternatives to the Acquisitions and
Listing that were considered and the fairness opinions rendered by Merrill
Lynch are described in the Information Memorandum under the caption "BACKGROUND
OF AND REASONS FOR THE ACQUISITIONS." Copies of the fairness opinions rendered
by Merrill Lynch are attached as Exhibit D-1 and Exhibit D-2, respectively, to
this Proxy Statement.
The Board believes that transforming APF into a full-service REIT by
acquiring the Advisor and the CNL Restaurant Financial Services Group and
significantly increasing APF's size by acquiring the Funds will enhance APF
stockholder value. APF believes that the Acquisitions will achieve three
important strategic objectives for APF. First, APF's ability to provide
integrated restaurant property services will give it a competitive advantage
over other REITs that typically provide a more limited array of services to
their
4
<PAGE>
prospective restaurant owners and operators. Second, the acquisition of
internal restaurant property service capabilities (including management,
acquisition, development and expanded financing capabilities) will improve
APF's performance through increased control over functions that are important
to the growth of its business. Third, the Acquisitions will facilitate Listing
and increase the value of the APF Shares following Listing.
Acquisition of the Advisor. APF will become internally advised and acquire
complete acquisition, development and asset management functions by acquiring
the Advisor. Because APF has had no employees since its inception, the Advisor
has provided these functions on behalf of APF and has been responsible for the
day-to-day operations of APF, including raising capital, investment analysis,
acquisitions, due diligence, asset management and accounting services. The
acquisition of the Advisor also will enable APF to provide restaurant
development services which include site selection, construction management and
build-to-suit development. As of September 30, 1998, the Advisor was overseeing
approximately 75 restaurant development projects.
The Advisor currently is entitled to various fees for providing services to
APF, including fees that are determined in part based on the cost basis of
APF's assets. Upon the acquisition of the Advisor, the operations of the
Advisor will become part of the business of APF and, accordingly, APF will
cease to pay such fees. APF has not previously sought to become internally
advised because, historically, it has not had a large enough asset base to
provide the economies of scale needed to support efficiently the extensive
general and administrative expenses of an internal management team. APF
believes that its asset base has now grown sufficiently large to support such
an infrastructure efficiently and that, due to such growth, APF will experience
long-term cost savings as a result of the acquisition of the Advisor.
In determining to acquire the Advisor, the Special Committee and the Board
considered, among other things, that investment analysts specializing in REITs
in recent years have emphasized their strong preference for internally-advised
REITs. These analysts believe that the nature of the relationship between
externally-advised REITs and their external advisors is susceptible to
conflicts of interest, most of which can be avoided through becoming internally
advised. An externally-advised REIT may compensate its external advisor on a
basis (such as a percentage of total assets or revenues under management) that
may not best align the interest of the external advisor with the REIT's
stockholders. While the Advisor owes a fiduciary obligation to the APF
stockholders and governance mechanisms have been implemented to resolve
potential conflicts of interest and protect APF's stockholders, APF believes
that the marketplace would value APF more favorably as an internally-advised
REIT. Of the REITs that are traded on the NYSE and have equity market
capitalizations of more than $1 billion, approximately 92% are self-advised.
Accordingly, APF believes that investors and analysts will view an internal
management structure more favorably.
Acquisition of CNL Restaurant Financial Services Group. Although APF
currently has the ability to make mortgage loans, the acquisition of the CNL
Restaurant Financial Services Group will permit APF to expand its financing
capabilities to include securitization transactions. APF also will acquire the
CNL Restaurant Financial Services Group's existing mortgage loan portfolio,
including the servicing rights for such portfolio, and will assume the
warehouse lines of credit used previously by them in providing such financial
services. As of September 30, 1998, the CNL Restaurant Financial Services Group
had originated approximately $465 million in mortgage loans on 458 restaurant
properties in 37 states, had secured approximately $135 million in loan
commitments and had securitized approximately $269 million of the $465 million
of originated mortgage loans. APF believes that its ability to offer a full
range of financial products to operators of national and regional restaurant
chains will increase the pool of available customers for APF's products.
The CNL Restaurant Financial Services Group "securitizes" mortgage loans. A
mortgage loan securitization involves combining a group of mortgage loans into
a pool, creating securities that are backed by the combined pool and then
issuing those securities to investors. The CNL Restaurant Financial Services
Group makes loans and securitizes them by selling them to a special purpose
entity which issues certificates
5
<PAGE>
representing beneficial interests in the pool of mortgage loans. The CNL
Restaurant Financial Services Group receives from a securitization (i) the net
proceeds (less a placement fee and other offering expenses) from the sale of
the certificates, (ii) income in the form of the "spread" between the interest
that is earned on the securitized mortgage loans (less transaction fees and
expenses and any portfolio losses) and the interest earned on the certificates
sold to third parties and (iii) fees for servicing mortgage loans that have
been securitized. The CNL Restaurant Financial Services Group usually will
retain a subordinated interest in the mortgage loans, which because it is
subordinated, generally will bear interest at a higher rate than the mortgage
loans as a whole. Further, by eliminating the securitized mortgage loans from
its balance sheet, the securitization transactions also reduce the CNL
Restaurant Financial Services Group's equity requirements.
APF believes that the expansion of its financing capabilities to include the
CNL Restaurant Financial Services Group's securitization capabilities will
enable APF to access more financing opportunities and, ultimately, to increase
cash available for distributions to the APF stockholders. APF believes that
securitization transactions may permit it to obtain additional capital with
greater ease and at a lower cost at times when market conditions are not
suitable for raising funds on economically attractive terms through the
issuance of equity or debt securities.
Acquisition of Funds. As of September 30, 1998, APF had invested more than
$480 million in 357 restaurant properties in 37 states. APF is seeking to
increase its asset base by acquiring the Funds, which currently own, in the
aggregate, 621 restaurant properties. For the nine months ended September 30,
1998, the Funds had aggregate gross revenues of approximately $37 million. If
APF acquires the Advisor, the CNL Restaurant Financial Services Group and all
of the Funds, it expects to have assets of approximately $1.5 billion and to
own or hold a mortgage interest in more than 1,400 restaurant properties,
making it one of the largest triple-net lease REITs in the United States.
The Funds were formed from 1985 to 1995 by affiliates of CNL Group, Inc., an
affiliate of APF. The limited partners of the Funds are the individuals and
entities who invested in the funds. James M. Seneff, Jr., APF's Chairman and
Chief Executive Officer, Robert A. Bourne, APF's Vice Chairman and Treasurer,
and CNL Realty Corporation are the general partners of each of the Funds.
The table below lists (i) the Funds that APF is seeking to acquire, (ii) the
number of APF Shares being offered to each Fund if it is acquired and (iii) the
estimated value (based on the assigned value of $10.00 per APF Share) of the
APF Shares to be paid to each Fund. The estimated value of the APF Shares being
offered to each Fund reflects a reduction in the number of APF Shares paid to
that Fund by APF for that Fund's allocable portion of the expenses of the
acquisitions.
6
<PAGE>
<TABLE>
<CAPTION>
Estimated
Value of APF
Number of APF Shares after
Shares Offered Acquisition
Fund to Fund(1) Expenses(1)
---- -------------- ------------
<S> <C> <C>
CNL Income Fund, Ltd............................. 1,157,759 $11,416,590
CNL Income Fund II, Ltd.......................... 2,393,267 23,664,939
CNL Income Fund III, Ltd......................... 2,082,901 20,591,448
CNL Income Fund IV, Ltd.......................... 2,668,016 26,341,688
CNL Income Fund V, Ltd........................... 2,049,031 20,258,264
CNL Income Fund VI, Ltd.......................... 3,730,388 36,877,167
CNL Income Fund VII, Ltd......................... 3,202,371 31,687,369
CNL Income Fund VIII, Ltd........................ 4,042,635 39,953,755
CNL Income Fund IX, Ltd.......................... 3,700,097 36,580,307
CNL Income Fund X, Ltd........................... 4,243,243 41,950,341
CNL Income Fund XI, Ltd.......................... 4,394,196 43,456,016
CNL Income Fund XII, Ltd......................... 4,768,496 47,152,089
CNL Income Fund XIII, Ltd........................ 3,886,185 38,375,335
CNL Income Fund XIV, Ltd......................... 4,313,041 42,605,480
CNL Income Fund XV, Ltd.......................... 3,733,901 36,888,672
CNL Income Fund XVI, Ltd......................... 4,320,947 42,693,949
CNL Income Fund XVII, Ltd........................ 3,014,377 29,790,126
CNL Income Fund XVIII, Ltd....................... 3,299,149 32,601,466
</TABLE>
- --------
(1) Assumes that none of the limited partners of the Funds elects to receive
the Cash/Notes Option.
APF believes that increasing its asset base through the Fund acquisitions
ultimately will result in greater earnings for APF, which, in turn, is expected
to increase the market value of the APF Shares and cash distributions to the
APF stockholders. APF believes that this will occur for the following reasons:
. APF believes that the public market valuations of the equity securities
of many publicly-traded real estate companies, including REITs that
focus on the restaurant industry, are based, in part, on the growth
potential of such companies and have historically exceeded the net book
values of their real estate assets. APF believes that the increase in
the size of its restaurant property portfolio will provide APF greater
access to both debt and equity capital necessary for funding its
operations and consummating acquisitions and financings on economically
attractive terms.
. APF also believes that the Fund acquisitions will generate cost savings
based on the economies of scale resulting from a larger restaurant
property portfolio.
. Finally, APF believes the increase in the size of its restaurant
property portfolio will increase the probability of broader coverage of
APF by financial analysts who cover REIT stocks generally. Broader
coverage by financial analysts may enhance the value of the APF Shares
and increase the volume of trading in the APF Shares, which would
increase their liquidity.
Listing on the NYSE; Public Offering. APF will provide liquidity and a
trading market for the APF Shares by Listing. APF will seek to have the APF
Shares begin trading on the NYSE concurrently with the consummation of the
acquisition by APF of the Funds. In an effort to obtain a greater following by
the investment banking analyst community, concurrently with or shortly
following the Fund acquisitions and Listing, and assuming market conditions
permit, APF intends to offer APF Shares to the public pursuant to an
underwritten public offering. APF has not yet determined how many APF Shares
will be offered for sale in the public offering or when the offering will
commence.
Effect of Increase in Authorized Shares. The Restated Articles would effect
an increase in the number of authorized APF Shares by 150,000,000 APF Shares.
To the extent APF issues these additional APF Shares,
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<PAGE>
which it will do to consummate the Fund acquisitions and to effect the proposed
underwritten public offering, the voting power of APF's current stockholders
will be diluted. In addition, the issuance of additional APF Shares in
connection with the Acquisitions may result in a reduction in funds from
operations per APF Share if the earnings attributable to the businesses and
restaurant properties that APF will acquire in the Acquisitions are not
sufficient to maintain the level of funds from operations per APF Share
existing prior to such issuance or issuances. Internal management projections
reviewed and considered by the Special Committee indicate that the Acquisitions
will be accretive on a funds from operations per share basis. For a discussion
of the accretion analysis that was performed by APF, see "BACKGROUND OF AND
REASONS FOR THE ACQUISITIONS -- Recommendation on the CNL Restaurant Business
Acquisitions" in the Information Memorandum attached as Exhibit C to this Proxy
Statement.
Authorization of additional APF Shares also could, under certain
circumstances, have an anti-takeover effect, although this is not the intention
of the amendments. An increased number of authorized APF Shares could
discourage, or be used to impede, an attempt to acquire or otherwise change
control of APF. The private placement of APF Shares into company "friendly"
hands, for example, could dilute the voting strength of a party seeking control
of APF. Furthermore, many companies have issued warrants or other rights to
acquire additional shares of common stock to the holders of their common stock
to discourage or defeat unsolicited share accumulation programs and acquisition
proposals, which programs or proposals may be viewed by the boards of directors
as not in the best interests of such companies and their stockholders. Although
APF has no present intent to use the additional authorized APF Shares for such
purposes, an increased number of APF Shares would be available for such
purposes if the Restated Articles are adopted.
Modifications to Reflect APF Becoming Internally Advised
The Existing Articles contain a number of provisions that impose guidelines
on transactions between APF and the Advisor and its affiliates. As discussed
above, in order to become a full-service REIT, APF will acquire the Advisor. As
a result of that acquisition, the separate existence of the Advisor will cease,
its operations will become part of the business of APF and APF will become an
internally-advised REIT. Once that occurs, the provisions in the Existing
Articles relating to the Advisor and its affiliates and to transactions and
relations between APF and the Advisor and its affiliates will no longer be
applicable. These provisions, which are eliminated in the Restated Articles,
are discussed below.
Independent Director Requirements. Section 2.1 of the Existing Articles
provides that a majority of the members of the Board of Directors must be
"Independent Directors." An "Independent Director" is defined in the Existing
Articles as someone who is not, and has not been for the previous two years,
associated with the Advisor. Because APF is acquiring the Advisor and becoming
internally advised, the Restated Articles eliminate the requirement that APF
have directors not associated with the Advisor. The Restated Articles also
eliminate any provisions of the Existing Articles that are only relevant if APF
has "Independent Directors." This includes, among others, Section 2.2 of the
Existing Articles (requiring that a majority of the members of Board committees
be Independent Directors), Section 2.6 (requiring that the Independent
Directors approve certain enumerated matters) and Section 5.2 (requiring the
Independent Directors to conduct an annual review of APF's investment
policies).
The term "independent director" is more commonly used to refer to a director
who is not also an employee of the company of which he or she is a director and
who is otherwise free of any relationship that would interfere with his or her
ability to exercise independent judgment in respect of that company's business.
In this regard, APF currently has five directors, two of whom (James M. Seneff,
Jr., APF's Chairman and Chief Executive Officer, and Robert A. Bourne, APF's
Vice Chairman and Treasurer) are employees of APF and three of whom are
independent directors under the more common meaning of the term. It is expected
that for the foreseeable future a majority of the Board will continue to be
comprised of independent directors.
Provisions Relating to Advisor Services. Article IV of the Existing Articles
consists of provisions that govern the relationship between APF and the
Advisor. These provisions include guidelines for supervision of
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<PAGE>
the Advisor by the Board of Directors, provisions relating to the termination
of the Advisor, restrictions on the types and amount of fees payable by APF to
the Advisor for services provided and limitations on reimbursement of expenses
incurred by the Advisor in performing those services. Because APF will acquire
the Advisor and become internally advised, Article IV of the Existing Articles
will no longer be applicable to APF's operations and will therefore be
eliminated in the Restated Articles.
Certain Conflict of Interest Provisions. In order to mitigate certain
potential conflicts of interest with the Advisor, Sections 6.3 and 6.4 of
Article VI of the Existing Articles contain a number of restrictions with
respect to transactions between APF and the Advisor and their respective
affiliates and on certain activities of the Advisor and its affiliates. For the
reasons discussed below, these provisions also are eliminated in the Restated
Articles.
Section 6.3(i) of the Existing Articles provides that the Advisor and its
affiliates will not offer or sell interests in certain subsequently formed
public programs prior to the completion of APF's initial public offering and
restricts investing by such programs prior to the time a certain percentage of
the proceeds of APF's initial public offering were invested. As described
above, once APF acquires the Advisor, restrictions on the activities of the
Advisor and its affiliates will no longer be applicable. The particular
provisions of Section 6.3(i) also are no longer relevant as APF's initial
public offering was completed in early 1997 and the proceeds of the initial
public offering were fully invested thereafter.
Sections 6.3(ii) and 6.4 also are eliminated in the Restated Articles
because they similarly will be inapplicable when APF acquires the Advisor. The
provisions that are being so eliminated include: (i) guidelines on how to
resolve conflicts when an investment opportunity becomes available which is
suitable for both APF and a public or private entity with which the Advisor or
its affiliates are affiliated (Section 6.3(ii)), (ii) restrictions on the
provision of goods and services to APF by the Advisor or its affiliates
(Section 6.4(i)) and (iii) restrictions on loans by the Advisor and its
affiliates to APF (Section 6.4(ii)). Section 6.4(ii) also restricts APF from
making any loans to affiliates. That provision is eliminated in the Restated
Articles for the reasons described below under "Other Modifications --
Restrictions on Affiliated Transactions."
Other Modifications
The Existing Articles were adopted prior to APF's commencing operations and
when APF had not yet acquired restaurant properties. In that context, a number
of limitations and restrictions were included in APF's Existing Articles. The
principal purpose of these limitations and restrictions was to impose
parameters on, and provide guidelines for, the development of APF's operating
capabilities and the acquisition of its restaurant property portfolio. Certain
of these limitations and restrictions were required under state regulations
because at the time of the initial public offering of APF Shares, the APF
Shares were not listed for trading on a national securities exchange or
designated for quotation on Nasdaq. Publicly-traded REITs are not required to,
and do not, include these types of provisions in their governing documents.
Since the adoption in 1995 of APF's original Articles of Incorporation
(which have not been comprehensively amended), APF has become a fully-operating
restaurant REIT, with a current portfolio of 357 restaurant properties. APF has
a four-year operating history, which means that investors and potential
investors now have substantial information on which to evaluate APF and its
business. In view of APF's operating history and its plans for Listing, APF and
the Board believe that many of the limitations and restrictions that were
included in the Existing Articles are unduly restrictive and could prevent APF
from pursuing favorable investment opportunities which could enhance
stockholder value. In addition, because other publicly-traded REITs generally
are not bound by similar limitations and restrictions, they could impair APF's
ability to compete effectively for investments and management talent. The Board
believes such limitations and restrictions should be modified so that APF will
be governed by articles of incorporation that are comparable to the articles of
incorporation of other publicly-traded operating REITs. The proposed Restated
Articles reflect the modifications that APF and the Board believe should be
made to the Existing Articles.
9
<PAGE>
The paragraphs below discuss, with respect to each provision of the Existing
Articles proposed to be modified by the Restated Articles (other than
modifications discussed above), the current provision as it appears in the
Existing Articles, the modified provision as it will appear in the Restated
Articles and the reason or reasons why the Board believes the provision should
be so modified.
References to NASAA REIT Guidelines. Several provisions of the Existing
Articles reference the guidelines for Real Estate Investment Trusts published
by the North American Securities Administrators Association. These guidelines
(the "NASAA REIT guidelines"), which consist of substantive restrictions on the
operations of a REIT, are applicable when a REIT is making a public offering of
its securities unless those securities are listed for trading on a national
securities exchange or designated for quotation on Nasdaq. Because the
governing documents of publicly-traded REITs are not required to comply with
the NASAA REIT guidelines and because APF will be becoming a publicly-traded
REIT, these references have been eliminated in the Restated Articles.
The Existing Articles also contain provisions that, while they do not
specifically reference the NASAA REIT guidelines, were included to comply with
those guidelines. Many of those provisions are modified or eliminated by the
Restated Articles as described elsewhere in this Proxy Statement.
Experience of Directors. The Existing Articles contain provisions requiring
that a director must have had, prior to his or her election to APF's Board of
Directors, "at least three (3) years of relevant experience demonstrating the
knowledge and experience required to successfully acquire and manage the type
of assets being acquired by [APF]." The Existing Articles further provide that
one of the Independent Directors must have three years of relevant real estate
experience. For a discussion of elimination of the Independent Director
requirement, see "Modifications to Reflect APF Becoming Internally Advised --
Independent Director Requirements" above.
The director experience requirements were included in the Existing Articles
in order to ensure that the directors guiding APF through its initial
development and acquisition phases were sufficiently experienced in the type of
activities in which APF intended to engage. While relevant experience and
particularly relevant real estate experience are factors that APF would
consider in recruiting and proposing nominees for director positions, APF
believes that because it is now a fully operating company with a large
portfolio of restaurant properties, it is no longer necessary or desirable to
require that directors have a particular type or specific number of years of
experience. Indeed, APF believes that having a director experience requirement
may prevent APF from proposing nominees who could potentially enrich the
composition of the Board of Directors by bringing to it broad and useful
experience, although they might not necessarily be experienced in the
acquisition and development of real properties. Examples of individuals who
might be precluded from serving as directors due to the director experience
requirements include university professors, government officials and
representatives and senior executives and directors of public companies that
are not engaged in real estate or restaurant-related activities. Individuals
with such backgrounds often are desired by public companies to serve on their
boards of directors.
APF believes that its Board should be composed of persons who can best serve
the interests of its stockholders. Because some of those persons might not meet
the director experience requirements under the Existing Articles, those
requirements have been eliminated under the Restated Articles.
Investment Limitations. The Existing Articles contain a number of
limitations and restrictions on APF's ability to make certain types of
investments. These investment limitations and restrictions were established, as
described above, in order to impose parameters on APF's operations because at
the time it had not commenced operations or acquired any restaurant properties.
The Board believes that now that APF is a fully-operating company, these
limitations and restrictions are no longer necessary or desirable because they
could impede APF's ability to take advantage of favorable investment
opportunities. Moreover, the elimination of certain of these limitations and
restrictions (for example, limitations under the Existing Articles on APF's
mortgage lending activities) will be desirable in light of APF's expansion of
its financing capabilities in connection with
10
<PAGE>
its acquisition of the CNL Restaurant Financial Services Group. The Board
further believes that these limitations and restrictions are inconsistent with
APF's ability to conduct business as a publicly-traded REIT and that, like
other publicly-traded REITs, the decision to make or not make these types of
investments should be wholly within the authority of the Board and APF's
management.
For the foregoing reasons, the Board is proposing the elimination of the
investment limitations and restrictions summarized below. The full text of the
eliminated provisions is set forth in the marked version of the Existing
Articles in Exhibit B to this Proxy Statement.
. Section 5.4 Investment Limitations. The investment limitations in
Section 5.4 of the Existing Articles that are eliminated in the Restated
Articles for the reasons outlined above prohibit APF from: (1) investing
more than 10% of its total assets in unimproved real property or
indebtedness secured by a deed of trust or mortgage loan on unimproved
real property (Section 5.4(i)); (2) investing in commodities or
commodity future contracts (Section 5.4(ii)); (3) investing in or making
mortgage loans unless an appraisal is obtained concerning the property
and certain other conditions are met (Sections 5.4(iii), (iv) and (v));
(4) investing in equity securities, except under certain limited
circumstances (Section 5.4(vi)); (5) except under specified
circumstances, issuing (A) equity securities redeemable solely at the
option of the holder, (B) debt securities, (C) common or preferred
shares on a deferred payment basis or under similar arrangements, (D)
non-voting or assessable securities and (E) options, warrants, or
similar evidences of right to buy its securities (Section 5.4(vii)); (6)
investing in contracts for the sale of real estate unless they are in
recordable form and appropriately recorded in the chain of title
(Section 5.4(viii)); (7) acquiring a restaurant property unless the
consideration to be paid for each such property is authorized by the
Board (Section 5.4(ix)); (8) engaging in underwriting or the agency
distribution of securities issued by others or in trading (Section
5.4(x)); (9) investing in any foreign currency or bullion or engaging in
any short sales (Section 5.4(xi)); and (10) issuing senior securities
except notes to lenders and preferred shares (Section 5.4(xii)).
. Limitations on Secured Equipment Financing. The Restated Articles also
eliminate the requirement under Section 5.3(iv) of the Existing Articles
that the offering by APF of leases secured by restaurant equipment must
be approved by a majority of directors (including a majority of
Independent Directors) as being fair, competitive and commercially
reasonable.
. Limitations on Investment in Equity Securities. The restriction in
Section 5.3(iii) of the Existing Articles on investment by APF in equity
securities also is eliminated under the Restated Articles. Under Section
5.3(iii), APF may invest in equity securities so long as a majority of
the disinterested directors (including a majority of the Independent
Directors) approve the investment as being fair, competitive and
commercially reasonable.
Limitations on Borrowing and Indebtedness. Historically, APF has funded
acquisitions using net proceeds from offerings of APF Shares. Since the
completion of its last offering of APF Shares in December 1998, APF has, and
intends in the future to, fund acquisitions and the development of new
restaurant properties through short-term borrowings and by financing or
refinancing its indebtedness on such properties on a longer-term basis when
market conditions are appropriate. Under Section 3.2(iv) and Section 5.4(xiii)
of the Existing Articles, total indebtedness of APF generally cannot exceed
300% of the net asset value of APF's assets. Although it is unlikely that APF
would ever exceed that level of indebtedness, an absolute limit on APF's
borrowings could impair its ability to engage in potentially advantageous
transactions. Such a limitation also is uncommon among publicly-traded REITs
and thus could restrict APF's ability to compete for investments and investment
opportunities. The proposed Restated Articles therefore do not contain any
limitation on the amount or percentage of indebtedness that APF may incur in
the future.
APF's Board has agreed that, as a general policy, APF will borrow funds only
when APF's ratio of debt-to-total assets is 45% or less. Because the Restated
Articles would eliminate any limitations on APF's ability to
11
<PAGE>
borrow, however, APF's Board could modify that policy at any time after the
Restated Articles are adopted. If that policy were changed, APF could become
more highly leveraged, resulting in an increase in the amount of debt
repayment. This, in turn, could increase APF's risk of default on its
obligations and adversely affect APF's funds from operations and its ability to
make distributions to its stockholders. Because this is only a policy, the
Board could, depending on the market conditions, modify the policy and increase
APF's leverage above 45%.
Restrictions on Affiliated Transactions. Various provisions of the Existing
Articles limit APF's ability to engage in transactions with the Advisor, a
director of APF or any of their affiliates. In general, these provisions
require that such transactions ("affiliated transactions") be approved by a
majority of the disinterested directors. They also contain limitations on the
substantive aspects of the affiliated transactions themselves, such as
restrictions on the consideration to be paid by APF for services provided or
assets acquired from or sold to such persons.
The provisions in the Existing Articles restricting affiliated transactions
are eliminated in the Restated Articles for a number of reasons. First, because
the Advisor is being acquired by APF, the likelihood of APF engaging in any
affiliated transactions is greatly reduced. Second, as discussed above, the
Restated Articles are intended to be more consistent with the articles of
incorporation of publicly-traded REITs and other public companies. The articles
of such companies generally do not contain charter restrictions on affiliated
transactions of the type proposed to be eliminated because, among other
reasons, the corporate laws of most states already contain provisions
restricting affiliated transactions. Under Maryland corporate law, to which APF
is subject, transactions between APF and its directors (or persons in which
such directors have a material financial interest) may be void or voidable
unless the conflict giving rise to the transaction is disclosed and the
transaction is approved or ratified by a majority of disinterested directors or
a majority of the stockholders or the transaction is fair and reasonable to
APF. Thus, APF's ability to enter into affiliated transactions is restricted
under applicable state law even if the affiliated transactions provisions in
the Existing Articles are eliminated by the Restated Articles.
The affiliated transaction provisions that are proposed to be eliminated in
the Restated Articles are the following:
. Joint Ventures. The Restated Articles eliminate Section 5.3(ii) of the
Existing Articles which provides that APF may invest in Joint Ventures
with the Advisor, one or more directors and any affiliates only if a
majority of disinterested directors approve the investment as being
fair and reasonable to APF and on substantially the same terms and
conditions as those received by other joint venturers.
. Sales and Leases to and from APF. The Restated Articles also eliminate
Sections 6.1 and 6.2 of the Existing Articles which require that APF's
disinterested directors approve as fair and reasonable to APF,
respectively, the purchase of property by APF from the Advisor, a
director or any affiliate and the acquisition or lease of assets from
APF by the Advisor, a director or any affiliate. Section 6.1 also
provides that the purchase by APF of any property from the Advisor, a
director or any affiliate must be at a price no greater than the cost
of the asset to the Advisor, or, as the case may be, such director or
affiliate, or if the price to APF is in excess of such cost, that
substantial justification for such excess exists, such excess is
reasonable and that the cost does not exceed the asset's appraised
value.
. Loans to Affiliates. The first sentence of Section 6.4(ii) prohibiting
APF from making loans to affiliates similarly is eliminated in the
Restated Articles.
. General Restriction. Section 9.5 of the Existing Articles contains
certain general restrictions on all transactions between APF and its
affiliates. The Restated Articles eliminate these restrictions which,
in addition to disinterested director approval, require that an
affiliated transaction be fair and reasonable to APF and its
stockholders, that the terms of such transaction are at least as
favorable as
12
<PAGE>
the terms of comparable arms-length transactions and that if an
acquisition is involved, the total consideration is not in excess of
the appraised value of the property being acquired. The Restated
Articles also eliminate the limitations in Section 9.5 on the payment
by APF of compensation to affiliates.
Voting Restrictions. The Restated Articles also eliminate Section 8.3 of the
Existing Articles which prohibits the Advisor, the directors and any of their
affiliates from voting on matters submitted to the APF stockholders regarding
removal of the Advisor, directors or any of their affiliates or any transaction
between APF and them. This provision, which was included in the Existing
Articles in accordance with the NASAA REIT guidelines (discussed above), is
eliminated because the articles of incorporation of publicly-traded REITs and
other public companies normally do not contain voting restrictions of this type
and, with respect to the restrictions on the Advisor and voting on removal of
or transactions with the Advisor, because APF is acquiring the Advisor.
Reports to Stockholders. Section 8.7 of the Existing Articles lists the
items of information that must be included in APF's annual report to
stockholders. However, because APF is a reporting company under the rules and
regulations of the Securities and Exchange Commission (the "SEC") and it will
become subject to the rules and regulations of the NYSE following Listing,
APF's annual reports will be required to comply with both the SEC and NYSE
annual reporting requirements. For these reasons, Section 8.7 has been modified
by eliminating the enumerated informational requirements and providing that the
reports to stockholders be prepared and delivered to stockholders in accordance
with the requirements of the SEC and the NYSE.
Indemnification. Under Section 7.2(i) of the Existing Articles, APF is
required to indemnify its directors and officers and permitted to indemnify its
employees and agents for losses or liabilities any of them (an "indemnitee")
may incur in connection with APF's business. Indemnification is not available,
however, (i) for losses or liabilities resulting from conduct by the indemnitee
that constitutes negligence, misconduct, bad faith or active or deliberate
dishonesty, (ii) if the indemnitee received an improper personal benefit, (iii)
in the case of a criminal proceeding, the indemnitee had reasonable cause to
believe his or her acts were unlawful or (iv) in a proceeding by or in the
right of APF, the indemnitee is adjudged liable to APF. Under Section 7.2(ii)
of the Existing Articles, APF also may not provide indemnification for losses
or liabilities arising from alleged violations by an indemnitee of federal or
state securities laws, except under certain specified circumstances.
The indemnification provisions under the Existing Articles are more narrow
than the indemnification provisions of publicly-traded REITs and other public
companies. They also limit APF's ability to provide indemnification to the
extent permitted by Maryland corporate law. The Restated Articles modify the
indemnification provisions, consistent with the charter provisions of publicly-
traded REITs and other public companies and consistent with Maryland law, to
provide that APF will indemnify its directors and officers and may indemnify
its employees and agents to the fullest extent permitted by Maryland law. This
modification will allow APF to offer director and officer candidates
indemnification similar to the indemnification they would receive from other
public companies and thus to compete with those companies for the most
qualified candidates.
Existence of APF. Under Section 11.1 of the Existing Articles, APF
automatically will terminate and dissolve on December 31, 2005 unless the APF
Shares are listed on a national securities exchange or over-the-counter market,
in which event APF automatically will become a perpetual life entity. In
contemplation of Listing, this provision is modified in the Restated Articles
to provide for APF's perpetual duration.
Issuance of Stock Certificates. Section 7.5 of the Existing Articles
provides that APF shall not issue stock certificates, but instead shall
maintain stock ownership records on its books. Because APF will be required to
issue stock certificates following Listing pursuant to the rules of the NYSE,
this provision has been deleted from the Restated Articles.
Conforming Changes and Other Ministerial Modifications. The Restated
Articles reflect a number of conforming changes and other modifications of a
ministerial nature that are necessary in view of the other
13
<PAGE>
modifications being proposed. These changes and modifications include, among
other things, deletion and revision of definitions, references and cross-
references and the re-numbering and lettering of remaining provisions. The
Restated Articles also eliminate provisions of the Existing Articles that were
relevant only in the context of APF's initial public offering, which was
completed in early 1997 (for example, the limitations on initial public
offering expenses under Section 3.2(vii) of the Existing Articles) and
provisions contemplating listing on a national securities exchange or over-the-
counter market (such as the provision in Section 5.1(iv) that obligates APF to
list the APF Shares or sell its assets within 5 to 10 years after the initial
public offering). All of these changes are indicated in the marked version of
the Existing Articles in Exhibit B to this Proxy Statement.
14
<PAGE>
SECURITY OWNERSHIP
The following table sets forth, as of , 1999, the number and percentage
of shares beneficially owned by all persons known by APF to own beneficially
more than 5% of the total APF Shares outstanding, by each director or named
executive officer and by all executive officers and directors as a group, based
solely upon information furnished to APF by such stockholders, executive
officers and directors. Unless otherwise noted below, the persons named in the
table have the sole voting and sole investment power with respect to each of
the shares beneficially owned by them.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of APF
of Beneficial Owner Beneficially Owned Shares Outstanding
- ------------------- ------------------ ------------------
<S> <C> <C>
James M. Seneff, Jr..................... 20,000(1) *
400 East South Street
Orlando, FL 32801
Robert A. Bourne........................ -- *
400 East South Street
Orlando, FL 32801
G. Richard Hostetter ................... 5,479(2) *
SunTrust Bank of Chattanooga, N.A.
P.O. Box 1638
Mail Code M0321
Chattanooga, TN 37401
Richard C. Huseman...................... -- *
3000 University Boulevard, Suite 251
Winter Park, FL 32792
J. Joseph Kruse......................... -- *
494 Woonasquatucket Avenue, Unit 114
North Providence, RI 02911
All directors and executive officers as
a group (10 persons)................... 25,479(1)(2) *
</TABLE>
- --------
* Less than 1%.
(1) Represents shares held by the CNL Group, Inc., of which Mr. Seneff is a
principal stockholder.
(2) Represents shares held by SunTrust Bank of Chattanooga, on behalf of Mr.
Hostetter, in an individual retirement account.
For pro forma beneficial ownership information based on the assumption that
there will be 147,279,427 APF Shares outstanding (net of expenses to be paid by
the Funds in the form of a reduction in the number of APF Shares paid to each
Fund and assuming no limited partners of the Funds elect the Cash/Notes Option)
following the Acquisitions if all of the Funds are acquired, see the table
under the caption "COMMON STOCK OWNERSHIP AFTER THE ACQUISITIONS" in the
Information Memorandum attached asExhibit C to this Proxy Statement.
15
<PAGE>
PROPOSALS FOR NEXT ANNUAL MEETING
Any stockholder proposal to be considered for inclusion in APF's proxy
statement and form of proxy for the annual meeting of stockholders to be held
in 2000 must be received at APF's office at 400 East South Street, Orlando,
Florida 32801, no later than November , 1999.
Under APF's bylaws, a stockholder must comply with certain procedures to
nominate directors or to propose other matters to be considered at an annual
meeting of stockholders. These procedures provide that the stockholders
desiring to make nominations for directors or to bring a proper subject before
a meeting must do so by notice timely delivered to APF's secretary. To be
timely, the secretary must receive the notice at APF's principal executive
offices not less than 60 days nor more than 90 days before the anniversary of
the preceding year's annual meeting of stockholders. In the case of APF's
annual meeting of stockholders in 2000, APF's secretary must receive notice of
any such proposal no earlier than February 13, 2000 and no later than March 14,
2000 (other than proposals intended to be included in the proxy statement and
form of proxy which, as noted above, must be received by November , 1999).
Generally, such notice must set forth: (i) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations or proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (ii) as
to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and of the beneficial
owner, if any, on whose behalf the proposal is made; (iii) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made, the name and address of such stockholder,
as they appear on APF's books, and of such beneficial owner and the class and
number of APF Shares which are owned beneficially and of record by such
stockholder and such beneficial owner. The Chairman of the annual meeting shall
have the power to declare that any proposal not meeting these and any other
applicable requirements imposed by the bylaws shall be disregarded. A copy of
the bylaws may be obtained without charge on written request addressed to CNL
American Properties Fund, Inc., Attn. Corporate Secretary, 400 East South
Street, Orlando, Florida 32801.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP has served as APF's independent certified public
accountants for APF's current and most recently completed fiscal years. A
representative of PricewaterhouseCoopers LLP will be present at the Special
Meeting and will be provided with the opportunity to make a statement if
desired. Such representative will also be available to respond to appropriate
questions.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented at the
Special Meeting other than those stated above. If any other business should
come before the Special Meeting, the person(s) named in the enclosed proxy will
vote thereon as he, she or they determine to be in the best interests of APF.
By Order of the Board of Directors,
-------------------------------------
Lynn E. Rose
Secretary
, 1999
Orlando, Florida
16
<PAGE>
PROXY
CNL AMERICAN PROPERTIES FUND, INC.
The undersigned hereby appoints James M. Seneff, Jr. and Robert A. Bourne,
and each of them, as proxies, with full power of substitution in each, to vote
all shares of common stock of CNL American Properties Fund, Inc. ("APF") which
the undersigned is entitled to vote, at a Special Meeting of Stockholders of
APF to be held on , 1999 at 10:30 a.m., local time, and any adjournment
thereof, on all matters set forth in the Notice of Special Meeting and Proxy
Statement, dated , 1999, a copy of which has been received by the
undersigned, as follows:
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING ITEMS:
1. Proposal to Approve an Amendment and Restatement of APF's Articles of
Incorporation:
[_]FOR [_]AGAINST [_]ABSTAIN
2. Other Matters:
Grant authority upon such other matters as may come before the Special
Meeting as they determine to be in the best interest of APF.
[_]FOR [_]AGAINST [_]ABSTAIN
(PLEASE SIGN AND DATE THIS PROXY ON THE REVERSE SIDE,AND RETURN IN
ENCLOSED ENVELOPE)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
IF YOU SIGN, DATE AND MAIL YOUR PROXY WITHOUT INDICATING HOW YOU WANT TO
VOTE, YOUR PROXY WILL BE COUNTED AS A VOTE "FOR" THE MATTERS STATED. IF YOU
FAIL TO RETURN YOUR PROXY, YOUR PROXY WILL NOT BE COUNTED. EACH STOCKHOLDER IS
URGED TO SUBMIT A SIGNED AND DATED PROXY.
Dated:
Signature(s) of Stockholder(s):
IMPORTANT: Please mark this Proxy, date it, sign it exactly as your name(s)
appear(s) and return it in the enclosed postage paid envelope. Joint owners
should each sign personally. Trustees and others signing in a representative or
fiduciary capacity should indicate their full titles in such capacity.
17
<PAGE>
Exhibit A
APF's Restated Articles (clean version)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CNL AMERICAN PROPERTIES FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article I: THE COMPANY;
DEFINITIONS...................................................... A-1
1.1 Name........................................................ A-1
1.2 Resident Agent.............................................. A-1
1.3 Nature of Company........................................... A-1
1.4 Purposes.................................................... A-1
1.5 Definitions................................................. A-1
Article II: BOARD OF DIRECTORS................................... A-3
2.1 Number...................................................... A-3
2.2 Committees.................................................. A-4
2.3 Initial Board; Term......................................... A-4
2.4 Fiduciary Obligations....................................... A-4
2.5 Resignation, Removal or Death............................... A-4
2.6 Business Combination Statute................................ A-5
2.7 Control Share Acquisition Statute........................... A-5
Article III: POWERS OF DIRECTORS................................. A-5
3.1 General..................................................... A-5
3.2 Specific Powers and Authority............................... A-5
3.3 Determination of Best Interest of Company................... A-9
Article IV: INVESTMENT OBJECTIVES AND OPERATING RESTRICTIONS..... A-9
4.1 Investment Objectives....................................... A-9
4.2 Operating Restrictions...................................... A-10
Article V: SHARES................................................ A-10
5.1 Authorized Shares........................................... A-10
5.2 Common Shares............................................... A-10
5.3 Preferred Shares............................................ A-11
5.4 General Nature of Shares.................................... A-12
5.5 Restrictions On Ownership and Transfer...................... A-12
5.6 Excess Shares............................................... A-18
5.7 Settlements................................................. A-21
5.8 Severability................................................ A-21
5.9 Waiver...................................................... A-21
Article VI: STOCKHOLDERS......................................... A-21
6.1 Meetings of Stockholders.................................... A-21
6.2 Voting Rights of Stockholders............................... A-22
6.3 Stockholder Action to be Taken by Meeting................... A-22
6.4 Right of Inspection......................................... A-22
6.5 Access to Stockholder List.................................. A-22
6.6 Reports..................................................... A-23
Article VII: LIABILITY; TRANSACTIONS BETWEEN AFFILIATES
AND THE COMPANY..................................... A-23
7.1 Limitation of Stockholder Liability......................... A-23
7.2 Exculpation................................................. A-23
7.3 Indemnification............................................. A-23
7.4 Express Exculpatory Clauses In Instruments.................. A-23
7.5 Transactions with Affiliates................................ A-24
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
Article VIII : AMENDMENT; REORGANIZATION; MERGER, ETC...................... A-24
8.1 Amendment............................................................ A-24
8.2 Reorganization....................................................... A-24
8.3 Merger, Consolidation or Sale of Company Property.................... A-25
Article IX : DURATION OF COMPANY........................................... A-26
9.1 Perpetual Existence.................................................. A-26
Article X : MISCELLANEOUS.................................................. A-26
10.1 Governing Law....................................................... A-26
10.2 Reliance by Third Parties........................................... A-26
10.3 Provisions in Conflict with Law or Regulations...................... A-26
10.4 Construction........................................................ A-26
10.5 Recordation......................................................... A-27
</TABLE>
-ii-
<PAGE>
ARTICLE I:
THE COMPANY; DEFINITIONS
1.1 Name.
The name of the corporation (the "Company") is:
CNL American Properties Fund, Inc.
So far as may be practicable, the business of the Company shall be conducted
and transacted under that name, which name, and the word "Company" wherever
used in these Second Amended and Restated Articles of Incorporation of CNL
American Properties Fund, Inc. (these "Articles of Incorporation"), except
where the context otherwise requires, shall refer to the Directors collectively
but not individually or personally and shall not refer to the Stockholders or
to any officers, employees or agents of the Company or of such Directors.
Under circumstances in which the Directors determine that the use of the
name "CNL American Properties Fund, Inc." is not practicable, they may use any
other designation or name for the Company.
1.2 Resident Agent.
The name and address of the resident agent for service of process of the
Company in the State of Maryland shall be The Corporation Trust Incorporated,
32 South Street, Baltimore, Maryland 21202. The Company may have such principal
office within the State of Maryland as the Directors may from time to time
determine. The Company may also have such other offices or places of business
within or without the State of Maryland as the Directors may from time to time
determine.
1.3 Nature of Company.
The Company is a Maryland corporation within the meaning of the MGCL.
1.4 Purposes.
The purposes for which the Company is formed are to conduct any business for
which corporations may be organized under the laws of the State of Maryland
including, but not limited to, the following: (i) to acquire, hold, own,
develop, construct, improve, maintain, operate, sell, lease, transfer,
encumber, convey, exchange and otherwise dispose of or deal with real and
personal property; (ii) to engage in the business of offering furniture,
fixture, and equipment financing to operators of Restaurant Chains; and (iii)
to enter into any partnership, joint venture or other similar arrangement to
engage in any of the foregoing.
1.5 Definitions.
As used in these Articles of Incorporation, the following terms shall have
the following meanings unless the context otherwise requires (certain other
terms used in Article V hereof are defined in Sections 5.2, 5.3, 5.5 and 5.6
hereof):
"Affiliate" or "Affiliated" means, as to any individual, corporation,
partnership, trust or other association (other than the Excess Shares Trust),
(i) any Person or entity directly or indirectly, through one or more
intermediaries controlling, controlled by, or under common control with another
person or entity; (ii) any Person or entity, directly or indirectly owning or
controlling ten percent (10%) or more of the outstanding voting securities of
another Person or entity; (iii) any officer, director, partner or trustee of
such Person or entity; (iv) any Person ten percent (10%) or more of whose
outstanding voting securities are directly or indirectly owned, controlled, or
held, with power to vote, by such other Person; and (v) if such other Person or
entity is an officer, director, partner, or trustee of a Person or entity, the
Person or entity for which such Person or entity acts in any such capacity.
A-1
<PAGE>
"Bylaws" means the bylaws of the Company, as the same are in effect from
time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute thereto. Reference to any provision of the Code
shall mean such provision as in effect from time to time, as the same may be
amended, and any successor provision thereto, as interpreted by any applicable
regulations as in effect from time to time.
"Company Property" means any and all property, real, personal or otherwise,
tangible or intangible, including without limitation mortgage loans, interests
in trust certificates and Secured Equipment Leases, which is transferred or
conveyed to the Company (including all rents, income, profits and gains
therefrom), which is owned or held by, or for the account of, the Company.
"Directors," "Board of Directors" or "Board" means, collectively, the
individuals named in Section 2.3 of these Articles of Incorporation so long as
they continue in office and all other individuals who have been duly elected
and qualify as Directors of the Company hereunder.
"Distributions" means any distributions of money or securities by the
Company to owners of Shares, including distributions that may constitute a
return of capital for federal income tax purposes. The Company will make no
distributions other than distributions of money or securities.
"Equity Shares" means transferable shares of beneficial interest of the
Company of any class or series, including Common Shares or Preferred Shares.
"Listing" means the listing of the Shares of the Company on a national
securities exchange or over-the-counter market.
"MGCL" means the Maryland General Corporation Law as contained in the
Corporations and Associations Article of the Annotated Code of Maryland.
"Mortgages" means mortgages, deeds of trust or other security interests on
or applicable to Real Property.
"Net Assets" means the total assets of the Company (other than intangibles),
at cost, before deducting depreciation or other non-cash reserves, less total
liabilities, calculated quarterly by the Company on a basis consistently
applied.
"Person" means an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company or other entity, or any government or any agency or political
subdivision thereof, and also includes a group as that term is used for
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended, but does not include an underwriter that participates in a public
offering of Equity Shares for a period of sixty (60) days following the initial
purchase by such underwriter of such Equity Shares in such public offering,
provided that the foregoing exclusion shall apply only if the ownership of such
Equity Shares by an underwriter would not cause the Company to fail to qualify
as a REIT by reason of being "closely held" within the meaning of Section
856(a) of the Code or otherwise cause the Company to fail to qualify as a REIT.
"Property" or "Properties" means (i) the real properties, including the
buildings located thereon, (ii) the real properties only, or (iii) the
buildings only, which are acquired by the Company, either directly or through
joint venture arrangements or other partnerships or similar arrangements.
"Real Property" or "Real Estate" means land, rights in land (including
leasehold interests), and any buildings, structures, improvements, furnishings,
fixtures and equipment located on or used in connection with land and rights or
interests in land.
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"REIT" means a "real estate investment trust" as defined pursuant to
Sections 856 through 860 of the Code.
"REIT Provisions of the Code" means Sections 856 through 860 of the Code and
any successor or other provisions of the Code relating to real estate
investment trusts (including provisions as to the attribution of ownership of
beneficial interests therein) and the regulations promulgated thereunder.
"Restaurant Chains" shall mean the national and regional restaurant chains,
primarily fast-food, family-style, and casual dining chains who themselves or
through their franchisees will either (i) lease the Properties purchased by the
Company or (ii) become lessees of Secured Equipment Leases.
"Roll-Up Entity" shall mean a partnership, real estate investment trust,
corporation, trust or similar entity that would be created or would survive
after the successful completion of a proposed Roll-Up Transaction.
"Roll-Up Transaction" shall mean a transaction involving the acquisition,
merger, conversion, or consolidation, directly or indirectly, of the Company
and the issuance of securities of a Roll-Up Entity. Such term does not include:
(i) a transaction involving securities of the Company that have been listed on
a national securities exchange or included for quotation on the National Market
System of the National Association of Securities Dealers Automated Quotation
System for at least 12 months; or (ii) a transaction involving the conversion
to corporate, trust, or association form of only the Company if, as a
consequence of the transaction, there will be no significant adverse change in
Stockholder voting rights, the term of existence of the Company or the
investment objectives of the Company.
"Secured Equipment Leases" means furniture, fixtures and equipment financing
made available by the Company.
"Securities" means Equity Shares, Excess Shares, any other stock, shares or
other evidences of equity or beneficial or other interests, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in, temporary or interim certificates for, receipts
for, guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire, any of the foregoing.
"Shares" means shares of beneficial interest of the Company of any class or
series, including Common Shares, Preferred Shares and Excess Shares.
"Stockholders" means the registered holders of the Company's Equity Shares.
ARTICLE II:
BOARD OF DIRECTORS
2.1 Number.
The number of Directors initially shall be five (5), which number may be
increased or decreased from time to time by resolution of the Directors then in
office or by a majority vote of the Stockholders entitled to vote; provided,
however, that the total number of Directors shall be not fewer than three (3)
and not more than fifteen (15), subject to the Bylaws and to any express rights
of any holders of any series of Preferred Shares to elect additional directors
under specified circumstances. No reduction in the number of Directors shall
cause the removal of any Director from office prior to the expiration of his
term. Any vacancy created by an increase in the number of Directors will be
filled, at any regular meeting or at any special meeting of the Directors
called for that purpose, by a majority of the Directors. Any other vacancy will
be filled at any annual meeting or at any special meeting of the Stockholders
called for that purpose, by a majority of the Common Shares
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outstanding and entitled to vote. For the purposes of voting for directors,
each Share of stock may be voted for as many individuals as there are directors
to be elected and for whose election the Share is entitled to be voted, or as
may otherwise be required by the MGCL or other applicable law as in effect from
time to time.
2.2 Committees.
Subject to the MGCL, the Directors may establish such committees as they
deem appropriate, in their discretion.
2.3 Initial Board; Term.
The initial Directors are James M. Seneff, Jr., Robert A. Bourne, G. Richard
Hostetter, J. Joseph Kruse and Richard C. Huseman. Each Director shall hold
office for one (1) year, until the next annual meeting of Stockholders and
until his successor shall have been duly elected and shall have qualified.
Directors may be elected to an unlimited number of successive terms.
The names and address of the initial Directors are as follows:
<TABLE>
<CAPTION>
Name Address
---- ----------------------
<S> <C>
James M. Seneff, Jr................................. 400 E. South Street
Orlando, Florida 32801
Robert A. Bourne.................................... 400 E. South Street
Orlando, Florida 32801
G. Richard Hostetter................................ 400 E. South Street
Orlando, Florida 32801
J. Joseph Kruse..................................... 400 E. South Street
Orlando, Florida 32801
Richard C. Huseman.................................. 400 E. South Street
Orlando, Florida 32801
</TABLE>
2.4 Fiduciary Obligations.
The Directors serve in a fiduciary capacity to the Company and have a
fiduciary duty to the Stockholders of the Company.
2.5 Resignation, Removal or Death.
Any Director may resign by written notice to the Board of Directors,
effective upon execution and delivery to the Company of such written notice or
upon any future date specified in the notice. A Director may be removed from
office with or without cause only at a meeting of the Stockholders called for
that purpose, by the affirmative vote of the holders of not less than a
majority of the Common Shares then outstanding and entitled to vote in the
election of the Directors, subject to the rights of any Preferred Shares to
vote for such Directors. The notice of such meeting shall indicate that the
purpose, or one of the purposes, of such meeting is to determine if a Director
should be removed. Upon the resignation or removal of any Director, or his
otherwise ceasing to be a Director, he shall automatically cease to have any
such right, title or interest in and to the Company Property and shall execute
and deliver such documents as the remaining Directors require for the
conveyance of any Company Property held in his name, and shall account to the
remaining Directors as they require for all property which he holds as
Director. Upon the incapacity or death of any Director, his legal
representative shall perform the acts described in the foregoing sentence.
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2.6 Business Combination Statute.
Notwithstanding any other provision of these Articles of Incorporation or
any contrary provision of law, the Maryland Business Combination Statute, found
in Title 3, subtitle 6 of the MGCL, as amended from time to time, or any
successor statute thereto, shall not apply to any "business combination" (as
defined in Section 3-601(e) of the MGCL, as amended from time to time, or any
successor statute thereto) of the Company and any Person.
2.7 Control Share Acquisition Statute.
Notwithstanding any other provision of these Articles of Incorporation or
any contrary provision of law, the Maryland Control Share Acquisition Statute,
found in Title 3, subtitle 7 of the MGCL, as amended from time to time, or any
successor statute thereto shall not apply to any acquisition of Securities of
the Company by any Person.
ARTICLE III:
POWERS OF DIRECTORS
3.1 General.
Subject to the express limitations herein or in the Bylaws and to the
general standard of care required of directors under the MGCL and other
applicable law, (i) the business and affairs of the Company shall be managed
under the direction of the Board of Directors and (ii) the Directors shall have
full, exclusive and absolute power, control and authority over the Company
Property and over the business of the Company as if they, in their own right,
were the sole owners thereof, except as otherwise limited by these Articles of
Incorporation. The Directors have established the written policies on
investments set forth in Article IV hereof and shall monitor the administrative
procedures, investment operations, and performance of the Company to assure
that such policies are carried out. The Directors may take any actions that, in
their sole judgment and discretion, are necessary or desirable to conduct the
business of the Company. A majority of the Board of Directors has approved
these Articles of Incorporation, which shall be construed with a presumption in
favor of the grant of power and authority to the Directors. Any construction of
these Articles of Incorporation or determination made in good faith by the
Directors concerning their powers and authority hereunder shall be conclusive.
The enumeration and definition of particular powers of the Directors included
in this Article III shall in no way be limited or restricted by reference to or
inference from the terms of this or any other provision of these Articles of
Incorporation or construed or deemed by inference or otherwise in any manner to
exclude or limit the powers conferred upon the Directors under the general laws
of the State of Maryland as now or hereafter in force.
3.2 Specific Powers and Authority.
Subject only to the express limitations herein, and in addition to all other
powers and authority conferred by these Articles of Incorporation or by law,
the Directors, without any vote, action or consent by the Stockholders, shall
have and may exercise, at any time or times, in the name of the Company or on
its behalf the following powers and authorities:
(i) Investments. Subject to Article IV and Section 7.5 hereof, to invest
in, purchase or otherwise acquire and to hold real, personal or mixed,
tangible or intangible, property of any kind wherever located, or rights or
interests therein or in connection therewith, all without regard to whether
such property, interests or rights are authorized by law for the investment
of funds held by trustees or other fiduciaries, or whether obligations the
Company acquires have a term greater or lesser than the term of office of
the Directors, for such consideration as the Directors may deem proper
(including cash, property of any kind or Securities of the Company);
provided, however, that the Directors shall take such actions as they deem
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necessary and desirable to comply with any requirements of the MGCL
relating to the types of assets held by the Company.
(ii) REIT Qualification. The Board of Directors shall use its best
efforts to cause the Company and its Stockholders to qualify for U.S.
federal income tax treatment in accordance with the provisions of the Code
applicable to REITs (as those terms are defined in Section 1.5 hereof). In
furtherance of the foregoing, the Board of Directors shall use its best
efforts to take such actions as are necessary, and may take such actions as
it deems desirable (in its sole discretion) to preserve the status of the
Company as a REIT; provided, however, that in the event that the Board of
Directors determines, by vote of at least two-thirds (2/3) of the
Directors, that it no longer is in the best interests of the Company to
qualify as a REIT, the Board of Directors shall take such actions as are
required by the Code, the MGCL and other applicable law, to cause the
matter of termination of qualification as a REIT to be submitted to a vote
of the Stockholders of the Company pursuant to Section 6.2.
(iii) Sale, Disposition and Use of Property. Subject to Article IV and
Sections 7.5 and 8.3 hereof, to sell, rent, lease, hire, exchange, release,
partition, assign, mortgage, grant security interests in, encumber,
negotiate, dedicate, grant easements in and options with respect to,
convey, transfer (including transfers to entities wholly or partially owned
by the Company or the Directors) or otherwise dispose of any or all of the
Company Property by deeds (including deeds in lieu of foreclosure with or
without consideration), trust deeds, assignments, bills of sale, transfers,
leases, mortgages, financing statements, security agreements and other
instruments for any of such purposes executed and delivered for and on
behalf of the Company or the Directors by one or more of the Directors or
by a duly authorized officer, employee, agent or nominee of the Company, on
such terms as they deem appropriate; to give consents and make contracts
relating to the Company Property and its use or other property or matters;
to develop, improve, manage, use, alter or otherwise deal with the Company
Property; and to rent, lease or hire from others property of any kind;
provided, however, that the Company may not use or apply land for any
purposes not permitted by applicable law.
(iv) Financings. To borrow or, in any other manner, raise money for the
purposes and on the terms they determine, which terms may (i) include
evidencing the same by issuance of Securities of the Company and (ii) may
have such provisions as the Directors determine; to reacquire such
Securities of the Excess Shares Trust; to enter into other contracts or
obligations on behalf of the Excess Shares Trust; to guarantee, indemnify
or act as surety with respect to payment or performance of obligations of
any Person; to mortgage, pledge, assign, grant security interests in or
otherwise encumber the Company Property to secure any such Securities of
the Company, contracts or obligations (including guarantees,
indemnifications and suretyships); and to renew, modify, release,
compromise, extend, consolidate or cancel, in whole or in part, any
obligation to or of the Company or participate in any reorganization of
obligors to the Company.
(v) Lending. Subject to the provisions of Section 7.5 hereof, to lend
money or other Company Property on such terms, for such purposes and to
such Persons as they may determine.
(vi) Secured Equipment Leases. To engage in the business of offering
furniture, fixture, and equipment financing to the operators of Restaurant
Chains, provided, however, that the Company shall use its best efforts to
ensure that the total value of Secured Equipment Leases, in the aggregate
will not exceed 25% of the Company's total assets and that Secured
Equipment Leases to a single lessee, in the aggregate, will not exceed 5%
of the Company's total assets.
(vii) Issuance of Securities. Subject to the provisions of Article V
hereof, to create and authorize and direct the issuance (on either a pro
rata or a non-pro rata basis) by the Company, in shares, units or amounts
of one or more types, series or classes, of Securities of the Company,
which may have such voting rights, dividend or interest rates, preferences,
subordinations, conversion or redemption prices or rights; maturity dates,
distribution, exchange, or liquidation rights or other rights as the
Directors may determine, without vote of or other action by the
Stockholders, to such Persons for such consideration, at such time or times
and in such manner and on such terms as the Directors determine, to list
any of the
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Securities of the Company on any securities exchange; and to purchase or
otherwise acquire, hold, cancel, reissue, sell and transfer any Securities
of the Company.
(viii) Expenses and Taxes. To pay any charges, expenses or liabilities
necessary or desirable, in the sole discretion of the Directors, for
carrying out the purposes of these Articles of Incorporation and conducting
business of the Company, including compensation or fees to Directors,
officers, employees and agents of the Company, and to Persons contracting
with the Company, and any taxes, levies, charges and assessments of any
kind imposed upon or chargeable against the Company, the Company Property
or the Directors in connection therewith; and to prepare and file any tax
returns, reports or other documents and take any other appropriate action
relating to the payment of any such charges, expenses or liabilities.
(ix) Collection and Enforcement. To collect, sue for and receive money
or other property due to the Company; to consent to extensions of the time
for payment, or to the renewal, of any Securities or obligations; to engage
or to intervene in, prosecute, defend, compound, enforce, compromise,
release, abandon or adjust any actions, suits, proceedings, disputes,
claims, demands, security interests or things relating to the Company, the
Company Property or the Company's affairs; to exercise any rights and enter
into any agreements and take any other action necessary or desirable in
connection with the foregoing.
(x) Deposits. To deposit funds or Securities constituting part of the
Company Property in banks, trust companies, savings and loan associations,
financial institutions and other depositories, whether or not such deposits
will draw interest, subject to withdrawal on such terms and in such manner
as the Directors determine.
(xi) Allocation; Accounts. To determine whether moneys, profits or other
assets of the Company shall be charged or credited to, or allocated
between, income and capital, including whether or not to amortize any
premium or discount and to determine in what manner any expenses or
disbursements are to be borne as between income and capital (regardless of
how such items would normally or otherwise be charged to or allocated
between income and capital without such determination); to treat any
dividend or other distribution on any investment as, or apportion it
between, income and capital; in their discretion to provide reserves for
depreciation, amortization, obsolescence or other purposes in respect of
any Company Property in such amounts and by such methods as they determine;
to determine what constitutes net earnings, profits or surplus; to
determine the method or form in which the accounts and records of the
Company shall be maintained; and to allocate to the Stockholders' equity
account less than all of the consideration paid for Securities and to
allocate the balance to paid-in capital or capital surplus.
(xii) Valuation of Property. To determine the value of all or any part
of the Company Property and of any services, Securities, property or other
consideration to be furnished to or acquired by the Company, and to revalue
all or any part of the Company Property, all in accordance with such
appraisals or other information as are reasonable, in their sole judgment.
(xiii) Ownership and Voting Powers. To exercise all of the rights,
powers, options and privileges pertaining to the ownership of any
Mortgages, Securities, Real Estate, Secured Equipment Leases and other
Company Property to the same extent that an individual owner might,
including without limitation to vote or give any consent, request or notice
or waive any notice, either in person or by proxy or power of attorney,
which proxies and powers of attorney may be for any general or special
meetings or action, and may include the exercise of discretionary powers.
(xiv) Officers, Etc.; Delegation of Powers. To elect, appoint or employ
such officers for the Company and such committees of the Board of Directors
with such powers and duties as the Directors may determine, the Company's
Bylaws provide or the MGCL requires; to engage, employ or contract with and
pay compensation to any Person (including subject to Section 7.5 hereof,
any Director and Person who is an Affiliate of any Director) as agent,
representative, member of an advisory board, employee or independent
contractor (including advisors, consultants, transfer agents, registrars,
underwriters, accountants, attorneys-at-law, real estate agents, property
and other managers, appraisers, brokers, architects, engineers,
construction managers, general contractors or otherwise) in one or more
capacities,
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to perform such services on such terms as the Directors may determine; to
delegate to one or more Directors, officers or other Persons engaged or
employed as aforesaid or to committees of Directors, the performance of
acts or other things (including granting of consents), the making of
decisions and the execution of such deeds, contracts, leases or other
instruments, either in the names of the Company, the Directors or as their
attorneys or otherwise, as the Directors may determine; and to establish
such committees as they deem appropriate.
(xv) Associations. Subject to Section 7.5 hereof, to cause the Company
to enter into joint ventures, general or limited partnerships,
participation or agency arrangements or any other lawful combinations,
relationships or associations of any kind.
(xvi) Reorganizations, Etc. Subject to Sections 8.2 and 8.3 hereof, to
cause to be organized or assist in organizing any Person under the laws of
any jurisdiction to acquire all or any part of the Company Property, carry
on any business in which the Company shall have an interest or otherwise
exercise the powers the Directors deem necessary, useful or desirable to
carry on the business of the Company or to carry out the provisions of
these Articles of Incorporation, to merge or consolidate the Company with
any Person; to sell, rent, lease, hire, convey, negotiate, assign, exchange
or transfer all or any part of the Company Property to or with any Person
in exchange for Securities of such Person or otherwise; and to lend money
to, subscribe for and purchase the Securities of, and enter into any
contracts with, any Person in which the Company holds, or is about to
acquire, Securities or any other interests.
(xvii) Insurance. To purchase and pay for out of Company Property
insurance policies insuring the Company and the Company Property against
any and all risks, and insuring the Stockholders, Directors, officers,
Affiliates, employees and agents of the Company individually (each an
"Insured") against all claims and liabilities of every nature arising by
reason of holding or having held any such status, office or position or by
reason of any action alleged to have been taken or omitted by the Insured
in such capacity, whether or not the Company would have the power to
indemnify against such claim or liability, provided that such insurance be
limited to the indemnification permitted by Section 7.3 hereof in regard to
any liability or loss resulting from negligence, gross negligence,
misconduct, willful misconduct or an alleged violation of federal or state
securities laws. Nothing contained herein shall preclude the Company from
purchasing and paying for such types of insurance, including extended
coverage liability and casualty and workers' compensation, as would be
customary for any Person owning comparable assets and engaged in a similar
business, or from naming the Insured as an additional insured party
thereunder, provided that such addition does not add to the premiums
payable by the Company.
(xviii) Executive Compensation, Pension and Other Plans. To adopt and
implement executive compensation, pension, profit sharing, share option,
share bonus, share purchase, share appreciation rights, restricted share,
savings, thrift, retirement, incentive or benefit plans, trusts or
provisions, applicable to any or all Directors, officers, employees or
agents of the Company, or to other Persons who have benefited the Company,
all on such terms and for such purposes as the Directors may determine or
the Bylaws provide.
(xix) Distributions. To declare and pay dividends or other distributions
to Stockholders, subject to the provisions of Section 5.4 hereof.
(xx) Indemnification. To the extent permitted by Section 7.3 hereof, to
indemnify any Person with whom the Company has dealings.
(xxi) Charitable Contributions. To make donations for the public welfare
or for community, charitable, religious, educational, scientific, civic or
similar purposes, regardless of any direct benefit to the Company.
(xxii) Discontinue Operations; Bankruptcy. To discontinue the operations
of the Company (subject to Section 8.2 hereof); to petition or apply for
relief under any provision of federal or state bankruptcy, insolvency or
reorganization laws or similar laws for the relief of debtors; to permit
any Company Property to be foreclosed upon without raising any legal or
equitable defenses that may be available to the Company or the Directors or
otherwise defending or responding to such foreclosure; to confess judgment
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against the Excess Shares Trust; or to take such other action with respect
to indebtedness or other obligations of the Directors, the Company Property
or the Company as the Directors, in such capacity, and in their discretion
may determine.
(xxiii) Termination of Status. To terminate the status of the Company as
a real estate investment trust under the REIT Provisions of the Code;
provided, however, that the Board of Directors shall take no action to
terminate the Company's status as a real estate investment trust under the
REIT Provisions of the Code until such time as (i) the Board of Directors
adopts a resolution recommending that the Company terminate its status as a
real estate investment trust under the REIT Provisions of the Code, (ii)
the Board of Directors presents the resolution at an annual or special
meeting of the Stockholders and (iii) such resolution is approved by the
holders of two-thirds (2/3) of the issued and outstanding Common Shares (as
defined in Section 5.2 hereof).
(xxiv) Fiscal Year. Subject to the Code, to adopt, and from time to time
change, a fiscal year for the Company.
(xxv) Seal. To adopt and use a seal, but the use of a seal shall not be
required for the execution of instruments or obligations of the Company.
(xxvi) Bylaws. To adopt, implement and from time to time alter, amend or
repeal the Bylaws of the Company relating to the business and organization
of the Company, provided that such amendments are not inconsistent with the
provisions of these Articles of Incorporation, and further provided that
the Directors may not amend the Bylaws, without the affirmative vote of a
majority of the Equity Shares, to the extent that such amendments adversely
affect the rights, preferences and privileges of Stockholders.
(xxvii) Further Powers. To do all other acts and things and execute and
deliver all instruments incident to the foregoing powers, and to exercise
all powers which they deem necessary, useful or desirable to carry on the
business of the Company or to carry out the provisions of these Articles of
Incorporation, even if such powers are not specifically provided hereby.
3.3 Determination of Best Interest of Company.
In determining what is in the best interest of the Company, a Director shall
consider the interests of the Stockholders of the Company and, in his or her
sole and absolute discretion, may consider (i) the interests of the Company's
employees, suppliers, creditors and customers, (ii) the economy of the nation,
(iii) community and societal interests, and (iv) the long-term as well as
short-term interests of the Company and its Stockholders, including the
possibility that these interests may be best served by the continued
independence of the Company.
ARTICLE IV:
INVESTMENT OBJECTIVES AND OPERATING RESTRICTIONS
4.1 Investment Objectives.
The Company's primary investment objectives are to preserve, protect, and
enhance the Company's assets; while (i) distributing dividends commencing in
the initial year of Company operations; (ii) obtaining fixed income through the
receipt of base rent, and increasing the Company's income (and dividends) and
providing protection against inflation through automatic increases in base rent
and receipt of percentage rent, and obtaining fixed income through the receipt
of payments on Secured Equipment Leases; and (iii) qualifying and remaining
qualified as a REIT for federal income tax purposes. The sheltering from tax of
income from other sources is not an objective of the Company. Subject to
Sections 3.2(ii) and (xxiii) hereof and to the restrictions set forth herein,
the Directors will use their best efforts to conduct the affairs of the Company
in such a manner as to continue to qualify the Company for the tax treatment
provided in the REIT Provisions of the Code; provided, however, no Director,
officer, employee or agent of the Company shall be liable for any act or
omission resulting in the loss of tax benefits under the Code, except to the
extent provided in Section 7.2 hereof.
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4.2 Operating Restrictions.
In addition to other investment restrictions imposed by the Directors from
time to time, consistent with the Company's objective of qualifying as a REIT,
the following shall apply to the Company's investments:
(i) The Company shall not operate so as to be classified as an
"investment company" under the Investment Company Act of 1940, as amended.
(ii) The Company will not make any investment that the Company believes
will be inconsistent with its objectives of qualifying and remaining
qualified as a REIT.
The foregoing objectives may not be modified or eliminated without the
approval of Stockholders owning a majority of the outstanding Common Shares.
ARTICLE V:
SHARES
5.1 Authorized Shares.
The capital stock of the Company shall be divided into Shares. The total
number of Shares which the Company is authorized to issue is three hundred
fifty-six million (356,000,000) Shares, consisting of two hundred seventy-five
million (275,000,000) Common Shares (as defined and described in Section 5.2
hereof), three million (3,000,000) Preferred Shares (as defined and described
in Section 5.3 hereof) and seventy-eight million (78,000,000) Excess Shares (as
defined and described in Section 5.6 hereof). All Shares shall be fully paid
and nonassessable when issued. Shares may be issued for such consideration as
the Directors determine or, if issued as a result of a Share dividend or Share
split, without any consideration.
5.2 Common Shares.
(i) Common Shares Subject to Terms of Preferred Shares. The Common Shares
shall be subject to the express terms of any series of Preferred Shares.
(ii) Description. Common Shares (herein so called) shall have a par value of
$.01 per share and shall entitle the holders to one (1) vote per share on all
matters upon which Stockholders are entitled to vote pursuant to Section 6.2
hereof, and shares of a particular class of issued Common Shares shall have
equal dividend, distribution, liquidation and other rights, and shall have no
preference, cumulative, preemptive, appraisal, conversion or exchange rights.
The Directors may classify or reclassify any unissued Common Shares by setting
or changing the number, designation, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of any such Common Shares and, in such event,
the Company shall file for record with the State Department of Assessments and
Taxation of the State of Maryland amended articles in substance and form as
prescribed by Title 2 of the MGCL.
(iii) Distribution Rights. The holders of Common Shares shall be entitled to
receive such Distributions as may be declared by the Board of Directors of the
Company out of funds legally available therefor.
(iv) Dividend or Distribution Rights. The Directors from time to time may
declare and pay to Stockholders such dividends or Distributions in cash or
securities as the Directors in their discretion shall determine. The Directors
shall endeavor to declare and pay such dividends and Distributions as shall be
necessary for the Company to qualify as a real estate investment trust under
the REIT Provisions of the Code; provided, however, Stockholders shall have no
right to any dividend or Distribution unless and until declared by the
Directors. The exercise of the powers and rights of the Directors pursuant to
this Section 5.2(iv) shall be subject to the provisions of any class or series
of Equity Shares at the time outstanding. The receipt by any
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Person in whose name any Equity Shares are registered on the records of the
Company or by his duly authorized agent shall be a sufficient discharge for
all dividends or Distributions payable or deliverable in respect of such
Equity Shares and from all liability to see to the application thereof.
Distributions in kind shall not be permitted, except for distributions of
readily marketable securities; distributions of beneficial interests in a
liquidating trust established for the dissolution of the Company and the
liquidation of its assets in accordance with the terms of these Articles of
Incorporation; or distributions of in-kind property as long as the Directors
(i) advise each Stockholder of the risks associated with direct ownership of
the property; (ii) offer each Stockholder the election of receiving in-kind
property distributions; and (iii) distribute in-kind property only to those
Stockholders who accept the Directors' offer.
(v) Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up, or any distribution of the assets of
the Company, the aggregate assets available for distribution to holders of the
Common Shares (including holders of Excess Shares resulting from the exchange
of Common Shares pursuant to Section 5.5(iii) hereof) shall be determined in
accordance with applicable law. Except as provided below as a consequence of
the limitations on distributions to holders of Excess Shares, each holder of
Common Shares shall be entitled to receive, ratably with (i) each other holder
of Common Shares and (ii) each holder of Excess Shares resulting from the
exchange of Common Shares, that portion of such aggregate assets available for
distribution as the number of the outstanding Common Shares held by such
holder bears to the total number of outstanding Common Shares and Excess
Shares resulting from the exchange of Common Shares then outstanding. Anything
herein to the contrary notwithstanding, in no event shall the amount payable
to a holder of Excess Shares exceed (i) the price per share such holder paid
for the Common Shares in the purported Transfer or Acquisition (as those terms
are defined in Section 5.5(i) or change in capital structure or other
transaction or event that resulted in the Excess Shares or (ii) if the holder
did not give full value for such Excess Shares (as through a gift, a devise or
other event or transaction), a price per share equal to the Market Price (as
that term is defined in Section 5.5(i) for the Common Shares on the date of
the purported Transfer, Acquisition, change in capital structure or other
transaction or event that resulted in such Excess Shares. Any amount available
for distribution in excess of the foregoing limitations shall be paid ratably
to the holders of Common Shares and other holders of Excess Shares resulting
from the exchange of Common Shares to the extent permitted by the foregoing
limitations.
(vi) Voting Rights. Except as may be provided in these Articles of
Incorporation, and subject to the express terms of any series of Preferred
Shares, the holders of the Common Shares shall have the exclusive right to
vote on all matters (as to which a holder of common stock shall be entitled to
vote pursuant to applicable law) at all meetings of the Stockholders of the
Company, and shall be entitled to one (1) vote for each Common Share entitled
to vote at such meeting.
5.3 Preferred Shares.
The Directors are hereby expressly granted the authority to authorize from
time to time the issuance of one or more series of Preferred Shares. Prior to
the issuance of each such series, the Board of Directors, by resolution, shall
fix the number of shares to be included in each series, and the terms, rights,
restrictions and qualifications of the shares of each series, however, the
voting rights for each share of the Preferred Shares shall not exceed voting
rights which bear the same relationship to the voting rights of the Common
Shares as the consideration paid to the Company for each of Preferred Shares
bears to the book value of the Common Shares or the date that such Preferred
Shares are issued. The authority of the Board of Directors with respect to
each series shall include, but not be limited to, determination of the
following:
(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The dividend rate on the shares of the series, if any, whether any
dividends shall be cumulative and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of
the series.
(iii) The redemption rights, including conditions and the price or
prices, if any, for shares of the series.
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(iv) The terms and amounts of any sinking fund for the purchase or
redemption of shares of the series.
(v) The rights of the shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of the
Company, and the relative rights of priority, if any, of payment of shares
of the series.
(vi) Whether the shares of the series shall be convertible into shares
of any other class or series, or any other security, of the Company or any
other corporation or other entity, and, if so, the specification of such
other class or series of such other security, the conversion price or
prices or rate or rates, any adjustments thereof, the date or dates on
which such shares shall be convertible and all other terms and conditions
upon which such conversion may be made.
(vii) Restrictions on the issuance of shares of the same series or of
any other class or series.
(viii) The voting rights of the holders of shares of the series subject
to the limitations contained in this Section 5.3.
(ix) Any other relative rights, preferences and limitations on that
series.
Subject to the express provisions of any other series of Preferred Shares
then outstanding, and notwithstanding any other provision of these Articles of
Incorporation, the Board of Directors may increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares, or
alter the designation or classify or reclassify any unissued shares of a
particular series of Preferred Shares, by fixing or altering, in one or more
respects, from time to time before issuing the shares, the terms, rights,
restrictions and qualifications of the shares of any such series of Preferred
Shares.
5.4 General Nature of Shares.
All Shares shall be personal property entitling the Stockholders only to
those rights provided in these Articles of Incorporation, the MGCL or in the
resolution creating any class or series of Shares. The legal ownership of the
Company Property and the right to conduct the business of the Company are
vested exclusively in the Directors; the Stockholders shall have no interest
therein other than the beneficial interest in the Company conferred by their
Shares and shall have no right to compel any partition, division, dividend or
Distribution of the Company or any of the Company Property. The death of a
Stockholder shall not terminate the Company or give his legal representative
any rights against other Stockholders, the Directors or the Company Property,
except the right, exercised in accordance with applicable provisions of the
Bylaws, to require the Company to reflect on its books the change in ownership
of the Shares. Holders of Shares shall not have any preemptive or other right
to purchase or subscribe for any class of securities of the Company which the
Company may at any time issue or sell.
5.5 Restrictions On Ownership and Transfer.
(i) Definitions. For purposes of Sections 5.5 and 5.6, the following terms
shall have the following meanings:
"Acquire" means the acquisition of Beneficial or Constructive Ownership
of Equity Shares by any means, including, without limitation, the exercise
of any rights under any option, warrant, convertible security, pledge or
other security interest or similar right to acquire shares, but shall not
include the acquisition of any such rights unless, as a result, the
acquiror would be considered a Beneficial Owner or Constructive Owner. The
terms "Acquires" and "Acquisition" shall have correlative meanings.
"Beneficial Ownership" means ownership of Shares by an individual who
would be treated as an owner of such Shares under Section 542(a)(2) of the
Code, either directly or constructively through the application of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code. For
purposes of this definition, the term "individual" shall include any
organization, trust, or other entity that is treated as
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an individual for purposes of Section 542(a)(2) of the Code. The terms
"Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" means a beneficiary of the Excess Shares Trust as
determined pursuant to Section 5.6(i) hereof.
"Closing Price" on any day shall mean the last sale price, regular way
on such day, or, if no such sale takes place on that day, the average of
the closing bid and asked prices, regular way, in either case as reported
on the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange, or
if the affected class or series of Equity Shares are not so listed or
admitted to trading, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange (including the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotation
System) on which the affected class or series of Equity Shares are listed
or admitted to trading, or, if the affected class or series of Equity
Shares are not so listed or admitted to trading, the last quoted price or,
if not quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System or, if such system is
no longer in use, the principal automated quotation system then in use, or,
if the affected class or series of Equity Shares are not so quoted by any
such system, the average of the closing bid and asked prices as furnished
by a professional market maker selected by the Board of Directors making a
market in the affected class or series of Equity Shares, or, if there is no
such market maker or such closing prices otherwise are not available, the
fair market value of the affected class or series of Equity Shares as of
such day, as determined by the Board of Directors in its discretion.
"Common Share Ownership Limit" means, with respect to the Common Shares,
nine point eight percent (9.8%) of the outstanding Common Shares, subject
to adjustment pursuant to Section 5.5(x) (but not more than nine point nine
percent (9.9%) of the outstanding Common Shares, as so adjusted) and to the
limitations contained in Section 5.5(xi).
"Constructive Ownership" means ownership of Equity Shares by a Person
who would be treated as an owner of such Equity Shares, either actually or
constructively, directly or indirectly, through the application of Section
318 of the Code, as modified by Section 856(d)(5) thereof. The terms
"Constructive Owner," "Constructively Owns" and "Constructively Owned"
shall have correlative meanings.
"Excess Shares Trust" means the trust created pursuant to Section 5.6(i)
hereof.
"Excess Shares Trustee" means the Company as trustee for the Excess
Shares Trust, and any successor trustee appointed by the Company.
"Market Price" means the average of the Closing Prices for the ten (10)
consecutive Trading Days immediately preceding such day (or those days
during such ten (10) Trading Day period for which Closing Prices are
available).
"Ownership Limit" means the Common Share Ownership Limit or the
Preferred Share Ownership Limit, or both, as the context may require.
"Preferred Share Ownership Limit" means, with respect to the Preferred
Shares, nine point eight percent (9.8%) of the outstanding shares of a
particular series of Preferred Shares of the Company, subject to adjustment
pursuant to Section 5.5(x) (but not more than nine point nine percent
(9.9%) of the outstanding Preferred Shares, as so adjusted) and to the
limitations contained in this Section 5.5.
"Purported Beneficial Holder" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the Person for whom the applicable Purported Record Holder
held the Equity Shares that were, pursuant to Section 5.5(iii),
automatically exchanged for Excess Shares upon the occurrence of such event
or transaction. The Purported Beneficial Holder and the Purported Record
Holder may be the same Person.
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"Purported Beneficial Transferee" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the purported
beneficial transferee for whom the Purported Record Transferee would have
acquired Equity Shares if such Transfer or Acquisition which results in
Excess Shares had been valid under Section 5.5(ii). The Purported
Beneficial Transferee and the Purported Record Transferee may be the same
Person.
"Purported Record Holder" means, with respect to any event or
transaction other than a purported Transfer or Acquisition which results in
Excess Shares, the record holder of the Equity Shares that were, pursuant
to Section 5.5(iii), automatically exchanged for Excess Shares upon the
occurrence of such an event or transaction. The Purported Record Holder and
the Purported Beneficial Holder may be the same Person.
"Purported Record Transferee" means, with respect to any purported
Transfer or Acquisition which results in Excess Shares, the record holder
of the Equity Shares if such Transfer or Acquisition which results in
Excess Shares had been valid under Section 5.5(ii). The Purported Record
Transferee and the Purported Beneficial Transferee may be the same Person.
"Restriction Termination Date" means the first day on which the Board of
Directors of the Company determines, pursuant to Section 3.2(xxiii) hereof,
that it is no longer in the best interests of the Company to attempt or
continue to qualify as REIT.
"Trading Day" means a day on which the principal national securities
exchange on which the affected class or series of Equity Shares are listed
or admitted to trading is open for the transaction of business or, if the
affected class or series of Equity Shares are not listed or admitted to
trading, shall mean any day other than a Saturday, Sunday or other day on
which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Transfer" means any sale, transfer, gift, hypothecation, assignment,
devise or other disposition of a direct or indirect interest in Equity
Shares or the right to vote or receive dividends on Equity Shares
(including (i) the granting of any option (including any option to acquire
an option or any series of such options) or entering into any agreement for
the sale, transfer or other disposition of Equity Shares or the right to
vote or receive dividends on Equity Shares or (ii) the sale, transfer,
assignment or other disposition of any securities or rights convertible
into or exchangeable for Equity Shares, whether voluntary or involuntary,
of record, constructively or beneficially, and whether by operation of law
or otherwise. The terms "Transfers," "Transferred" and "Transferable" shall
have correlative meanings.
(ii) Ownership and Transfer Limitations.
(a) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.5(ix) and Section 5.7, prior
to the Restriction Termination Date, no Person shall Beneficially or
Constructively Own Equity Shares in excess of the Common or Preferred Share
Ownership Limit.
(b) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.5(ix) and Section 5.7, prior
to the Restriction Termination Date, any Transfer, Acquisition, change in
the capital structure of the Company, other purported change in Beneficial
or Constructive Ownership of Equity Shares or other event or transaction
that, if effective, would result in any Person Beneficially or
Constructively Owning Equity Shares in excess of the Common or Preferred
Share Ownership Limit shall be void ab initio as to the Transfer,
Acquisition, change in the capital structure of the Company, other
purported change in Beneficial or Constructive Ownership or other event or
transaction with respect to that number of Equity Shares which would
otherwise be Beneficially or Constructively Owned by such Person in excess
of the Common or Preferred Share Ownership Limit, and none of the Purported
Beneficial Transferee, the Purported Record Transferee, the Purported
Beneficial Holder or the Purported Record Holder shall acquire any rights
in that number of Equity Shares.
(c) Notwithstanding any other provision of these Articles of
Incorporation, and except as provided in Section 5.7, prior to the
Restriction Termination Date, any Transfer, Acquisition, change in the
capital
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structure of the Company, or other purported change in Beneficial or
Constructive Ownership (including actual ownership) of Equity Shares or
other event or transaction that, if effective, would result in the Equity
Shares being actually owned by fewer than 100 Persons (determined without
reference to any rules of attribution) shall be void ab initio as to the
Transfer, Acquisition, change in the capital structure of the Company,
other purported change in Beneficial or Constructive Ownership (including
actual ownership) with respect to that number of Equity Shares which
otherwise would be owned by the transferee, and the intended transferee or
subsequent owner (including a Beneficial Owner or Constructive Owner) shall
acquire no rights in that number of Equity Shares.
(d) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.7, prior to the Restriction
Termination Date, any Transfer, Acquisition, change in the capital
structure of the Company, other purported change in Beneficial or
Constructive Ownership of Equity Shares or other event or transaction that,
if effective, would cause the Company to fail to qualify as a REIT by
reason of being "closely held" within the meaning of Section 856(h) of the
Code or otherwise, directly or indirectly, would cause the Company to fail
to qualify as a REIT shall be void ab initio as to the Transfer,
Acquisition, change in the capital structure of the Company, other
purported change in Beneficial or Constructive Ownership or other event or
transaction with respect to that number of Equity Shares which would cause
the Company to be "closely held" within the meaning of Section 856(h) of
the Code or otherwise, directly or indirectly, would cause the Company to
fail to qualify as a REIT, and none of the Purported Beneficial Transferee,
the Purported Record Transferee, the Purported Beneficial Holder or the
Purported Record Holder shall acquire any rights in that number of Equity
Shares.
(e) Notwithstanding any other provision of these Articles of
Incorporation, except as provided in Section 5.7, prior to the Restriction
Termination Date, any Transfer, Acquisition, change in capital structure of
the Company, or other purported change in Beneficial or Constructive
Ownership of Equity Shares or other event or transaction that, if
effective, would (i) cause the Company to own (directly or Constructively)
an interest in a tenant that is described in Section 856(d)(2)(B) of the
Code and (ii) cause the Company to fail to satisfy any of the gross income
requirements of Section 856(c) of the Code, shall be void ab initio as to
the Transfer, Acquisition, change in capital structure of the Company,
other purported change in Beneficial or Constructive Ownership or other
event or transaction with respect to that number of Equity Shares which
would cause the Company to own an interest (directly or Constructively) in
a tenant that is described in Section 856(d)(2)(B) of the Code, and none of
the Purported Beneficial Transferee, the Purported Record Transferee, the
Purported Beneficial Holder or the Purported Record Holder shall acquire
any rights in that number of Equity Shares.
(iii) Exchange for Excess Shares.
(a) If, notwithstanding the other provisions contained in this Article
V, at any time prior to the Restriction Termination Date, there is a
purported Transfer, Acquisition, change in the capital structure of the
Company, other purported change in the Beneficial or Constructive Ownership
of Equity Shares or other event or transaction such that any Person would
either Beneficially or Constructively Own Equity Shares in excess of the
Common or Preferred Share Ownership Limit, then, except as otherwise
provided in Section 5.5(ix), such Equity Shares (rounded up to the next
whole number of shares) in excess of the Common or Preferred Share
Ownership Limit automatically shall be exchanged for an equal number of
Excess Shares having terms, rights, restrictions and qualifications
identical thereto, except to the extent that this Article V requires
different terms. Such exchange shall be effective as of the close of
business on the business day next preceding the date of the purported
Transfer, Acquisition, change in capital structure, other change in
purported Beneficial or Constructive Ownership of Equity Shares, or other
event or transaction.
(b) If, notwithstanding the other provisions contained in this Article
V, at any time prior to the Restriction Termination Date, there is a
purported Transfer, Acquisition, change in the capital structure of the
Company, other purported change in the Beneficial or Constructive Ownership
of Equity Shares or other event or transaction which, if effective, would
result in a violation of any of the restrictions
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described in subparagraphs (b), (c), (d) and (e) of Section 5.5(ii) or,
directly or indirectly, would cause the Company for any reason to fail to
qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(h) of the Code, or otherwise, directly or indirectly, would
cause the Company to fail to qualify as a REIT, then the Equity Shares
(rounded up to the next whole number of shares) being Transferred or which
are otherwise affected by the change in capital structure or other
purported change in Beneficial or Constructive Ownership and which, in any
case, would cause the Company to be "closely held" within the meaning of
such Section 856(h) or otherwise would cause the Company to fail to qualify
as a REIT automatically shall be exchanged for an equal number of Excess
Shares having terms, rights, restrictions and qualifications identical
thereto, except to the extent that this Article V requires different terms.
Such exchange shall be effective as of the close of business on the
business day prior to the date of the purported Transfer, Acquisition,
change in capital structure, other purported change in Beneficial or
Constructive Ownership or other event or transaction.
(iv) Remedies For Breach. If the Board of Directors or its designee
shall at any time determine in good faith that a Transfer, Acquisition,
change in the capital structure of the Company or other purported change in
Beneficial or Constructive Ownership or other event or transaction has
taken place in violation of Section 5.5(ii) or that a Person intends to
Acquire or has attempted to Acquire Beneficial or Constructive Ownership of
any Equity Shares in violation of this Section 5.5, the Board of Directors
or its designee shall take such action as it deems advisable to refuse to
give effect to or to prevent such Transfer, Acquisition, change in the
capital structure of the Company, other attempt to Acquire Beneficial or
Constructive Ownership of any Equity Shares or other event or transaction,
including, but not limited to, refusing to give effect thereto on the books
of the Company or instituting injunctive proceedings with respect thereto;
provided, however, that any Transfer, Acquisition, change in the capital
structure of the Company, attempted Transfer or other attempt to Acquire
Beneficial or Constructive Ownership of any Equity Shares or other event or
transaction in violation of subparagraphs (b), (c), (d) and (e) of Section
5.5(ii) (as applicable) shall be void ab initio and where applicable
automatically shall result in the exchange described in Section 5.5(iii),
irrespective of any action (or inaction) by the Board of Directors or its
designee.
(v) Notice of Restricted Transfer. Any Person who acquires or attempts
to Acquire Beneficial or Constructive Ownership of Equity Shares in
violation of Section 5.5(ii) and any Person who Beneficially or
Constructively Owns Excess Shares as a transferee of Equity Shares
resulting in an exchange for Excess Shares, pursuant to Section 5.5(iii),
or otherwise shall immediately give written notice to the Company, or, in
the event of a proposed or attempted Transfer, Acquisition, or purported
change in Beneficial or Constructive Ownership, shall give at least fifteen
(15) days prior written notice to the Company, of such event and shall
promptly provide to the Company such other information as the Company, in
its sole discretion, may request in order to determine the effect, if any,
of such Transfer, attempted Transfer, Acquisition, Attempted Acquisition or
purported change in Beneficial or Constructive Ownership on the Company's
status as a REIT.
(vi) Owners Required To Provide Information. Prior to the Restriction
Termination Date:
(a) Every Beneficial or Constructive Owner of more than five percent
(5%), or such lower percentages as determined pursuant to regulations
under the Code or as may be requested by the Board of Directors, in its
sole discretion, of the outstanding shares of any class or series of
Equity Shares of the Company shall annually, no later than January 31
of each calendar year, give written notice to the Company stating (i)
the name and address of such Beneficial or Constructive Owner; (ii) the
number of shares of each class or series of Equity Shares Beneficially
or Constructively Owned; and (iii) a description of how such shares are
held. Each such Beneficial or Constructive Owner promptly shall provide
to the Company such additional information as the Company, in its sole
discretion, may request in order to determine the effect, if any, of
such Beneficial or Constructive Ownership on the Company's status as a
REIT and to ensure compliance with the Common or Preferred Share
Ownership Limit and other restrictions set forth herein.
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(b) Each Person who is a Beneficial or Constructive Owner of Equity
Shares and each Person (including the Stockholder of record) who is
holding Equity Shares for a Beneficial or Constructive Owner promptly
shall provide to the Company such information as the Company, in its
sole discretion, may request in order to determine the Company's status
as a REIT, to comply with the requirements of any taxing authority or
other governmental agency, to determine any such compliance or to
ensure compliance with the Common or Preferred Share Ownership Limit
and other restrictions set forth herein.
(vii) Remedies Not Limited. Nothing contained in this Article V except
Section 5.7 shall limit scope or application of the provisions of this
Section 5.5, the ability of the Company to implement or enforce compliance
with the terms thereof or the authority of the Board of Directors to take
any such other action or actions as it may deem necessary or advisable to
protect the Company and the interests of its Stockholders by preservation
of the Company's status as a REIT and to ensure compliance with the
Ownership Limits for each class or series of Equity Shares and other
restrictions set forth herein, including, without limitation, refusal to
give effect to a transaction on the books of the Company.
(viii) Ambiguity. In the case of an ambiguity in the application of any
of the provisions of this Section 5.5, including any definition contained
in Sections 1.5 and 5.5(i), the Board of Directors shall have the power and
authority, in its sole discretion, to determine the application of the
provisions of this Section 5.5 with respect to any situation based on the
facts known to it.
(ix) Exception. The Board of Directors, upon receipt of a ruling from
the Internal Revenue Service, an opinion of counsel or other evidence
satisfactory to the Board of Directors, in its sole discretion, in each
case to the effect that the restrictions contained in subparagraphs (c),
(d) and (e) of Section 5.5(ii) will not be violated, may waive or change,
in whole or in part, the application of the Common or Preferred Share
Ownership Limit with respect to any Person that is not an individual, as
such term is defined in Section 542(a)(2) of the Code. In connection with
any such waiver or change, the Board of Directors may require such
representations and undertakings from such Person or Affiliates and may
impose such other conditions as the Board deems necessary, advisable or
prudent, in its sole discretion, to determine the effect, if any, of the
proposed transaction or ownership of Equity Shares on the Company's status
as a REIT.
(x) Increase in Common or Preferred Share Ownership Limit. Subject to
the limitations contained in Section 5.5(xi), the Board of Directors may
from time to time increase the Common or Preferred Share Ownership Limit.
(xi) Limitations on Modifications.
(a) The Ownership Limit for a class or series of Equity Shares may
not be increased and no additional ownership limitations may be created
if, after giving effect to such increase or creation, the Company would
be "closely held" within the meaning of Section 856(h) of the Code
(assuming ownership of shares of Equity Shares by all Persons equal to
the greatest of (A) the actual ownership, (B) the Beneficial Ownership
of Equity Shares by each Person, or (C) the applicable Ownership Limit
with respect to such Person.
(b) Prior to any modification of the Ownership Limit with respect to
any Person, the Board of Directors may require such opinions of
counsel, affidavits, undertakings or agreements as it may deem
necessary, advisable or prudent, in its sole discretion, in order to
determine or ensure the Company's status as a REIT.
(c) Neither the Preferred Share Ownership Limit nor the Common Share
Ownership Limit may be increased to a percentage that is greater than
nine point nine percent (9.9%).
(xii) Notice to Stockholders Upon Issuance or Transfer. Upon issuance or
transfer of Shares, the Company shall provide the recipient with a notice
containing information about the shares purchased or otherwise transferred,
in lieu of issuance of a share certificate, in a form substantially similar
to the following:
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"The securities issued or transferred are subject to restrictions on
transfer and ownership for the purpose of maintenance of the Company's
status as a real estate investment trust (a "REIT") under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"). Except as otherwise provided pursuant to the Articles of
Incorporation of the Company, no Person may (i) Beneficially or
Constructively Own Common Shares of the Company in excess of 9.8% (or
such greater percent as may be determined by the Board of Directors of
the Company) of the outstanding Common Shares; (ii) Beneficially or
Constructively Own shares of any series of Preferred Shares of the
Company in excess of 9.8% of the outstanding shares of such series of
Preferred Shares; or (iii) Beneficially or Constructively Own Common
Shares or Preferred Shares (of any class or series) which would result
in the Company being "closely held" under Section 856(h) of the Code or
which otherwise would cause the Company to fail to qualify as a REIT.
Any Person who has Beneficial or Constructive Ownership, or who
Acquires or attempts to Acquire Beneficial or Constructive Ownership of
Common Shares and/or Preferred Shares in excess of the above
limitations and any Person who Beneficially or Constructively Owns
Excess Shares as a transferee of Common or Preferred Shares resulting
in an exchange for Excess Shares (as described below) immediately must
notify the Company in writing or, in the event of a proposed or
attempted Transfer or Acquisition or purported change in Beneficial or
Constructive Ownership, must give written notice to the Company at
least 15 days prior to the proposed or attempted transfer, transaction
or other event. Any Transfer or Acquisition of Common Shares and/or
Preferred Shares or other event which results in violation of the
ownership or transfer limitations set forth in the Company's Articles
of Incorporation shall be void ab initio and the Purported Beneficial
and Record Transferee shall not have or acquire any rights in such
Common Shares and/or Preferred Shares. If the transfer and ownership
limitations referred to herein are violated, the Common Shares or
Preferred Shares represented hereby automatically will be exchanged for
Excess Shares to the extent of violation of such limitations, and such
Excess Shares will be held in trust by the Company, all as provided by
the Articles of Incorporation of the Company. All defined terms used in
this legend have the meanings identified in the Company's Articles of
Incorporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer, will be sent without
charge to each Stockholder who so requests."
5.6 Excess Shares.
(i) Ownership In Trust. Upon any purported Transfer, Acquisition, change in
the capital structure of the Company, other purported change in Beneficial or
Constructive Ownership or event or transaction that results in Excess Shares
pursuant to Section 5.5(iii), such Excess Shares shall be deemed to have been
transferred to the Company, as Excess Shares Trustee of an Excess Shares Trust
for the benefit of such Beneficiary or Beneficiaries to whom an interest in
such Excess Shares may later be transferred pursuant to Section 5.5(v). Excess
Shares so held in trust shall be issued and outstanding stock of the Company.
The Purported Record Transferee (or Purported Record Holder) shall have no
rights in such Excess Shares except the right to designate a transferee of such
Excess Shares upon the terms specified in Section 5.5(v). The Purported
Beneficial Transferee shall have no rights in such Excess Shares except as
provided in Section 5.6(iii) and (v).
(ii) Distribution Rights. Excess Shares shall not be entitled to any
dividends or Distributions (except as provided in Section 5.6(iii)). Any
dividend or Distribution paid prior to the discovery by the Company that the
Equity Shares have been exchanged for Excess Shares shall be repaid to the
Company upon demand, and any dividend or Distribution declared but unpaid at
the time of such discovery shall be void ab initio with respect to such Excess
Shares.
(iii) Rights Upon Liquidation.
(a) Except as provided below, in the event of any voluntary or
involuntary liquidation, dissolution or winding up, or any other
distribution of the assets, of the Company, each holder of Excess Shares
resulting from the exchange of Preferred Shares of any specified series
shall be entitled to receive, ratably with each other holder of Excess
Shares resulting from the exchange of Preferred Shares of such series
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and each holder of Preferred Shares of such series, such accrued and unpaid
dividends, liquidation preferences and other preferential payments, if any,
as are due to holders of Preferred Shares of such series. In the event that
holders of shares of any series of Preferred Shares are entitled to
participate in the Company's distribution of its residual assets, each
holder of Excess Shares resulting from the exchange of Preferred Shares of
any such series shall be entitled to participate, ratably with (A) each
other holder of Excess Shares resulting from the exchange of Preferred
Shares of all series entitled to so participate; (B) each holder of
Preferred Shares of all series entitled to so participate; and (C) each
holder of Common Shares and Excess Shares resulting from the exchange of
Common Shares (to the extent permitted by Section 5.5(iii) hereof), that
portion of the aggregate assets available for distribution (determined in
accordance with applicable law) as the number of shares of such Excess
Shares held by such holder bears to the total number of (1) outstanding
Excess Shares resulting from the exchange of Preferred Shares of all series
entitled to so participate; (2) outstanding Preferred Shares of all series
entitled to so participate; and (3) outstanding Common Shares and Excess
Shares resulting from the exchange of Common Shares. The Company, as holder
of the Excess Shares in trust, or, if the Company shall have been
dissolved, any trustee appointed by the Company prior to its dissolution,
shall distribute ratably to the Beneficiaries of the Excess Shares Trust,
when determined, any such assets received in respect of the Excess Shares
in any liquidation, dissolution or winding up, or any distribution of the
assets, of the Company. Anything to the contrary herein notwithstanding, in
no event shall the amount payable to a holder with respect to Excess Shares
resulting from the exchange of Preferred Shares exceed (A) the price per
share such holder paid for the Preferred Shares in the purported Transfer,
Acquisition, change in capital structure or other transaction or event that
resulted in the Excess Shares or (B) if the holder did not give full value
for such Excess Shares (as through a gift, devise or other event or
transaction), a price per share equal to the Market Price for the shares of
Preferred Shares on the date of the purported Transfer, Acquisition, change
in capital structure or other transaction or event that resulted in such
Excess Shares. Any amount available for distribution in excess of the
foregoing limitations shall be paid ratably to the holders of Preferred
Shares and Excess Shares resulting from the exchange of Preferred Shares to
the extent permitted by the foregoing limitations.
(b) Except as provided below, in the event of any voluntary or
involuntary liquidation, dissolution or winding up, or any other
distribution of the assets, of the Company, each holder of Excess Shares
resulting from the exchange of Common Shares shall be entitled to receive,
ratably with (A) each other holder of such Excess Shares and (B) each
holder of Common Shares, that portion of the aggregate assets available for
distribution to holders of Common Shares (including holders of Excess
Shares resulting from the exchange of Common Shares pursuant to Section
5.5(iii)), determined in accordance with applicable law, as the number of
such Excess Shares held by such holder bears to the total number of
outstanding Common Shares and outstanding Excess Shares resulting from the
exchange of Common Shares then outstanding. The Company, as holder of the
Excess Shares in trust, or, if the Company shall have been dissolved, any
trustee appointed by the Company prior to its dissolution, shall distribute
ratably to the Beneficiaries of the Excess Shares, when determined, any
such assets received in respect of the Excess Shares in any liquidation,
dissolution or winding up, or any distribution of the assets, of the
Company. Anything herein to the contrary notwithstanding, in no event shall
the amount payable to a holder with respect to Excess Shares exceed (A) the
price per share such holder paid for the Equity Shares in the purported
Transfer, Acquisition, change in capital structure or other transaction or
event that resulted in the Excess Shares or (B) if the holder did not give
full value for such Equity Shares (as through a gift, devise or other event
or transaction), a price per share equal to the Market Price for the Equity
Shares on the date of the purported Transfer, Acquisition, change in
capital structure or other transaction or event that resulted in such
Excess Shares. Any amount available for distribution in excess of the
foregoing limitations shall be paid ratably to the holders of Common Shares
and Excess Shares resulting from the exchange of Common Shares to the
extent permitted by the foregoing limitations.
(iv) Voting Rights. The holders of Excess Shares shall not be entitled to
vote on any matters (except as required by the MGCL).
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(v) Restrictions on Transfer; Designation of Beneficiary.
(a) Excess Shares shall not be transferable. The Purported Record
Transferee (or Purported Record Holder) may freely designate a Beneficiary
of its interest in the Excess Shares Trust (representing the number of
Excess Shares held by the Excess Shares Trust attributable to the purported
Transfer or Acquisition that resulted in the Excess Shares), if (A) the
Excess Shares held in the Excess Shares Trust would not be Excess Shares in
the hands of such Beneficiary and (B) the Purported Beneficial Transferee
(or Purported Beneficial Holder) does not receive a price for designating
such Beneficiary that reflects a price per share for such Excess Shares
that exceeds (1) the price per share such Purported Beneficial Transferee
(or Purported Beneficial Holder) paid for the Equity Shares in the
purported Transfer, Acquisition, change in capital structure, or other
transaction or event that resulted in the Excess Shares or (2) if the
Purported Beneficial Transferee (or Purported Beneficial Holder) did not
give value for such Excess Shares (as through a gift, devise or other event
or transaction), a price per share equal to the Market Price for the Equity
Shares on the date of the purported Transfer, Acquisition, change in
capital structure, or other transaction or event that resulted in the
Excess Shares. Upon such transfer of an interest in the Excess Shares
Trust, the corresponding Excess Shares in the Excess Shares Trust
automatically shall be exchanged for an equal number of Equity Shares
(depending on the type and class of Shares that were originally exchanged
for such Excess Shares), and such Equity Shares shall be transferred of
record to the Beneficiary of the interest in the Excess Shares Trust
designated by the Purported Record Transferee (or Purported Record Holder),
as described above, if such Equity Shares would not be Excess Shares in the
hands of such Beneficiary. Prior to any transfer of any interest in the
Excess Shares Trust, the Purported Record Transferee (or Purported Record
Holder) must give advance written notice to the Company of the intended
transfer and the Company must have waived in writing its purchase rights
under Section 5.6(vi).
(b) Notwithstanding the foregoing, if a Purported Beneficial Transferee
(or Purported Beneficial Holder) receives a price for designating a
Beneficiary of an interest in the Excess Shares Trust that exceeds the
amounts allowable under subparagraph (i) of this Section 5.5(v), such
Purported Beneficial Transferee (or Purported Beneficial Holder) shall pay,
or cause the Beneficiary of the interest in the Excess Shares Trust to pay,
such excess in full to the Company.
(c) If any of the transfer restrictions set forth in this Section
5.5(v), or any application thereof, are determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the
Purported Record Transferee (or Purported Record Holder) may be deemed, at
the option of the Company, to have acted as the agent of the Company in
acquiring the Excess Shares as to which such restrictions would otherwise,
by their terms, apply and to hold such Excess Shares on behalf of the
Company.
(vi) Purchase Right in Excess Shares. Excess Shares shall be deemed to have
been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that created
such Excess Shares (or, in the case of devise or gift or event other than a
Transfer or Acquisition which results in the issuance of Excess Shares, the
Market Price at the time of such devise or gift or event other than a Transfer
or Acquisition which results in the issuance of Excess Shares) and (ii) the
Market Price of the Equity Shares exchanged for such Excess Shares on the date
the Company, or its designee, accepts such offer. The Company and its assignees
shall have the right to accept such offer for a period of ninety (90) days
after the later of (i) the date of the purported Transfer, Acquisition, change
in capital structure of the Company, purported change in Beneficial Ownership
or other event or transaction which resulted in such Excess Shares and (ii) the
date on which the Board of Directors determines in good faith that a Transfer,
Acquisition, change in capital structure of the Company, purported change in
Beneficial or Constructive Ownership resulting in Excess Shares has occurred,
if the Company does not receive a notice pursuant to Section 5.5(v), but in no
event later than a permitted Transfer pursuant to and in compliance with the
terms of Section 5.6(v).
(vii) Remedies Not Limited. Nothing contained in this Article V except
Section 5.7 shall limit scope or application of the provisions of this Section
5.6, the ability of the Company to implement or enforce compliance with the
terms hereof or the authority of the Board of Directors to take any such other
action or
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actions as it may deem necessary or advisable to protect the Company and the
interests of its Stockholders by preservation of the Company's status as a REIT
and to ensure compliance with applicable Share Ownership Limits and the other
restrictions set forth herein, including, without limitation, refusal to give
effect to a transaction on the books of the Company.
(viii) Authorization. At such time as the Board of Directors authorizes a
series of Preferred Shares pursuant to Section 5.3 of this Article V, without
any further or separate action of the Board of Directors, there shall be deemed
to be authorized a series of Excess Shares consisting of the number of shares
included in the series of Preferred Shares so authorized and having terms,
rights, restrictions and qualifications identical thereto, except to the extent
that such Excess Shares are already authorized or this Article V requires
different terms.
5.7 Settlements.
Nothing in Sections 5.5 and 5.6 or in any other provision of these Articles
of Incorporation shall preclude the settlement of any transaction with respect
to the Common Shares entered into through the facilities of the New York Stock
Exchange or other national securities exchange on which the Common Shares are
listed.
5.8 Severability.
If any provision of this Article V or any application of any such provision
is determined to be void, invalid or unenforceable by any court having
jurisdiction over the issue, the validity and enforceability of the remaining
provisions of this Article V shall not be affected and other applications of
such provision shall be affected only to the extent necessary to comply with
the determination of such court.
5.9 Waiver.
The Company shall have authority at any time to waive the requirements that
Excess Shares be issued or be deemed outstanding in accordance with the
provisions of this Article V if the Company determines, based on an opinion of
nationally recognized tax counsel, that the issuance of such Excess Shares or
the fact that such Excess Shares are deemed to be outstanding, would jeopardize
the status of the Company as a REIT (as that term is defined in Section 1.5).
ARTICLE VI:
STOCKHOLDERS
6.1 Meetings of Stockholders.
There shall be an annual meeting of the Stockholders, to be held at such
time and place as shall be determined by or in the manner prescribed in the
Bylaws, at which the Directors shall be elected and any other proper business
may be conducted. The annual meeting will be held at a location convenient to
the Stockholders, on a date which is a reasonable period of time following the
distribution of the Company's annual report to Stockholders but not less than
thirty (30) days after delivery of such report. A majority of Stockholders
present in person or by proxy at an annual meeting at which a quorum is
present, may, without the necessity for concurrence by the Directors, vote to
elect the Directors. Special meetings of Stockholders may be called in the
manner provided in the Bylaws, including at any time by Stockholders holding,
in the aggregate, not less than ten percent (10%) of the outstanding Equity
Shares entitled to be cast on any issue proposed to be considered at any such
special meeting. If there are no Directors, the officers of the Company shall
promptly call a special meeting of the Stockholders entitled to vote for the
election of successor Directors. Any meeting may be adjourned and reconvened as
the Directors determine or as provided by the Bylaws.
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6.2 Voting Rights of Stockholders.
Subject to the provisions of any class or series of Shares then outstanding
and the mandatory provisions of any applicable laws or regulations, the
Stockholders shall be entitled to vote only on the following matters; (a)
election or removal of Directors as provided in Sections 2.3, 2.5 and 6.1
hereof; (b) amendment of these Articles of Incorporation as provided in Section
8.1 hereof; (c) reorganization of the Company as provided in Section 8.2
hereof; (d) merger, consolidation or sale or other disposition of all or
substantially all of the Company Property, as provided in Section 8.3 hereof;
and (e) termination of the Company's status as a real estate investment trust
under the REIT Provisions of the Code, as provided in Section 3.2(xxiii)
hereof. The Stockholders may terminate the status of the Company as a REIT
under the Code by a vote of two-thirds of the Shares outstanding and entitled
to vote. Except with respect to the foregoing matters, no action taken by the
Stockholders at any meeting shall in any way bind the Directors.
6.3 Stockholder Action to be Taken by Meeting.
Any action required or permitted to be taken by the Stockholders of the
Company must be effected at a duly called annual or special meeting of
Stockholders of the Company and may not be effected by any consent in writing
of such Stockholders.
6.4 Right of Inspection.
Any Stockholder and any designated representative thereof shall be permitted
access to all records of the Company at all reasonable times, and may inspect
and copy any of them for a reasonable charge. Inspection of the Company books
and records by the office or agency administering the securities laws of a
jurisdiction shall be provided upon reasonable notice and during normal
business hours.
6.5 Access to Stockholder List.
An alphabetical list of the names, addresses and telephone numbers of the
Stockholders of the Company, along with the number of Shares held by each of
them (the "Stockholder List"), shall be maintained as part of the books and
records of the Company and shall be available for inspection by any Stockholder
or the Stockholder's designated agent at the home office of the Company upon
the request of the Stockholder. The Stockholder List shall be updated at least
quarterly to reflect changes in the information contained therein and a copy of
such list shall be mailed to any Stockholder so requesting within ten (10) days
of the request. The Company may impose a reasonable charge for expenses
incurred in reproduction pursuant to the Stockholder request. A Stockholder may
request a copy of the Stockholder List in connection with matters relating to
Stockholders' voting rights, and the exercise of Stockholder rights under
federal proxy laws. The Company may require the Stockholder requesting the
Stockholder List to represent that the list is not requested for a commercial
purpose unrelated to the Stockholder's interest in the Company. The Company may
impose a reasonable charge for expenses incurred in reproducing such
Stockholder List. The Stockholder List may not be used for commercial purposes.
If the Advisor or Directors neglect or refuse to exhibit, produce or mail a
copy of the Stockholder List as requested, the Advisor and the Directors shall
be liable to any Stockholder requesting the list for the costs, including
attorneys' fees, incurred by that Stockholder for compelling the production of
the Stockholder List, and for actual damages suffered by any Stockholder by
reason of such refusal or neglect. It shall be a defense that the actual
purpose and reason for the requests for inspection or for a copy of the
Stockholder List is to secure such list of Stockholders or other information
for the purpose of selling such list or copies thereof, or of using the same
for a commercial purpose other than in the interest of the applicant as a
Stockholder relative to the affairs of the Company. The remedies provided
hereunder to Stockholders requesting copies of the Stockholder List are in
addition, to and shall not in any way limit, other remedies available to
Stockholders under federal law, or the laws of any state.
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6.6 Reports.
The Directors shall take reasonable steps to insure that the Company shall
cause to be prepared and mailed or delivered to each Stockholder as of a record
date after the end of the fiscal year and each holder of other publicly held
securities of the Company an annual report for each fiscal year in accordance
with the requirements of the Securities and Exchange Commission and the New
York Stock Exchange or other national securities exchange on which the
Company's Securities are listed.
ARTICLE VII:
LIABILITY; TRANSACTIONS BETWEEN AFFILIATES AND THE COMPANY
7.1 Limitation of Stockholder Liability.
No Stockholder shall be liable for any debt, claim, demand, judgment or
obligation of any kind of, against or with respect to the Company by reason of
his being a Stockholder, nor shall any Stockholder be subject to any personal
liability whatsoever, in tort, contract or otherwise, to any Person in
connection with the Company Property or the affairs of the Company by reason of
his being a Stockholder. The Company shall include a clause in its contracts
which provides that Stockholders shall not be personally liable for obligations
entered into on behalf of the Company.
7.2 Exculpation.
To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers, no director or officer
of the Company shall be liable to the Company or any of the Stockholders for
money damages. Neither the amendment nor repeal of this Section 7.2, nor the
adoption or amendment of any provision of these Articles of Incorporation
inconsistent with this Section 7.2, shall apply to or affect in any respect the
applicability of the preceding sentence with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
7.3 Indemnification.
Each person who is or was or who agrees to become a director or officer of
the Company, or each person who, while a director of the Company, is or was
serving or who agrees to serve, at the request of the Company, as a director,
officer, partner, joint venture, employee or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
(including the heirs, executor, administrators or estate of such person), shall
be indemnified by the Company, and shall be entitled to have paid on his behalf
or be reimbursed for reasonable expenses in advance of final disposition of a
proceeding, in accordance with the Bylaws of the Company, to the full extent
permitted from time to time by the Maryland General Corporation Law as the same
exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment) or any other applicable laws presently or hereafter in effect.
The Company shall have the power, with the approval of the Board of Directors,
to provide such indemnification and advancement of expenses to any employee or
agent of the Company, in accordance with the Bylaws of the Company. Without
limiting the generality or the effect of the foregoing, the Company may enter
into one or more agreements with any person which provide for indemnification
greater or different than that provided in this Article VII. Any amendment or
repeal of this Article VII shall not adversely affect any right or protection
existing hereunder immediately prior to such amendment or repeal.
7.4 Express Exculpatory Clauses In Instruments.
Neither the Stockholders nor the Directors, officers, employees or agents of
the Company shall be liable under any written instrument creating an obligation
of the Company by reason of their being Stockholders,
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Directors, officers, employees or agents of the Company, and all Persons shall
look solely to the Company Property for the payment of any claim under or for
the performance of that instrument. The omission of the foregoing exculpatory
language from any instrument shall not affect the validity or enforceability
of such instrument and shall not render any Stockholder, Director, officer,
employee or agent liable thereunder to any third party, nor shall the
Directors or any officer, employee or agent of the Company be liable to anyone
as a result of such omission.
7.5 Transactions with Affiliates.
The Company may engage in transactions with any Affiliates, subject to any
express restrictions in these Articles of Incorporation (including Article IV
and Section 5.6) or adopted by the Directors in the Bylaws or by resolution,
and further subject to the disclosure and ratification requirements of MGCL
(S) 2-419 and other applicable law.
ARTICLE VIII:
AMENDMENT; REORGANIZATION; MERGER, ETC.
8.1 Amendment.
(i) These Articles of Incorporation may be amended, without the necessity
for concurrence by the Directors, by the affirmative vote of the holders of
not less than a majority of the Shares then outstanding and entitled to vote
thereon, except that (1) no amendment may be made which would change any
rights with respect to any outstanding class of securities, by reducing the
amount payable thereon upon liquidation, or by diminishing or eliminating any
voting rights pertaining thereto; and (2) Section 8.2 hereof and this Section
8.1 shall not be amended (or any other provision of these Articles of
Incorporation be amended or any provision of these Articles of Incorporation
be added that would have the effect of amending such sections), without the
affirmative vote of the holders of two-thirds (2/3) of the Shares then
outstanding and entitled to vote thereon.
(ii) The Directors, by a two-thirds (2/3) vote, may amend provisions of
these Articles of Incorporation from time to time as necessary to enable the
Company to qualify as a real estate investment trust under the REIT Provisions
of the Code. With the exception of the foregoing, the Directors may not amend
these Articles of Incorporation.
(iii) An amendment to these Articles of Incorporation shall become
effective as provided in Section 10.5.
(iv) These Articles of Incorporation may not be amended except as provided
in this Section 8.1.
8.2 Reorganization.
Subject to the provisions of any class or series of Shares at the time
outstanding, the Directors shall have the power (i) to cause the organization
of a corporation, association, trust or other organization to take over the
Company Property and to carry on the affairs of the Company, or (ii) merge the
Company into, or sell, convey and transfer the Company Property to any such
corporation, association, trust or organization in exchange for Securities
thereof or beneficial interests therein, and the assumption by the transferee
of the liabilities of the Company, and upon the occurrence of (i) or (ii)
above terminate the Company and deliver such Securities or beneficial
interests ratably among the Stockholders according to the respective rights of
the class or series of Shares held by them; provided, however, that any such
action shall have been approved, at a meeting of the Stockholders called for
that purpose, by the affirmative vote of the holders of not less than a
majority of the Shares then outstanding and entitled to vote thereon.
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8.3 Merger, Consolidation or Sale of Company Property.
Subject to the provisions of any class or series of Shares at the time
outstanding, the Directors shall have the power to (i) merge the Company into
another entity, (ii) consolidate the Company with one (1) or more other
entities into a new entity; (iii) sell or otherwise dispose of all or
substantially all of the Company Property; or (iv) dissolve or liquidate the
Company; provided, however, that such action shall have been approved, at a
meeting of the Stockholders called for that purpose, by the affirmative vote of
the holders of not less than a majority of the Shares then outstanding and
entitled to vote thereon. Any such transaction involving an Affiliate of the
Company also must be approved by a majority of the Directors not otherwise
interested in such transaction as fair and reasonable to the Company and on
terms and conditions not less favorable to the Company than those available
from unaffiliated third parties.
In connection with any proposed Roll-Up Transaction, which, in general
terms, is any transaction involving the acquisition, merger, conversion, or
consolidation, directly or indirectly, of the Company and the issuance of
securities of a Roll-Up Entity that would be created or would survive after the
successful completion of the Roll-Up Transaction, an appraisal of all
Properties shall be obtained from a competent independent appraiser. The
Properties shall be appraised on a consistent basis, and the appraisal shall be
based on the evaluation of all relevant information and shall indicate the
value of the Properties as of a date immediately prior to the announcement of
the proposed Roll-Up Transaction. The appraisal shall assume an orderly
liquidation of Properties over a 12-month period. The terms of the engagement
of the independent appraiser shall clearly state that the engagement is for the
benefit of the Company and the Stockholders. A summary of the appraisal,
indicating all material assumptions underlying the appraisal, shall be included
in a report to Stockholders in connection with a proposed Roll-Up Transaction.
In connection with a proposed Roll-Up Transaction which has not been approved
by vote of at least two-thirds (2/3) of the Stockholders, the person sponsoring
the Roll-Up Transaction shall offer to Stockholders who vote against the
proposed Roll-Up Transaction the choice of:
(i) accepting the securities of a Roll-Up Entity offered in the proposed
Roll-Up Transaction; or
(ii) one of the following:
(a) remaining Stockholders of the Company and preserving their
interests therein on the same terms and conditions as existed
previously; or
(b) receiving cash in an amount equal to the Stockholder's pro rata
share of the appraised value of the net assets of the Company.
The Company is prohibited from participating in any proposed Roll-Up
Transaction:
(iii) which would result in the Stockholders having democracy rights in
a Roll-Up Entity that are less than the rights provided for in Sections
6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 7.1 of these Articles of Incorporation;
(iv) which includes provisions that would operate as a material
impediment to, or frustration of, the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the minimum
extent necessary to pre serve the tax status of the Roll-Up Entity), or
which would limit the ability of an investor to exercise the voting rights
of its Securities of the Roll-Up Entity on the basis of the number of
Shares held by that investor;
(v) in which investor's rights to access of records of the Roll-Up
Entity will be less than those described in Sections 6.4 and 6.5 hereof; or
(vi) in which any of the costs of the Roll-Up Transaction would be borne
by the Company if the Roll-Up Transaction is not approved by the
Stockholders.
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ARTICLE IX:
DURATION OF COMPANY
9.1 Perpetual Existence.
The duration of the Company is perpetual.
ARTICLE X:
MISCELLANEOUS
10.1 Governing Law.
These Articles of Incorporation have been approved by the Directors
executing the Articles of Amendment in which they are included and delivered in
the State of Maryland with reference to the laws thereof, and the rights of all
parties and the validity, construction and effect of every provision hereof
shall be subject to and construed according to the laws of the State of
Maryland without regard to conflicts of laws provisions thereof.
10.2 Reliance by Third Parties.
Any certificate shall be final and conclusive as to any Persons dealing with
the Company if executed by an individual who, according to the records of the
Company or of any recording office in which these Articles of Incorporation may
be recorded, appears to be the Secretary or an Assistant Secretary of the
Company or a Director, and if certifying to: (i) the number or identity of
Directors, officers of the Company or Stockholders; (ii) the due authorization
of the execution of any document; (iii) the action or vote taken, and the
existence of a quorum, at a meeting of the Directors or Stockholders; (iv) a
copy of the Articles of Incorporation or of the Bylaws as a true and complete
copy as then in force; (v) an amendment to these Articles of Incorporation;
(vi) the dissolution of the Company; or (vii) the existence of any fact or
facts which relate to the affairs of the Company. No purchaser, lender,
transfer agent or other Person shall be bound to make any inquiry concerning
the validity of any transaction purporting to be made on behalf of the Company
by the Directors or by any duly authorized officer, employee or agent of the
Company.
10.3 Provisions in Conflict with Law or Regulations.
(i) The provisions of these Articles of Incorporation are severable, and if
the Directors shall determine that any one or more of such provisions are in
conflict with the REIT Provisions of the Code, or other applicable federal or
state laws, the conflicting provisions shall be deemed never to have
constituted a part of these Articles of Incorporation, even without any
amendment of these Articles of Incorporation pursuant to Section 8.1 hereof;
provided, however, that such determination by the Directors shall not affect or
impair any of the remaining provisions of these Articles of Incorporation or
render invalid or improper any action taken or omitted prior to such
determination. No Director shall be liable for making or failing to make such a
determination.
(ii) If any provision of these Articles of Incorporation shall be held
invalid or unenforceable in any jurisdiction, such holding shall not in any
manner affect or render invalid or unenforceable such provision in any other
jurisdiction or any other provision of these Articles of Incorporation in any
jurisdiction.
10.4 Construction.
In these Articles of Incorporation, unless the context otherwise requires,
words used in the singular or in the plural include both the plural and
singular and words denoting any gender include both genders. The title and
headings of different parts are inserted for convenience and shall not affect
the meaning, construction or effect of these Articles of Incorporation. In
defining or interpreting the powers and duties of the Company and
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its Directors and officers, reference may be made, to the extent appropriate,
to the Code and to Titles 1 through 3 of the Corporations and Associations
Article of the Annotated Code of Maryland, referred to herein as the "MGCL."
10.5 Recordation.
These Articles of Incorporation and any amendment hereto shall be filed for
record with the State Department of Assessments and Taxation of Maryland and
may also be filed or recorded in such other places as the Directors deem
appropriate, but failure to file for record these Articles of Incorporation or
any amendment hereto in any office other than in the State of Maryland shall
not affect or impair the validity or effectiveness of these Articles of
Incorporation or any amendment hereto. A restated Articles of Incorporation
shall, upon filing, be conclusive evidence of all amendments contained therein
and may thereafter be referred to in lieu of the original Articles of
Incorporation and the various amendments thereto.
A-27
<PAGE>
Exhibit B
---------
APF's Restated Articles (marked to show changes from Existing Articles)
A black-lined version of the Restated Articles of APF will be attached as
Exhibit B to the Proxy Statement, which will be mailed to the stockholders of
APF in connection with the Special Meeting. The black-lined version will show
the modifications proposed to be made to the Existing Articles, with the
additions underlined in bold and the deletions shown as strike-throughs.
<PAGE>
Exhibit C
INFORMATION MEMORANDUM
Attachment to Proxy Statement
for the Special Meeting of Stockholders of
CNL American Properties Fund, Inc.
to be held on , 1999
This Information Memorandum is being furnished to the holders of shares of
common stock, par value $0.01 per share ("APF Shares"), of CNL American
Properties Fund, Inc. ("APF"), a Maryland corporation, as an attachment to the
proxy statement (the "Proxy Statement") for the special meeting of such holders
to be held on , 1999 (the "Special Meeting"). NO VOTE OR OTHER
ACTION OF THE APF STOCKHOLDERS IS REQUIRED WITH RESPECT TO THIS INFORMATION
MEMORANDUM. WE ARE REQUESTING YOUR PROXY SOLELY IN CONNECTION WITH THE MATTERS
DESCRIBED IN THE PROXY STATEMENT TO WHICH THIS INFORMATION MEMORANDUM IS
ATTACHED.
This Information Memorandum describes certain acquisitions described below
(collectively, the "Acquisitions") that APF intends to complete in order to
increase stockholder value. Upon consummation of the Acquisitions, APF intends
to list the APF Shares for trading on the New York Stock Exchange (the "NYSE")
in order to provide liquidity and a trading market for them. At the Special
Meeting, the APF stockholders will be asked to consider and vote upon a
proposal to approve an amendment and restatement of APF's Articles of
Incorporation (the "Restated Articles") to facilitate the consummation of the
Acquisitions and to modify APF's existing Articles to provide APF with the
greater degree of operational flexibility that is characteristic of publicly-
traded real estate investment trusts ("REITs").
As a result of the Acquisitions, APF will become a full-service REIT which
has the ability to offer to prospective restaurant operators or owners a
complete range of restaurant development and financing options. The
Acquisitions consist of the following:
. Acquisition of Advisor. APF will become internally advised and will
acquire complete acquisition, development and in-house management
functions by acquiring its external advisor, CNL Fund Advisors, Inc.
(the "Advisor"). Because APF has had no employees since its inception,
the Advisor has provided these functions on behalf of APF and has been
responsible for the day-to-day operations of APF, including raising
capital, investment analysis, acquisitions, due diligence, asset
management and accounting services. The acquisition of the Advisor also
will provide APF with restaurant development capabilities, including
site selection, construction management and build-to-suit development.
. Acquisition of CNL Restaurant Financial Services Group. To increase its
financing capabilities and expand its mortgage loan portfolio, APF will
acquire CNL Financial Corp. and CNL Financial Services, Inc. (together,
the "CNL Restaurant Financial Services Group" and collectively with the
Advisor, the "CNL Restaurant Businesses"). The CNL Restaurant Financial
Services Group makes and services mortgage loans (and, as described
below, "securitizes" a portion of such loans) to operators of national
and regional restaurant chains comparable to the restaurant chain
operators that currently are tenants of APF.
. Acquisition of CNL Income Funds. To increase the size of its restaurant
property portfolio, APF will seek to acquire 18 CNL Income Funds (the
"Funds"), which are limited partnerships that owned, as of September 30,
1998 and in the aggregate, 621 restaurant properties similar to the
types of restaurant properties in which APF invests. If APF acquires the
Advisor, the CNL Restaurant Financial Services Group and all of the
Funds, it expects to have total assets of approximately $1.5 billion at
the time those acquisitions are consummated and it will own or hold a
mortgage interest in more than 1,400 restaurant properties, making APF
one of the largest triple-net lease REITs in the United States.
The terms of the Acquisitions and the background of and reasons for them are
discussed below.
C-1
<PAGE>
DESCRIPTION OF THE ACQUISITIONS
General
APF has entered into merger agreements with the stockholders of each of the
Advisor and the CNL Restaurant Financial Services Group and merger agreements
with the general partners of each of the Funds (collectively, the "Merger
Agreements"). The Advisor and the CNL Restaurant Financial Services Group will
each be merged into a separate newly-formed, wholly-owned subsidiary of APF and
the Funds will be merged with and into CNL APF Partners, L.P., an existing,
wholly-owned subsidiary of APF through which APF will conduct its business
after the Acquisitions have been consummated. The Merger Agreements were
negotiated and executed following the recommendation of a special committee
(the "Special Committee") of APF's Board of Directors (the "Board"), which is
comprised of the three independent members of APF's Board, and the unanimous
vote in favor of the Acquisitions of the members of the full Board. See
"BACKGROUND OF AND REASONS FOR THE ACQUISITIONS -- Chronology of the
Acquisitions."
The Merger Agreements provide that the purchase price payable by APF to the
stockholders of the CNL Restaurant Businesses will consist of 12,300,000 APF
Shares (with the Board having allocated 7,600,000 of such APF Shares for the
acquisition of the Advisor and 4,700,000 of such APF Shares for the acquisition
of the CNL Restaurant Financial Services Group) and that if all of the Funds
are acquired, up to an aggregate of 61,000,000 APF Shares will be issued to the
partners of the Funds (before the payment by the Funds of certain acquisition
expenses). Because the APF Shares are not listed at this time, the value of an
APF Share is uncertain. For purposes of the Acquisitions, the Board assigned
the APF Shares a value of $10.00 per share, which is the price at which APF
sold APF Shares in three previous public offerings, the most recent of which
was completed in December 1998. Based on that value, APF will pay $123 million
for the CNL Restaurant Businesses (with the Board having allocated $76 million
of that amount for the acquisition of the Advisor and $47 million for the
acquisition of CNL Restaurant Financial Services Group) and, if all the Funds
are acquired, up to an aggregate of $610 million for the Funds (before the
payment by the Funds of certain acquisition expenses). APF has obtained two
separate fairness opinions from Merrill Lynch, Pierce, Fenner & Smith,
Incorporated ("Merrill Lynch"), an independent investment banking firm, in
which Merrill Lynch opined that the aggregate consideration to be paid by APF
for the CNL Restaurant Businesses and for the Funds, respectively, is fair to
APF from a financial point of view. See "BACKGROUND OF AND REASONS FOR THE
ACQUISITIONS-- Fairness Opinions" and the full text of the fairness opinions,
which are attached as Exhibit D-1 and Exhibit D-2, respectively, to the Proxy
Statement.
The acquisition of the CNL Restaurant Businesses (collectively, the "CNL
Restaurant Business Acquisitions") will be completed as soon as practicable.
Because APF already has a sufficient number of APF Shares available to
consummate these acquisitions, they may be completed before the Restated
Articles are approved. The acquisitions of the Funds (collectively, the "Fund
Acquisitions"), on the other hand, are subject to approval of the Restated
Articles by the APF stockholders because APF does not currently have a
sufficient number of authorized shares to complete those acquisitions. Further,
the Fund Acquisitions are subject to the approval by the holders of a majority
of the units of limited partnership interest ("Units") of each Fund. A special
meeting of the limited partners of the Funds is scheduled to be held on
1999 for the purpose of voting on the Fund Acquisitions. If the Restated
Articles are approved, the Fund Acquisitions will occur as soon as practicable
following the approval of such acquisitions by the limited partners of the
Funds. It is expected that the Fund Acquisitions will be consummated in the
fourth quarter of 1999. In no event will the Acquisitions be consummated later
than December 31, 1999.
Acquisition of the Advisor
APF will become internally advised and acquire complete acquisition,
development and in-house asset management functions by acquiring the Advisor.
Because APF has had no employees since its inception, the Advisor has provided
these functions on behalf of APF and it has been responsible for the day-to-day
operations of APF, including raising capital, investment analysis,
acquisitions, due diligence, asset management and accounting services. In June
1998, the Advisor acquired CNL Restaurant Development, Inc. (the "Development
Company"). As a result of that acquisition, the Advisor now offers site
selection and
C-2
<PAGE>
construction management and build-to-suit development services that had
previously been performed by the Development Company. As of September 30, 1998,
the Advisor was overseeing 75 restaurant development projects.
The Advisor is a majority owned subsidiary of CNL Group, Inc., a diversified
real estate company wholly-owned by James M. Seneff, Jr. and his wife. The
seven executive officers of APF are also executive officers of the Advisor, and
Mr. Seneff serves as Chairman of the Board of Directors and Chief Executive
Officer of CNL Group, Inc., APF, the Advisor and other CNL affiliates. The
Advisor has developed extensive experience and long-term relationships
throughout the restaurant industry, including but not limited to the
relationships the Advisor has developed with the restaurant chains with which
APF has relationships. APF believes that the Advisor's experience and
relationships benefit APF in selecting, acquiring and managing its properties,
thereby providing APF with a competitive advantage in the management and
operation of its real estate assets and in the identification of attractive
investments. The Advisor's principal executive offices are in the same location
as APF's: 400 East South Street, Orlando, Florida 32801, telephone number (407)
650-1000.
The Advisor currently is entitled to various fees (the "Advisor Fees") for
providing services to APF. Upon the acquisition of the Advisor, the operations
of the Advisor will become part of the business of APF and, accordingly, APF
will cease to pay any Advisor Fees and other fees that APF pays to affiliates
of the Advisor. APF believes that, as a result, it will experience long-term
cost savings by acquiring the Advisor. See "BACKGROUND OF AND REASONS FOR THE
ACQUISITIONS -- Reasons for Acquiring the CNL Restaurant Businesses."
The Advisor Fees and other fees payable to affiliates of the Advisor, all of
which APF will cease to pay once it acquires the Advisor, consist generally of
the following:
(a) a monthly asset management fee equal to one-twelfth of .60% of (i) the
amount invested in properties wholly-owned by APF, determined on the
basis of cost, plus, in the case of properties owned by a joint venture
or partnership, the portion of the cost of such properties paid by APF,
exclusive of acquisition fees and expenses (the "Real Estate Asset
Value"), and (ii) the outstanding principal amount of APF's mortgage
loans as of the end of the preceding month;
(b) subject to certain limitations, reimbursement of operating expenses;
(c) an acquisition fee for the acquisition of properties and funding of
mortgage loans in an amount equal to 4.5% of the total amount raised
from the sale of APF Shares or from borrowings under APF's line of
credit after all net offering proceeds have been invested;
(d) subject to approval of the Board, additional acquisition, development
or construction fees that are payable to affiliates of the Advisor in
connection with the financing, development, construction and renovation
of properties;
(e) an acquisition expense reimbursement for costs incurred by the Advisor
on behalf of APF in site selection and acquisition activities
(including travel and related items) that, when combined with
acquisition fees payable to the Advisor and its affiliates, shall not
(without the approval of the Board) exceed 6% of the Real Estate Asset
Value of a property or, in the case of a mortgage loan, 6% of the funds
advanced;
(f) a deferred subordinated real estate disposition fee, payable upon sale
of one or more properties, equal to the lesser of (i) one half of a
competitive real estate commission (defined as a commission that is
reasonable, customary and competitive in light of the size, type and
location of the property) and (ii) 3% of the sales price of the
property;
(g) a deferred, subordinated incentive fee payable upon the listing of the
APF Shares on a national securities exchange or over-the-counter market
or the sale of assets of APF, subject to the receipt by the APF
stockholders of total distributions in excess of certain minimum
levels;
C-3
<PAGE>
(h) a secured equipment lease servicing fee equal to 2% of the purchase
price of equipment subject to each secured equipment lease and
reimbursement of expenses incurred in obtaining such leases up to a
maximum of 0.5% of the purchase price of the equipment subject to each
lease; and
(i) an annual soliciting dealer servicing fee equal to 0.2% of APF's
"invested capital" (generally, the amount of cash paid for all APF
Shares sold reduced by certain prior distributions with respect to such
shares) on December 31 of each year, which fee is payable until the
listing of the APF Shares on a national securities exchange or over-
the-counter market or the sale of assets of APF.
For the years ended December 31, 1998, 1997 and 1996, the Advisor Fees
amounted to $24,172,688, $13,601,242 and $6,155,180, respectively. The Advisor
pays all of its own expenses, including salaries, wages, payroll taxes, costs
of employee benefit plans and charges for incidental help, incurred in
connection with acquisition activities under the Advisory Agreement. The
Advisor also pays its own accounting fees and related expenses, legal fees,
insurance, rent, telephone, utilities and certain travel expenses of its
officers and employees. All of these expenses will be borne directly by APF
after the consummation of the acquisition of the CNL Restaurant Businesses.
The Advisory Agreement is subject to annual renewal by APF and the Advisor.
APF renewed the Advisory Agreement effective April 1998 for the period ending
April 1999. Because APF and the Advisor are under common control, the decision-
making process with respect to such renewal has not necessarily proceeded on
the same arm's-length basis it would have if APF and the Advisor were
unaffiliated entities. Nevertheless, APF believes that the Advisor Fees paid to
the Advisor are no less favorable than the fees that would be paid to an
unaffiliated third party advisor. In addition, APF believes that no other
advisory company could provide the same level of experience and expertise as
the Advisor, and therefore has not actively pursued discussions with any other
advisory companies prior to renewing the Advisory Agreement.
Acquisition of CNL Restaurant Financial Services Group
CNL Financial Corp. and CNL Financial Services, Inc. are Florida
corporations, each owned 90% by CNL Group, Inc. and its employees and
affiliates and 10% by Five Arrows Realty Securities L.L.C., a Delaware limited
liability company that is not affiliated with CNL Group, Inc. Their principal
executive offices are in the same location as APF's: 400 East South Street,
Orlando, Florida 32801, telephone number (407) 650-1000.
Although APF has the ability to make mortgage loans (subject to certain
restrictions under its existing Articles of Incorporation, which restrictions
are proposed to be eliminated under the Restated Articles as described in the
Proxy Statement), the acquisition of the CNL Restaurant Financial Services
Group will permit APF to expand its financing capabilities to include
securitization transactions (described below). APF also will acquire the CNL
Restaurant Financial Services Group's existing mortgage loan portfolio,
including the servicing rights related to the portfolio, and will assume the
warehouse lines of credit used previously by them in providing such financial
services. As of September 30, 1998, the CNL Restaurant Financial Services Group
had made $465 million in mortgage loans on 458 restaurant properties in 37
states, had secured approximately $135 million in loan commitments and had
securitized approximately $269 million of the $465 million of originated
mortgage loans.
The CNL Restaurant Financial Services Group "securitizes" mortgage loans. A
mortgage loan securitization involves combining a group of mortgage loans into
a pool, creating securities that are backed by the combined pool and then
issuing those securities to investors. The CNL Restaurant Financial Services
Group makes loans and securitizes them by selling them to a special purpose
entity which issues certificates representing beneficial interests in the pool
of mortgage loans. The CNL Restaurant Financial Services Group receives from a
securitization (i) the net proceeds (less a placement fee and other offering
expenses) from the sale of the certificates, (ii) income in the form of the
"spread" between the interest that is earned on the securitized mortgage loans
(less transaction fees and expenses and any portfolio losses) and the interest
earned on the certificates sold to third parties and (iii) fees for servicing
mortgage loans that have been securitized.
C-4
<PAGE>
The CNL Restaurant Financial Services Group usually will retain a subordinated
interest in the mortgage loans, which because it is subordinated, generally
will bear interest at a higher rate than the mortgage loans as a whole.
Further, by eliminating the securitized mortgage loans from its balance sheet,
the securitization transactions reduce the CNL Restaurant Financial Services
Group's equity requirements.
The following table shows certain annualized information regarding mortgage
loans made by APF on restaurant properties in which APF owned an interest as of
September 30, 1998 and assuming APF had acquired the CNL Restaurant Financial
Services Group as of that date, including the restaurant chain, the number of
restaurant properties subject to mortgage loans per restaurant chain, the
aggregate revenue per restaurant chain and the aggregate outstanding balance of
mortgage loans per chain.
<TABLE>
<CAPTION>
Annualized
Aggregate Percent of Aggregate Percent of
Number of Total Total Outstanding Outstanding
Restaurant Chain Properties Revenue Revenue Balance Balance
- ---------------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Applebee's.......... 53 $5,342,000 31.7% $ 65,909,000 34.9%
T.G.I. Friday's..... 12 2,336,000 13.8% 23,111,000 12.2%
Burger King......... 29 1,888,000 11.2% 22,570,000 11.9%
Pizza Hut........... 47 1,764,000 10.5% 16,440,000 8.7%
Taco Bell........... 27 1,442,000 8.6% 17,988,000 9.5%
Denny's............. 10 1,100,000 6.5% 11,243,000 6.0%
Shoney's............ 7 630,000 3.7% 6,138,000 3.3%
Fazoli's............ 7 606,000 3.6% 6,283,000 3.3%
Ruby Tuesday........ 5 454,000 2.7% 4,721,000 2.5%
Golden Corral....... 2 337,000 2.0% 3,881,000 2.1%
Del Taco............ 4 311,000 1.8% 3,300,000 1.8%
Houlihan's.......... 1 236,000 1.4% 2,360,000 1.2%
Captain D's......... 2 117,000 0.7% 1,343,000 0.7%
Papa John's......... 6 116,000 0.7% 1,337,000 0.7%
Popeyes............. 2 73,000 0.4% 805,000 0.4%
Wendy's............. 1 70,000 0.4% 806,000 0.4%
Arby's.............. 1 58,000 0.3% 760,000 0.4%
--- ----------- ----- ------------ -----
Total............. 216 $16,880,000 100.0% $188,995,000 100.0%
=== =========== ===== ============ =====
</TABLE>
C-5
<PAGE>
The following table shows, for restaurant properties in which APF owned an
interest, as of September 30, 1998 and assuming APF had acquired the CNL
Restaurant Financial Services Group as of that date, annualized information by
restaurant chain, for mortgage loans that the CNL Restaurant Financial Services
Group has securitized.
<TABLE>
<CAPTION>
Aggregate Percent of
Number of Outstanding Outstanding
Restaurant Chain Properties Balance(1) Balance
- ---------------- ---------- ------------ -----------
<S> <C> <C> <C>
T.G.I. Friday's............................ 35 $ 54,289,000 20.2%
Wendy's.................................... 50 48,695,000 18.1%
Bennigan's................................. 22 36,950,000 13.8%
Taco Bell.................................. 56 34,086,000 12.7%
Burger King................................ 36 32,334,000 12.0%
Ruby Tuesday............................... 13 17,479,000 6.5%
Steak and Ale Restaurant................... 6 8,650,000 3.2%
KFC........................................ 10 8,390,000 3.1%
Applebee's................................. 4 6,066,000 2.3%
Fazoli's................................... 5 5,244,000 2.0%
Papa John's................................ 33 4,968,000 1.8%
Sonny's Real Pit Bar-B-Q................... 8 4,331,000 1.6%
Morton's of Chicago........................ 2 2,278,000 0.8%
Denny's.................................... 2 1,624,000 0.6%
Arby's..................................... 3 1,553,000 0.6%
Del Taco................................... 2 1,030,000 0.4%
Popeyes.................................... 1 673,000 0.3%
--- ------------ -----
Total.................................... 288 $268,640,000 100.0%
=== ============ =====
</TABLE>
- --------
(1) Of the total securitized portfolio of $268.6 million, the CNL Restaurant
Financial Services Group has retained a subordinated interest in $23.4
million, which, assuming no prepayment of default by the borrower, will
generate on an annualized basis approximately $4.0 million in interest
income and servicing fees.
Acquisition of Funds
APF is seeking to increase its asset base by acquiring the Funds, which as
of September 30, 1998, owned in the aggregate, 621 restaurant properties in 39
states, which for the nine months ended September 30, 1998, had aggregate gross
revenues of approximately $37 million. Similar to APF, the Funds' restaurant
properties generally are leased on a triple-net basis to operators of national
and regional restaurant chains and managed by the Advisor. The Funds' principal
executive offices are in the same location as APF's: 400 East South Street,
Orlando, Florida 32801, telephone number (407) 650-1000. See "BUSINESS OF THE
FUNDS" for a discussion of the current business of the Funds, the methods by
which the Funds evaluate and acquire restaurant properties and the terms upon
which the Funds' restaurant properties are leased.
The Funds were formed from 1985 to 1995 by affiliates of CNL Group, Inc., an
affiliate of APF. The limited partners of the Funds are the individuals and
entities who invested in the Funds. James M. Seneff, Jr., APF's Chairman and
Chief Executive Officer, Robert A. Bourne, APF's Vice Chairman and Treasurer,
and CNL Realty Corporation are the general partners of each of the Funds
(collectively, the "General Partners").
If all of the Funds are acquired by APF, and assuming that APF had acquired
all of the Funds as of September 30, 1998, APF would own and lease on a triple-
net basis, 978 restaurant properties. The restaurant properties would be leased
to more than 150 tenants, operated by more than 60 different restaurant chains,
located in 45 states and approximately 96 percent leased as of September 30,
1998. The average age of the buildings on restaurant properties in the
portfolio would be approximately 8.7 years. As a result, APF would
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<PAGE>
become one of the largest triple-net lease REITs in the United States. The
following table sets forth certain annualized restaurant property information
for restaurant properties owned as of September 30, 1998 (assuming the Fund
Acquisitions occurred on that date) with respect to significant restaurant
chains operating restaurant properties.
<TABLE>
<CAPTION>
Total Number Average
of Age of Annualized Percent of
Restaurant Buildings Aggregate Total Total Rental
Restaurant Chain Properties (years) Rental Revenue Revenue
- ---------------- ------------ --------- --------------- ------------
<S> <C> <C> <C> <C>
Golden Corral.............. 102 6.0 $14,400,000 15.3%
Jack in the Box............ 96 5.2 9,731,000 10.4
Burger King................ 74 10.8 7,083,000 7.6
Denny's.................... 61 10.2 5,792,000 6.2
Boston Market (1).......... 50 2.7 4,781,000 5.1
Hardee's................... 64 7.3 4,472,000 4.8
Bennigan's................. 22 15.4 4,100,000 4.4
Shoney's................... 31 7.9 3,513,000 3.7
IHOP....................... 24 4.1 3,263,000 3.5
Steak and Ale Restaurant... 18 21.1 2,774,000 3.0
Black-eyed Pea............. 22 5.9 2,400,000 2.6
Darryl's................... 17 17.9 2,341,000 2.5
Wendy's.................... 29 9.0 2,373,000 2.5
Arby's..................... 29 5.2 2,290,000 2.4
Long John Silver's (2)..... 43 7.6 2,064,000 2.2
Checkers................... 47 5.0 1,932,000 2.1
Chevy's Fresh Mex.......... 8 5.1 1,814,000 1.9
Applebee's................. 12 4.0 1,676,000 1.8
Pizza Hut.................. 67 16.1 1,692,000 1.8
Ground Round............... 15 18.1 1,615,000 1.7
Pollo Tropical............. 11 4.7 1,538,000 1.6
KFC........................ 18 9.1 1,265,000 1.3
Popeyes.................... 20 11.9 1,065,000 1.1
Other...................... 98 8.9 9,843,000 10.5
--- ----------- -----
Total.................... 978 $93,817,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) In October 1998, tenants of 44 Boston Market restaurant properties filed
voluntary petitions for bankruptcy under Chapter 11 of the U.S. Bankruptcy
Code. To date, the tenants have closed 19 of these restaurant properties.
APF and the relevant Funds are currently actively marketing these
restaurant properties to existing and prospective clients.
(2) The tenant of 36 Long John Silver's restaurant properties filed a voluntary
petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. To
date, the tenant has closed 16 of these restaurant properties. APF is
currently actively marketing these restaurant properties to existing and
prospective clients.
Since the acquisition of one Fund is not dependent upon the acquisition of
any other Fund and the acquisition of each fund must be approved by its limited
partners, it is possible that APF will not acquire all of the Funds.
Consequently, after the Fund Acquisitions, APF will not necessarily own all of
the restaurant properties listed above.
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<PAGE>
The table below lists (i) the Funds that APF is seeking to acquire, (ii) the
number of APF Shares being offered to each Fund if it is acquired and (iii) the
estimated value (based on the assigned value of $10.00 per APF Share) of the
APF Shares to be paid to each Fund. The estimated value of the APF Shares being
offered to each Fund reflects a reduction in the number of APF Shares paid to
that Fund by APF for that Fund's allocable portion of the expenses of the
acquisition.
<TABLE>
<CAPTION>
Estimated
Value of
Number of APF Shares
APF Shares after
Offered to Acquisition
Fund Fund(1) Expenses(1)
---- ---------- -----------
<S> <C> <C>
CNL Income Fund, Ltd............................... 1,157,759 $11,416,590
CNL Income Fund II, Ltd............................ 2,393,267 23,664,939
CNL Income Fund III, Ltd........................... 2,082,901 20,591,448
CNL Income Fund IV, Ltd............................ 2,668,016 26,341,688
CNL Income Fund V, Ltd............................. 2,049,031 20,258,704
CNL Income Fund VI, Ltd............................ 3,730,388 36,877,167
CNL Income Fund VII, Ltd........................... 3,202,371 31,687,369
CNL Income Fund VIII, Ltd.......................... 4,042,635 39,953,755
CNL Income Fund IX, Ltd............................ 3,700,097 36,580,307
CNL Income Fund X, Ltd............................. 4,243,243 41,950,341
CNL Income Fund XI, Ltd............................ 4,394,196 43,456,016
CNL Income Fund XII, Ltd........................... 4,768,496 47,152,089
CNL Income Fund XIII, Ltd.......................... 3,886,185 38,375,335
CNL Income Fund XIV, Ltd........................... 4,313,041 42,605,480
CNL Income Fund XV, Ltd............................ 3,733,901 36,888,672
CNL Income Fund XVI, Ltd........................... 4,320,947 42,693,949
CNL Income Fund XVII, Ltd.......................... 3,014,377 29,790,126
CNL Income Fund XVIII, Ltd......................... 3,299,149 32,601,466
</TABLE>
--------
(1) Assumes that none of the limited partners of the Funds elects to
receive the Cash/Notes Option described below.
The limited partners of the Funds that are acquired will receive APF Shares
in exchange for their Units unless they affirmatively vote against the
acquisition and elect to receive the alternative consideration (the "Cash/Notes
Option") which will consist of a payment that is 10% in cash and 90% in APF %
Callable Notes due in 2006 (the "Notes") redeemable at any time. The Notes
will bear interest at a rate equal to 120% of the applicable federal rate as of
the date immediately preceding the effective time of the Fund Acquisitions. The
applicable federal rate, which is subject to change prior to the date the
interest rate is determined, was % as of , 1999. The payment received by
the limited partners who elect the Cash/Notes Option will be equal to their
portion of the amount that their Fund would receive upon an orderly liquidation
of its restaurant properties over a 12-month period pursuant to the partnership
agreement governing their Fund, based upon a liquidation value appraisal
prepared by Valuation Associates. The number of APF Shares issued to a
particular Fund will be reduced to the extent its limited partners elect the
Cash/Notes Option.
The acquisition of each Fund is subject to the approval by the holders of a
majority of the Units of such Fund. APF anticipates that it will take between
two and four months to solicit the limited partners of the Funds, obtain the
necessary approvals and consummate the Fund Acquisitions. It is expected that
the Fund Acquisitions will be consummated in the fourth quarter of 1999.
In connection with the Fund Acquisitions, James M. Seneff, Jr. and Robert A.
Bourne (together, the "Principals"), will receive APF Shares in exchange for
their interests as General Partners in the acquired Funds. See "RISK FACTORS
AND BENEFITS TO THE PRINCIPALS -- Benefits to the Principals Resulting from the
Acquisitions."
C-8
<PAGE>
Description of the Fund Merger Agreements
The following paragraphs summarize the material terms (other than those
described elsewhere in this Information Memorandum) of the Merger Agreements
between APF and the Funds for the acquisition of the Funds (collectively, the
"Fund Merger Agreements"). Except for the particular contracting parties and
the consideration payable by APF, the Fund Merger Agreements are substantially
identical. A copy of a form of Fund Merger Agreement is attached as Exhibit E
to the Proxy Statement and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the form of Fund Merger Agreement.
General. CNL APF Partners, L.P., a wholly-owned subsidiary of APF (the
"Operating Partnership"), has entered into the Fund Merger Agreements with the
Funds, which agreements set forth the terms and conditions (including requisite
partner approvals) upon which the Operating Partnership will acquire the Funds.
Pursuant to and subject to the terms and conditions of the Fund Merger
Agreements, the Operating Partnership will acquire each Fund. In consideration
therefor, each limited partner of each Fund that is acquired will receive APF
Shares in exchange for his or her Units, except that limited partners of Funds
that are acquired who affirmatively vote against the acquisition of their Funds
may elect the Cash/Notes Option in lieu of receiving APF Shares.
Closing. The Fund Merger Agreements provide that the mergers will occur
after all of the conditions set forth in the Fund Merger Agreements have been
satisfied or waived. It is expected that the closing of the merger of each Fund
with the Operating Partnership ( the "Closing") will occur in the fourth
quarter of 1999.
Conduct of Business Prior to Closing. Each Fund and its General Partners
have agreed, among other things, that prior to the Closing, the Fund will not
take certain actions without APF's written consent, including but not limited
to: (i) issuing new Units; (ii) effecting any Unit splits; (iii) adopting any
amendment to its partnership agreement; (iv) incurring or guaranteeing
indebtedness for borrowed money; (v) mortgaging, pledging, selling or
transferring any of its material assets; or (vi) engaging in any business which
is materially different from the business in which the Fund was engaged at the
time the Fund Merger Agreement was executed.
Each Fund also has agreed that, prior to the Closing, it (i) will cause the
tenants of its restaurant properties to maintain public liability and casualty
insurance, (ii) will not sell its restaurant properties, (iii) will not place
any encumbrances on its restaurant properties that would prevent the merger
from occurring, (iv) will not incur material obligations or liabilities other
than in the ordinary course of business and (v) will pay taxes and assessments
or cause such taxes and assessments to be paid if due prior to the Closing.
Conditions to Closing. The obligations of APF, the Operating Partnership,
each Fund and that Fund's General Partners to effect the merger are subject to
the fulfillment or waiver on or prior to the Closing of certain conditions,
including (i) the approval by the limited partners holding in excess of 50% of
the outstanding Units of that Fund (ii) the approval by the APF stockholders of
the Restated Articles, (iii) the listing of the APF Shares on the NYSE prior to
or concurrently with the consummation of the Fund Acquisitions and (iv) if
fewer than all of the Funds approve the Fund Acquisitions, the receipt by APF
of a fairness opinion from Merrill Lynch stating that the aggregate
consideration payable to the approving Funds is fair to APF from a financial
point of view. In addition, the obligations of APF and the Operating
Partnership to effect each merger are subject to the fulfillment or waiver at
or prior to the Closing of certain additional conditions, including (i) that
the representations and warranties made by the relevant Fund and its General
Partners with respect to its business set forth in its respective merger
agreement are true and correct in all material respects as of the date of the
Closing, (ii) that APF has acquired the CNL Restaurant Businesses and (iii)
that the Fund's estimated environmental liabilities be 10% or less of the value
of the APF Share consideration proposed to be paid to such Fund by APF (based
on the assigned value of $10.00 per APF Share).
Representations and Warranties. Each Fund and its General Partners have
represented and warranted in its Fund Merger Agreement that, to their
respective knowledge, it has good and valid title to its respective restaurant
properties and will covenant to transfer such title to the Operating
Partnership at the time of its
C-9
<PAGE>
acquisition. Each Fund made various other representations and warranties,
including representations and warranties that (i) it has caused and will cause
all tenants of its restaurant properties to maintain public liability and
casualty insurance; (ii) that the leases at its restaurant properties are in
full force and effect; (iii) that there are no condemnation proceedings against
its restaurant properties; and (iv) that it has not received notice of any
material uncured violation of any applicable governmental regulation or
ordinance. Each Fund has made representations and warranties as to (i) the
amount of its outstanding indebtedness; (ii) its financial condition and
liabilities; (iii) the existence of material contracts relating to its
restaurant properties and (iv) the existence of pending or (to the Fund's
knowledge) threatened litigation affecting that Fund. In addition, each Fund
has represented and warranted that, to its knowledge, (i) it and/or its tenants
have the necessary permits for the ownership and operation of its restaurant
properties; (ii) there is no claim for a material delinquent tax obligation;
(iii) there are no material environmental violations or liabilities with
respect to its restaurant properties; (iv) there are no pending or, to their
knowledge, threatened material proceedings alleging environmental violations or
liability with respect to its restaurant properties; (v) the improvements on
its restaurant properties are in good condition in all material respects; and
(vi) there is no pending proceeding to levy special assessments against its
restaurant properties. The representations and warranties in the Fund Merger
Agreements will survive for 18 months following the Closing. APF is not
entitled to assert claims against any Fund (or its restaurant properties) for a
breach of any representations and warranties made by that Fund unless and until
the estimated damages from such claims exceed 1% of the value (based on the
assigned value of $10.00 per APF Share) of the APF Shares paid to the partners
of that Fund.
Expenses. APF will bear the transaction costs it incurs in connection with
the Fund Acquisitions. The Funds that are acquired by APF will bear their
transaction costs in the form of a reduction in the number of APF Shares they
receive as consideration. The transaction costs incurred by the Funds that are
not acquired by APF will be borne by those Funds and their General Partners.
Tax Consequences to APF of the Fund Acquisitions
APF will not recognize a gain or loss as a result of the Fund Acquisitions.
APF will have a holding period in the restaurant properties that it acquires
from the Funds beginning on the date of the Closing of the Fund Acquisitions.
The basis of the restaurant properties owned by the Funds that are acquired by
APF will equal the fair market value of the APF Shares plus the cash and issue
price of the Notes issued in the Fund Acquisitions, plus the amount of any
liabilities of the Funds assumed by APF.
The aggregate basis of APF's assets will be allocated among such assets in
accordance with their relative fair market values as described in section 1060A
of the Internal Revenue Code of 1986, as amended. As a result, APF's basis in
each acquired restaurant property may differ from the Fund's basis therein, and
the restaurant properties may be subject to different depreciable periods and
methods as a result of the Fund Acquisitions. These factors could result in an
overall change, following the Fund Acquisitions, in the depreciation deductions
attributable to the restaurant properties acquired from the Funds following the
Fund Acquisitions.
Accounting Treatment
The Acquisitions will all be accounted for as purchases under generally
accepted accounting principles or GAAP.
Regulatory Approvals
No federal or state regulatory requirements must be completed with or
approvals must be obtained in connection with the Acquisitions.
Listing of Shares; Public Offering
APF intends to provide liquidity and a trading market for the APF Shares by
listing the APF Shares for trading on the NYSE ("Listing"). APF will seek to
have the shares begin trading on the NYSE concurrently
C-10
<PAGE>
with the consummation of the Fund Acquisitions. In an effort to obtain a
greater following by the investment banking analyst community, concurrently
with or shortly following the Fund Acquisitions and Listing, and assuming
market conditions permit, APF intends to offer APF Shares to the public
pursuant to an underwritten public offering. APF has not yet determined how
many APF Shares will be offered for sale in the public offering or when the
offering will commence.
SUMMARY FINANCIAL INFORMATION
Summary Unaudited Pro Forma Condensed Combined Financial Data
The following tables set forth certain financial information for APF and the
Funds on a historical basis (see page C-12 and C-14) and for APF, the CNL
Restaurant Businesses and the Funds on a pro forma basis (see pages C-15 and C-
19), and should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF APF,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS OF THE FUNDS" and the Financial Statements contained elsewhere in
this Information Memorandum. The pro forma statement of earnings combines
information from the historical consolidated statements of earnings of APF, the
CNL Restaurant Businesses and the Funds giving effect to the Acquisitions as if
they had occurred on January 1, 1997. The unaudited pro forma balance sheet
combines information from the historical consolidated balance sheets of each
giving effect to the Acquisitions as if APF had completed the Acquisitions on
September 30, 1998.
This information is provided for illustrative purposes only. It does not
necessarily reflect what the results of operations or financial position of APF
would have been if the Acquisitions had actually occurred on the dates
indicated. This information also does not necessarily indicate what APF's
future operating results or consolidated financial position will be. The
information does not reflect certain additional costs associated with the
Acquisitions which APF cannot presently estimate.
C-11
<PAGE>
SUMMARY SELECTED HISTORICAL, CONSOLIDATED FINANCIAL DATA
CNL AMERICAN PROPERTIES FUND, INC.
and subsidiaries
<TABLE>
<CAPTION>
Nine months ended
September 30, Year ended December 31,
-------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and earned
income................ $ 22,947,199 $ 9,636,626 $ 15,490,615 $ 4,357,298 $ 539,776
Interest and other
income................ 6,117,911 2,615,824 3,967,318 1,849,386 119,355
------------ ------------ ------------ ------------ -----------
Total revenues......... 29,065,110 12,252,450 19,457,933 6,206,684 659,131
------------ ------------ ------------ ------------ -----------
Expenses:
General and
administrative........ 1,539,004 717,919 1,010,725 601,540 142,878
Management and advisory
fees.................. 1,248,393 493,921 804,879 251,200 23,078
State taxes............ 397,569 173,604 251,358 56,184 20,189
Depreciation and
amortization.......... 2,693,020 1,105,611 1,795,062 521,871 104,131
------------ ------------ ------------ ------------ -----------
Total expenses......... 5,877,986 2,491,055 3,862,024 1,430,795 290,276
------------ ------------ ------------ ------------ -----------
Net earnings before
equity in earnings of
joint ventures/
minority interests..... 23,187,124 9,761,395 15,595,909 4,775,889 368,855
------------ ------------ ------------ ------------ -----------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) (23,586) (31,453) (29,927) (76)
------------ ------------ ------------ ------------ -----------
Net earnings............ $ 23,163,853 $ 9,737,809 $ 15,564,456 $ 4,745,962 $ 368,779
============ ============ ============ ============ ===========
Other Data:
Weighted average number
of shares of common
stock outstanding
during period (1)...... 47,633,909 20,368,867 23,423,868 8,071,670 1,898,350
Total properties owned
at end of period (2)... 357 214 244 94 18
Funds from operations
(3).................... $ 26,408,569 $ 11,042,307 $ 17,732,888 $ 5,355,464 $ 471,670
Earnings per share...... $ 0.49 $ 0.48 $ 0.66 $ 0.59 $ 0.19
Cash distributions
declared per share of
common stock(4)........ $ 0.57 $ 0.55 $ 0.74 $ 0.71 $ 0.31
<CAPTION>
September 30, December 31,
-------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets,
net.................... $415,996,732 $209,593,964 $252,951,781 $ 75,448,118 $21,097,608
Mortgages/notes
receivable............. $ 33,523,506 $ 17,657,131 $ 31,170,054 $ 13,389,607 $ --
Accounts receivable,
net.................... $ 575,104 $ 736,931 $ 635,796 $ 142,389 $ 113,613
Investment in/due from
joint ventures......... $ 631,374 $ -- $ -- $ -- $ --
Total assets............ $566,383,967 $288,151,045 $339,077,762 $134,825,048 $33,603,084
Total
liabilities/minority
interest............... $ 14,478,585 $ 32,547,767 $ 17,439,661 $ 11,957,621 $ 1,622,436
Total stockholders'
equity................. $551,905,382 $255,603,278 $321,638,101 $122,867,427 $31,980,648
</TABLE>
- --------
(1) The weighted average number of APF Shares outstanding is based upon the
period APF was operational.
(2) As of September 30, 1998, APF had acquired 357 restaurant properties for
an aggregate purchase price of $379 million.
(3) Funds from operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with generally accepted accounting principles or
GAAP, excluding gains or losses from debt restructuring and sales of
restaurant properties and gain on securitization, plus depreciation and
amortization of real estate assets plus amortization of direct financing
leases, and after adjustments for unconsolidated partnerships and joint
ventures. (Net earnings determined in accordance with GAAP include the
noncash effect of straight-lining rent increases throughout the lease term
and/or rental payments during the construction of a restaurant property
prior to the date it is placed in service. Straight-lining rent is a GAAP
convention requiring real estate companies to report rental revenue based
on the average rent per year over the life of the lease. During the nine
months ended September 30, 1998 and
C-12
<PAGE>
1997, and the years ended December 31, 1997, 1996 and 1995, net earnings
included $2,315,968, $1,259,180, $1,941,054, $517,067 and $39,142,
respectively, of these amounts.) FFO was restated by APF for the nine months
ended September 30, 1998 and 1997, and for the years ended December 31,
1997, 1996 and 1995 to add back the amortization of direct financing leases.
FFO, on a historical basis, was developed by NAREIT as a relative measure of
performance and liquidity of an equity REIT in order to recognize that
income-producing real estate historically has not depreciated on the basis
determined under GAAP. However, FFO (i) does not represent cash generated
from operating activities determined in accordance with GAAP (which, unlike
FFO, generally reflects all cash effects of transactions and other events
that enter into the determination of net earnings), (ii) is not necessarily
indicative of cash flow available to fund cash needs and (iii) should not be
considered as an alternative to net earnings determined in accordance with
GAAP as an indication of APF's operating performance, or to cash flow from
operating activities determined in accordance with GAAP as a measure of
either liquidity or APF's ability to make distributions. Accordingly, APF
believes that in order to facilitate a clear understanding of the
consolidated historical operating results of APF, FFO should be considered
in conjunction with APF's net earnings and cash flows as reported in the
accompanying consolidated financial statements and notes thereto.
(4) Approximately 12%, 10%, 8%, 13% and 42% of cash distributions ($0.07,
$0.06, $0.06, $0.09 and $0.13 per APF Share) for the nine months ended
September 30, 1998 and 1997, and the years ended December 31, 1997, 1996
and 1995, respectively, represent a return of capital in accordance with
GAAP. Cash distributions treated as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
earnings on a GAAP basis.
C-13
<PAGE>
SUMMARY SELECTED COMBINED UNAUDITED HISTORICAL FINANCIAL DATA
CNL INCOME FUNDS
<TABLE>
<CAPTION>
Nine months ended
September 30, Year ended December 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income................ $ 35,891,418 $ 37,959,609 $ 51,340,020 $ 50,949,983 $ 48,448,434
Interest and other
income................ 1,528,771 1,350,822 1,815,714 1,608,501 1,207,475
------------ ------------ ------------ ------------ ------------
Total revenues......... 37,420,189 39,310,431 53,155,734 52,558,484 49,655,909
------------ ------------ ------------ ------------ ------------
Expenses:
General and
administrative........ 3,037,610 2,560,951 3,691,750 3,253,683 3,056,180
Management and advisory
fees.................. 210,414 195,992 263,766 236,823 210,908
State taxes............ 248,468 229,361 234,022 187,257 211,391
Depreciation and
amortization.......... 4,646,985 4,538,047 6,066,059 5,856,467 5,554,902
------------ ------------ ------------ ------------ ------------
Total expenses......... 8,143,477 7,524,351 10,255,597 9,534,230 9,033,381
------------ ------------ ------------ ------------ ------------
Net earnings before
equity in earnings of
joint ventures/minority
interests, gain on sale
of properties,
provision for loss on
land and building and
other income
(expenses)............. 29,276,712 31,786,080 42,900,137 43,024,254 40,622,528
Equity in earnings of
joint ventures/minority
interests.............. 2,507,758 2,813,159 3,678,871 2,969,010 2,566,728
Gain on sale of
properties............. 2,239,278 2,932,959 4,224,500 524,722 10,822
Provision for loss on
land and building...... (577,405) (224,347) (665,574) (316,548) (207,844)
Other income
(expenses)............. (45,150) -- 214,000 -- --
------------ ------------ ------------ ------------ ------------
Net earnings............ $ 33,401,193 $ 37,307,851 $ 50,351,934 $ 46,201,438 $ 42,992,234
============ ============ ============ ============ ============
Other Data:
Total properties owned
at end of period....... 621 684 689 671 639
Funds from operations
(1).................... $ 36,908,784 $ 39,899,403 $ 53,497,919 $ 52,625,612 $ 49,460,708
Total cash distributions
declared (2)........... $ 45,063,628 $ 38,536,152 $ 52,492,839 $ 49,760,239 $ 46,856,173
Cash distributions
declared per $10,000
Investment............. $ 733 $ 643 $ 871 $ 864 $ 854
<CAPTION>
September 30, December 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets,
net.................... $423,023,449 $435,340,114 $439,470,490 $428,986,658 $416,148,000
Mortgages/notes
receivable............. $ 4,836,808 $ 5,609,876 $ 5,586,571 $ 4,894,615 $ 2,627,418
Accounts receivable,
net.................... $ 314,049 $ 1,211,720 $ 1,337,121 $ 1,706,649 $ 1,478,015
Investment in/due from
joint ventures......... $ 50,429,925 $ 37,138,957 $ 42,936,915 $ 32,895,042 $ 29,432,410
Total assets............ $523,441,709 $532,048,369 $537,140,278 $514,640,301 $486,778,595
Total
liabilities/minority
interest............... $ 17,203,055 $ 19,427,828 $ 19,186,549 $ 18,782,159 $ 16,318,644
Total equity............ $506,238,654 $512,620,541 $517,953,729 $495,858,142 $470,459,951
</TABLE>
- --------
(1) For a definition of "funds from operations," see footnote 3 on page C-12.
(2) Cash distributions for the year ended December 31, 1997 include additional
amounts earned in 1997, but declared payable in the first quarter of 1998.
Cash distributions for the nine months ended September 30, 1998 include
special distributions of net sales proceeds received from the sale of
properties.
C-14
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical
----------------------------------------------------
CNL
Restaurant
Financial
Services Combined
APF Funds Advisor Group Historical
------------ ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and
earned income.. $ 22,947,199 $ 35,891,418 $ -- $ -- $ 58,838,617
Management
fees........... -- -- 21,405,127 5,122,366 26,527,493
Interest and
other income... 6,117,911 1,528,771 751 18,463,647 26,111,080
------------ ------------ ----------- ------------ --------------
Total revenue... 29,065,110 37,420,189 21,405,878 23,586,013 111,477,190
Expenses:
General and
administrative.. 1,539,004 3,037,610 6,701,115 6,704,482 17,982,211
Advisory fees... 1,248,393 210,414 -- 1,026,231 2,485,038
State taxes..... 397,569 248,468 15,226 220,180 881,443
Depreciation and
amortization... 2,693,020 4,646,985 131,539 1,000,493 8,472,037
Interest
expense........ -- -- 105,668 14,234,533 14,340,201
Paid to
affiliates..... -- -- 256,456 1,569,202 1,825,658
------------ ------------ ----------- ------------ --------------
Total expenses.. 5,877,986 8,143,477 7,210,004 24,755,121 45,986,588
------------ ------------ ----------- ------------ --------------
Net earnings
(loss) before
income taxes.... 23,187,124 29,276,712 14,195,874 (1,169,108) 65,490,602
Equity in
earnings of
joint
ventures/minority
interests....... (23,271) 2,507,758 -- 12,452 2,496,939
Gain (loss) on
sales of
properties...... -- 2,239,278 -- -- 2,239,278
Provision for
loss on
properties...... -- (577,405) -- -- (577,405)
Lease Termination
income (loss)... -- (45,150) -- -- (45,150)
Gain on
securitization.. -- -- -- 3,018,268 3,018,268
Provision for
federal income
taxes........... -- -- 5,607,415 708,666 6,316,081
------------ ------------ ----------- ------------ --------------
Net earnings..... $ 23,163,853 $ 33,401,193 $ 8,588,459 $ 1,152,946 $ 66,306,451
============ ============ =========== ============ ==============
Other Data:
Weighted average
number of shares
of common stock
outstanding
during period... 47,633,909 N/A N/A N/A N/A
Total properties
owned at end of
period.......... 357 621 N/A N/A N/A
Funds from
operations (*).. $ 26,408,569 $ 36,908,784 N/A N/A N/A
Total cash
distributions
declared (**)... $ 26,460,446 $ 45,063,628 N/A N/A N/A
Cash
distributions
declared per
$10,000
investment...... $ 572 $ 733 N/A N/A N/A
<CAPTION>
Historical Combined
September 30, 1998 Historical
---------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Data
Real estate
assets, net..... $407,663,180 $423,023,449 $ -- $ -- $ 830,686,629
Mortgages/notes
receivable...... $ 33,523,506 $ 4,836,808 $ -- $173,776,981 $ 212,137,295
Accounts
receivable,
net............. $ 575,104 $ 314,049 $ 7,544,985 $ 7,342,103 $ 15,776,241
Investment in/due
from joint
ventures........ $ 631,374 $ 50,429,925 -- -- $ 51,061,299
Total assets..... $566,383,967 $523,441,709 $ 8,429,809 $197,528,789 $1,295,784,274
Total
liabilities/minority
interest........ $ 14,478,585 $ 17,203,055 $ 5,049,152 $185,998,045 $ 222,728,837
Total equity..... $551,905,382 $506,238,654 $ 3,380,657 $ 11,530,744 $1,073,055,437
<CAPTION>
Pro Forma
-----------------------------------------
Pro Forma Combined Pro
Adjustments Forma
---------------------- ------------------
<S> <C> <C>
Operating Data
Revenues:
Rental and
earned income.. $ 10,584,064 (a)(b) $69,422,681
Management
fees........... (24,796,800)(c)(d) 1,730,693
Interest and
other income... 1,526,547 (e) 27,637,627
---------------------- ------------------
Total revenue... (12,686,189) 98,791,001
Expenses:
General and
administrative.. (3,628,474)(f)(g)(h) 14,353,737
Advisory fees... (2,485,038)(i) --
State taxes..... 601,369 (j) 1,482,812
Depreciation and
amortization... 4,358,736 (k)(l) 12,830,773
Interest
expense........ (68,670)(m) 14,271,531
Paid to
affiliates..... (1,825,658)(n) --
---------------------- ------------------
Total expenses.. (3,047,735) 42,938,853
---------------------- ------------------
Net earnings
(loss) before
income taxes.... (9,638,454) 55,852,148
Equity in
earnings of
joint
ventures/minority
interests....... -- 2,496,939
Gain (loss) on
sales of
properties...... -- 2,239,278
Provision for
loss on
properties...... -- (577,405)
Lease Termination
income (loss)... -- (45,150)
Gain on
securitization.. -- 3,018,268
Provision for
federal income
taxes........... (6,316,081)(o) --
---------------------- ------------------
Net earnings..... $ (3,322,373) $62,984,078
====================== ==================
Other Data:
Weighted average
number of shares
of common stock
outstanding
during period... -- 130,673,371 (p)
Total properties
owned at end of
period.......... -- 978
Funds from
operations (*).. -- $72,211,884
Total cash
distributions
declared (**)... -- 72,211,884
Cash
distributions
declared per
$10,000
investment...... -- 553
<CAPTION>
Pro forma
September 30, 1998
-----------------------------------------
<S> <C> <C>
Balance Sheet
Data
Real estate
assets, net..... 143,027,768 (q)(r) $ 973,714,397
Mortgages/notes
receivable...... 849,195 (q) $ 212,986,490
Accounts
receivable,
net............. (8,795,102)(s) $ 6,981,139
Investment in/due
from joint
ventures........ 13,158,851 (q) $ 64,220,150
Total assets..... 122,165,505 $1,417,949,779
Total
liabilities/minority
interest........ (11,954,756)(q)(s)(t) $ 210,774,081
Total equity..... 134,120,261 (q)(t) $1,207,175,698
</TABLE>
- -------
(*) For the definition of "funds from operations," see footnote 3 on page C-12.
(**) Cash distributions for the year ended December 31, 1997 include additional
amounts earned in 1997, but declared payable in the first quarter of 1998.
Cash distributions for the nine months ended September 30, 1998 include
special distributions of net sales proceeds recieved from the sale of
properties.
C-15
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by APF from January 1, 1998 through
November 30, 1998 had been placed in service on May 1, 1997 (assumes a
four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transaction by APF..... $9,635,208
Rental and earned income on Property Transactions by CNL In-
come Fund XVIII, Ltd. ..................................... 112,185
----------
$9,747,393
==========
</TABLE>
(b) Represents $836,671 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the Funds as if the leases had been
acquired on January 1, 1997.
(c) Represents the elimination of fees between APF, the Advisor, the CNL
Restaurant Financial Services Group and the Funds:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,424)
Advisory fees............................................. (1,932,795)
Reimbursement of administrative costs..................... (627,662)
Acquisition fees.......................................... (15,757,119)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,493)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,920,894)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF,
the Advisor, the CNL Restaurant Financial Services Group and the Funds.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (627,662)
Servicing fee.............................................. (1,014,117)
-----------
$(1,641,779)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF
C-16
<PAGE>
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by APF were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $571,595 in professional services and
administrative expenses resulting from reporting on one combined
company versus 22 separate entities.
(i) Represents the elimination of fees between APF, the Advisor, the CNL
Restaurant Financial Services Group and the Funds:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,932,795)
Administrative fees......................................... (148,493)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,485,038)
===========
</TABLE>
(j) Represents additional state taxes of $601,369 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the Funds had
operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (q) from acquiring the Fund portfolios using
the straight-line method over the estimated useful lives of generally
30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $2,870,103
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote 2 to
the Unaudited Pro Forma Financial Statements attached to this
Information Memorandum.
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,488,633
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in note (d) on page C-20.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Advisor, the CNL Restaurant Financial Services Group
and the Funds:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the acquisition. APF expects to continue to
qualify as a REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved the proposal to adopt the Restated Articles and thus to
increase the number of authorized APF Shares.
C-17
<PAGE>
(q) Represents the payment of $7,175,000 in cash and the issuance of
72,582,500 APF Shares in consideration for the purchase of the Advisor,
CNL Restaurant Financial Services Group and the Funds at September 30,
1998 based on a price of $10.00 per APF Share plus estimated
transaction costs. The acquisitions of the CNL Restaurant Financial
Services Group and the Funds have been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
estimated value of the consideration paid exceeded the fair value of
the net tangible assets acquired. As for the acquisition of the Advisor
from a related party, the consideration paid in excess of the fair
value of the net tangible assets received has been accounted for as
costs incurred in acquiring the Advisor from a related party because
the Advisor has not been deemed to qualify as a "business" for purposes
of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisitions, this expense will be recorded as an
operating expense on APF's statement of earnings. APF will not deduct
this expense for purposes of calculating funds from operations due to
the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Advisor.................................................... $ 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
Funds...................................................... 610,000,000
------------
Total Purchase Price (cash and shares)................... 733,000,000
Less cash paid to Funds.................................... (7,175,000)
------------
Share consideration...................................... 725,825,000
APF transaction costs...................................... 8,933,000
------------
Total costs ............................................. $734,758,000
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisitions, ii) made an upward adjustment to the
Funds carrying value of land and building on operating leases by
$92,857,763, net investment in direct financing leases by $24,117,264,
investment in joint venture by $13,158,851; and made downward
adjustments to the carrying value of accrued rental income of
$18,089,015; made downward adjustments to other assets of $4,673,130;
and made downward adjustments to deferred income of $168,790 to adjust
historical values to fair value, iii) recorded goodwill of $39,696,874
for the acquisition of the CNL Restaurant Financial Services Group,
iv) reduced retained earnings by $73,545,548 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114, and
partners' capital balance of $506,238,654 of the Advisor, the CNL
Restaurant Financial Services Group and the Funds.
(r) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue
$849,195 in mortgage notes which occurred from October 1, 1998 through
November 30, 1998.
(s) Represents the elimination by the Funds of $945,723 in related party
payables recorded as receivables by the Advisor, the elimination by the
CNL Restaurant Financial Services Group of $6,641,379 in related party
payables recorded as receivables by CNL Restaurant Financial Services
Group and the elimination by APF of $1,208,000 in related party
payables recorded as receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the merger agreement for the acquisition of each of the Advisor
and the CNL Restaurant Financial Services Group requires that the
Advisor and CNL Restaurant Financial Services Group have no accumulated
or current earnings and profits for federal income tax purposes at the
time of their acquisition.
C-18
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------ ---------------------------------
CNL
Restaurant
Financial Combined
Services Historical Pro Forma Combined
APF Funds Advisor Group Subtotal Adjustments Pro Forma
----------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income............... $15,490,615 $51,340,020 $ -- $ -- $66,830,635 $26,343,180 (a)(b) 93,173,815
Management fees....... -- -- 8,310,836 6,038,814 14,349,650 (12,749,188)(c)(d) 1,600,462
Interest and other
income............... 3,967,318 1,815,714 165,569 10,932,843 16,881,444 249,395 (e) 17,130,839
----------- ----------- ---------- ----------- ----------- ----------- -----------
Total revenue......... 19,457,933 53,155,734 8,476,405 16,971,657 98,061,729 13,843,387 111,905,116
Expenses:
General and
administrative....... 1,010,725 3,691,750 4,266,169 2,718,752 11,687,396 (3,372,243)(f)(g)(h) 8,315,153
Advisory fees......... 804,879 263,766 -- 1,802,532 2,871,177 (2,871,177)(i) --
State taxes........... 251,358 234,022 12,084 2,894 500,358 110,893 (j) 611,251
Depreciation and
amortization......... 1,795,062 6,066,059 66,583 992,538 8,920,242 7,094,549 (k)(l) 16,014,791
Interest expense...... -- -- 162,153 8,503,315 8,665,468 (81,594)(m) 8,583,874
Paid to affiliates.... -- -- 151,041 594,041 745,082 (745,082)(n) --
----------- ----------- ---------- ----------- ----------- ----------- -----------
Total expenses........ 3,862,024 10,255,597 4,658,030 14,614,072 33,389,723 135,346 33,525,069
----------- ----------- ---------- ----------- ----------- ----------- -----------
Net earnings before
income taxes.......... 15,595,909 42,900,137 3,818,375 2,357,585 64,672,006 13,708,041 78,380,047
Equity in earnings of
joint
ventures/minority
interests............. (31,453) 3,678,871 -- (126,627) 3,520,791 -- 3,520,791
Gain on sales of
properties............ -- 4,224,500 -- -- 4,224,500 -- 4,224,500
Provision for loss on
properties............ -- (665,574) -- -- (665,574) -- (665,574)
Other Income........... -- 214,000 -- -- 214,000 -- 214,000
Gain on
securitization........ -- -- -- -- --
Provision for federal
income taxes.......... -- -- 1,508,258 954,348 2,462,606 (2,462,606)(o) --
----------- ----------- ---------- ----------- ----------- ----------- -----------
Net earnings.......... $15,564,456 $50,351,934 $2,310,117 $ 1,276,610 $69,503,117 16,170,647 85,673,764
=========== =========== ========== =========== =========== =========== ===========
Other Data
Weighted average number
of shares of common
stock outstanding
during period......... 23,423,868 N/A N/A N/A N/A N/A 131,446,067(p)
Total properties owned
at end of period...... 244 689 N/A N/A N/A N/A 933
Funds from operations
(*)................... $17,732,888 $53,497,919 N/A N/A N/A N/A 96,053,362
Total cash
distributions
declared(**).......... $16,854,297 $52,492,839 N/A N/A N/A 96,053,362
Cash Distributions
declared per $10,000
investment............ $ 745 $ 871 N/A N/A N/A 731
</TABLE>
- -------
(*) For the definition of "funds from operations," see footnote 3 on page C-12.
(**) Cash distributions for the year ended December 31, 1997 include additional
amounts earned in 1997, but declared payable in the first quarter of 1998.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1997 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by
APF................................................. $24,048,982
Rental and earned income on Property Transactions by
CNL Income Fund XVIII, Ltd. ........................ 1,232,511
-----------
$25,281,493
===========
</TABLE>
(b) Represents $1,061,687 in accrued rental income resulting from the
recalculation of the straight-lining of scheduled rent increases throughout
the lease terms for the leases acquired from the Funds as if the leases had
been acquired on January 1, 1997.
C-19
<PAGE>
(c) Represents the elimination of fees between APF, the Advisor, the CNL
Restaurant Financial Services Group and the Funds:
<TABLE>
<S> <C>
Origination fees.......................................... $ (594,041)
Secured equipment lease fee............................... (375,219)
Advisory fees............................................. (2,039,446)
Reimbursement of administrative costs..................... (439,377)
Acquisition fees.......................................... (4,337,634)
Underwriting fees......................................... (151,041)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
Arrangement fees.......................................... (350,000)
Servicing fee............................................. (598,988)
Development fees.......................................... (369,570)
------------
Total................................................... $(10,087,047)
============
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents (i) the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised during
1997 and all cash held on January 1, 1997 was used to effect the
Acquisitions on January 1, 1997, (ii) interest income of $2,047,619 earned
from Other Investments acquired and mortgage notes issued from January 1,
1998 through November 30, 1998 as if this had occurred on January 1, 1997
and (iii) recognition of $133,107 of origination fees collected during the
year ended December 31, 1997 which were deferred in (d) and are being
amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Advisor, the CNL Restaurant Financial Services Group and the Funds.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (439,377)
Servicing fee.............................................. (598,988)
-----------
$(1,038,365)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $714,640 in professional services and administrative
expenses resulting from reporting on one combined entity versus 22 separate
entities.
(i) Represents the elimination of fees between APF, the Advisor, the CNL
Restaurant Financial Services Group and the Funds:
<TABLE>
<S> <C>
Advisory fees............................................... $(2,039,446)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,871,177)
===========
</TABLE>
C-20
<PAGE>
(j) Represents additional state taxes of $110,893 resulting from assuming that
acquisitions from January 1, 1997 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Funds had operated under
a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (2) to the Notes to the Pro Forma Financial Statements
attached to this Information Memorandum from acquiring the Funds'
portfolios using the straight-line method over the estimated useful lives
of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $5,109,705
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (2) of the
Notes to the Pro Forma Financial Statements attached to this Information
Memorandum.
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,984,844
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest expense
and the capitalization of interest expense during the period that
properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees.............................. $(24,144)
Capitalization of interest during development period.......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Advisor, the CNL Restaurant Financial Services Group and
the Funds:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income taxes
as a result of the CNL Restaurant Business Acquisitions. APF expects to
continue to qualify as a REIT and does not expect to incur federal income
taxes.
(p) APF Shares issued during the period were assumed to have been issued and
outstanding as of January 1, 1997. For purposes of the pro forma financial
statement, it is assumed that the stockholders approved the proposal to
adopt the Restated Articles and thus to increase the number of authorized
APF Shares.
C-21
<PAGE>
BACKGROUND OF AND REASONS FOR THE ACQUISITIONS
General
The Board believes that transforming APF into a full-service REIT by
acquiring the CNL Restaurant Businesses and significantly increasing APF's size
by acquiring the Funds will enhance APF stockholder value. APF believes that
the Acquisitions will achieve three important strategic objectives for APF.
First, the Board believes that APF's ability to provide full-service restaurant
property services will give it a competitive advantage over other REITs that
typically provide a more limited array of services to their prospective
restaurant owners and operators. Second, the Board believes that the
acquisition of internal restaurant property service capabilities (including
management, acquisition, development and expanded financing capabilities) will
improve APF's performance through increased control over functions that are
important to the growth of its business. Third, the Board believes that the
Acquisitions will facilitate Listing and may increase the value of the APF
Shares following Listing. The reasons for the Acquisitions are described in
greater detail below.
APF believes that the Acquisitions will permit it to achieve its strategic
goal of becoming a leading provider of financial, development, advisory and
other real estate services to operators of national restaurant chains. The
Acquisitions should enable APF, unlike a number of its competitors, to position
itself in the restaurant industry as a provider of a complete range of
restaurant financing options and development services. APF believes that its
ability to offer complete "turn-key," build-to-suit development services, from
site selection to construction management, together with its ability to provide
its clients with multiple financing options such as triple-net leasing,
mortgage loans and secured equipment financing, will make it a preferred
provider for all the real estate related business needs of operators of
national and regional restaurant chains. Relying on APF's senior management
team, which has an average of more than 17 years of experience in the real
estate and financial services industries, will permit a restaurant chain or
restaurant chain operator to focus on its core business objectives of operating
its restaurant business while avoiding the distractions associated with the
acquisition, construction, development and financing of additional restaurant
properties. During their years in the real estate and financial services
industries, APF's experienced management team has cultivated long-standing
relationships with national restaurant chains, such as Applebee's, Arby's,
Bennigan's(R), Black-eyed Pea, Burger King(R), Chevy's Fresh Mex, Darryl's,
Denny's, Golden Corral, Ground Round, Houlihan's, Jack in the Box, Pizza Hut,
Shoney's, Steak and Ale(R) Restaurant, T.G.I. Friday's and Wendy's, and with
operators of national and regional restaurant chains, such as S&A Restaurant
Corp., Foodmaker, Inc., Golden Corral Corporation, IHOP and DenAmerica Corp.
Reasons for Acquiring the CNL Restaurant Businesses
Cost-Efficiency of Acquiring Advisory and Development
Capabilities. Historically, APF has not had a large enough asset base to
provide the economies of scale needed to support efficiently the extensive
general and administrative expenses of an in-house management, development and
financing team. As APF's asset and revenue base has grown in recent years,
however, the amount of advisory and development fees paid to the Advisor has
approached the level of costs which APF believes it would incur were those
capabilities brought in-house. APF believes that the advisory and development
fees it would pay if the CNL Restaurant Business Acquisitions were not
consummated would be likely to exceed the incremental operating costs of
becoming internally advised. Accordingly, APF believes that it will experience
long-term cost savings as a result of the CNL Restaurant Business Acquisitions.
Market Leadership in the Provision of Restaurant Property Services. As
discussed above, APF believes that the Acquisitions will permit it to become a
leading provider of financial, development and other real estate services to
operators of national and regional restaurant chains. APF believes that the CNL
Restaurant Business Acquisitions should position APF in the restaurant industry
as a provider of a complete range of restaurant financing options and
development services. APF believes that its ability to offer complete
restaurant development services, including site selection, construction
management and build-to-suit development,
C-22
<PAGE>
together with its ability to provide its clients with financing options, such
as triple-net leasing, mortgage loans and secured equipment financing, will
make it a preferred provider for all the real estate related business needs of
restaurant chains and restaurant chain operators. APF believes that restaurant
chain operators will find the broad range of services offered by APF to be
highly attractive, because it will permit them to focus on the operation of
their restaurant businesses while avoiding the distractions associated with the
acquisition, construction, development and financing of additional restaurant
properties.
Enhanced Public Market Valuation of Assets. APF believes that the public
market valuations of the equity securities of many publicly-traded real estate
companies, including REITs that focus on the restaurant industry, are based in
part on the growth potential of such companies and have historically exceeded
the net book values of their real estate assets. In addition, APF believes that
the marketplace continues to value internally-advised REITs more favorably than
externally-advised REITs. Of the REITs that are traded on the NYSE and have
equity market capitalizations of more than $1 billion, approximately 92% are
self-advised. APF believes that investors and analysts view an internally-
advised structure more favorably and that, consequently, internally-advised
REITs, as compared to externally-advised REITs, have commanded a premium in the
marketplace based on traditional financial measures such as the multiple of
stock price to funds from operations per share. This, in turn, may provide such
REITs with a competitive advantage in financing their investment portfolios.
Although it is not possible to quantify the existence of such premium or the
benefit obtained thereby, APF believes that the Acquisitions and subsequent
Listing will permit APF stockholders to dispose of their APF Shares on more
favorable terms than are currently available and will permit APF itself to
raise capital on more advantageous terms.
Expansion of Financing Options for APF's Customers. APF's historic approach
has been to invest in restaurant properties to be leased to restaurant chains
on a long-term, triple-net basis. APF believes that many restaurant chains find
such leasing to be an attractive method by which to finance the acquisition of
additional restaurants. APF recognizes, however, that restaurant chains may
also find mortgage loans to be an attractive source of financing depending on,
among other things, the relative costs of triple-net leasing as compared to
long-term mortgage financing. APF has historically provided mortgage loan
financing on a limited basis. The acquisition of the CNL Restaurant Financial
Service Group would significantly expand APF's ability to offer mortgage loan
financing to restaurant chains.
The acquisition of the CNL Restaurant Financial Services Group also will
permit APF to offer a full range of financing options to restaurant property
owners and operators, which it believes will increase the pool of available
customers for APF's products and will enable APF to compete more effectively
with other restaurant chain finance companies. In addition, APF will be more
competitive within its existing group of targeted customers because of its
ability to offer the most appropriate financial product to a particular tenant.
Acquisition of Mortgage Loan Securitization Capabilities. The acquisition of
the CNL Restaurant Financial Service Group also will provide APF with the
ability to securitize the mortgage loans it originates, as described above in
"DESCRIPTION OF THE ACQUISITIONS -- Acquisition of the CNL Restaurant Financial
Services Group." APF believes that the expansion of its financing capabilities
to include the CNL Restaurant Financial Services Group's securitization
capabilities will enable APF to access more financing opportunities and,
ultimately, to increase cash available for distributions to the APF
stockholders. APF believes that securitization transactions may permit it to
obtain additional capital with greater ease and at a lower cost at times when
market conditions are not suitable for raising funds on economically attractive
terms through the issuance of equity or debt securities.
Future Development and Mortgage Loan Opportunities. As a result of APF's
acquisition of the CNL Restaurant Businesses, APF will acquire restaurant
property development capabilities and expand its mortgage origination,
securitization and servicing capabilities. The acquisition of those
capabilities will provide APF with an additional pool of operators of national
and regional restaurant chains to which it can offer triple-net lease and
mortgage loan financing. The CNL Restaurant Businesses' current financing
commitments with operators of national and regional restaurant chains either
through triple-net lease financing or mortgage loan financing
C-23
<PAGE>
are $333 million. APF will be in the position to capitalize on these mortgage
commitments and the corresponding potential to grow the restaurant development
and mortgage financing businesses in the future. In addition, APF believes that
the Advisor's relationship with CNL Advisory Services, Inc. ("CAS") will
enhance APF's financing business. CAS provides merger, acquisition, divestiture
and strategic planning services to operators of national and regional
restaurant chains which desire to grow or streamline their business operations.
For the nine months ended September 30, 1998, CAS negotiated the acquisition of
24 restaurant properties having an aggregate purchase price of in excess of
$37.6 million. CAS has granted to the Advisor a right of first refusal to
provide triple-net lease or mortgage loan financing to CAS' clients. APF
believes this relationship will provide APF with an additional pipeline of
potential customers to which it can target its financial products. See "APF's
BUSINESS -- Strategic Alliance with CNL Advisory Services, Inc." for more
information regarding APF's strategic alliance with CAS.
Greater Reduction of Conflicts of Interest. Following the acquisition of the
Advisor, APF will be operated as an internally-advised REIT with management
employed by APF, thereby eliminating the Advisor Fees, reducing various
conflict of interests and more closely aligning the interests of stockholders
and management. The persons engaged to manage APF will be directly accountable
to APF. They will not be employees of a separate management company or
investment adviser whose activities could be determined by objectives and goals
inconsistent with APF's financial objectives. Management will owe its duty of
loyalty only to APF. The incorporation of all aspects of the management into
APF assures a commitment to hands-on management. By contrast, externally-
advised REITs may have no such commitment from a management team to focus
exclusively on their portfolios.
In order to further reduce conflicts of interest, as part of the CNL
Restaurant Business Acquisitions, Mr. Seneff and certain of his affiliates, Mr.
Bourne and certain other executive officers of the Advisor have agreed that,
for a period of three years following the consummation of such acquisitions,
they will not engage in any restaurant property or financing services
competitive with the services that APF will be able to provide as a result of
those acquisitions.
Reasons for Acquiring the Funds
Operational Economies of Scale. Because the Funds own restaurant properties
similar to those in APF's current restaurant property portfolio, APF believes
that the combination of the Funds into APF's existing business will result in
administrative and operational economies of scale and cost savings for APF.
Enhanced Liquidity for APF Stockholders. Concurrently with the consummation
of the Fund Acquisitions, APF will achieve one of its primary strategic goals
by Listing. Listing will substantially enhance liquidity for APF stockholders,
as there currently is no established trading market for APF Shares.
Because the consideration paid by APF for the Funds will consist of newly-
issued APF Shares (except to the extent that limited partners of acquired Funds
affirmatively vote against the acquisition by APF of their Funds and elect to
receive the Cash/Notes Option), the acquisition of the Funds will further
enhance liquidity by increasing both size of the APF's stockholder base and the
public float of the APF Shares.
Broader Analyst Coverage/Enhanced Ability to Raise Capital. At its current
size, APF cannot be certain that the APF Shares, if listed, would attract
sufficient interest from research analysts and institutional investors to raise
capital on terms favorable to APF. The acquisition of the Funds, which own
restaurant properties similar to those in APF's existing restaurant property
portfolio, would provide an opportunity for APF to substantially increase the
size of its portfolio of restaurant properties. If all of the Funds are
acquired, APF would become one of the largest triple-net lease REITs in the
United States. APF believes that by increasing its size, its stockholder base
and its public float through the acquisition of the Funds, it would be likely
to develop a following among research analysts and institutional investors and
would therefore be able to raise capital on more favorable terms. Broader
coverage by financial analysts potentially may enhance the value of the APF
Shares and may increase the volume of trading in the APF Shares, which would
increase their liquidity.
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Risk Diversification. Although the diversification effects of the Fund
Acquisitions will differ depending on which Funds participate, the combination
of the restaurant properties owned by the participating Funds with APF's
existing restaurant properties will diversify APF's investment over a larger
number of restaurant properties and a broader group of restaurant types and
tenants and geographic locations. This diversification will reduce the
dependence of APF's investment upon the performance of, and the exposure to the
risks associated with, the particular group of restaurant properties currently
owned by APF.
Chronology of the Acquisitions
The paragraphs below provide a chronology of the deliberations of the Board,
the Special Committee and APF's management with respect to the Acquisitions.
In December 1997, APF's management began exploring certain strategic
alternatives designed to increase APF's stockholder value.
During the week of February 9, 1998, APF interviewed four prominent New York
investment banking firms to advise APF regarding the possible implementation of
one or more of the strategic alternatives.
During the week of February 16, 1998, APF interviewed four law firms,
including Shaw Pittman Potts & Trowbridge ("Shaw Pittman"), to advise APF
regarding the legal consequences of implementing one or more of the strategic
alternatives.
In early April 1998, APF's Board of Directors selected Shaw Pittman to
represent APF in the implementation of one or more of the strategic
alternatives, and APF's management narrowed the list of investment banking
firms that would potentially represent APF in the implementation of any
strategic alternative to two, Merrill Lynch and Salomon Smith Barney Holdings,
Inc. ("Salomon Smith Barney").
On April 15, 1998, members of APF's management and representatives of Shaw
Pittman met to discuss the structuring of particular strategic alternatives and
the time tables necessary to implement such strategic alternatives.
On May 4, 1998, APF's Board of Directors decided to evaluate the
implementation of one or more of the strategic alternatives. In addition to the
members of the Board, representatives of Shaw Pittman were present at the
meeting. Upon completion of the Board's discussion, the Board established a
Special Committee of the Board of Directors to consider the implementation of
any strategic alternative. The Special Committee consisted of Mr. G. Richard
Hostetter, Dr. Richard C. Huseman and Mr. J. Joseph Kruse, each being an
independent member of APF's Board having no financial interest in the
implementation of any strategic alternative (except, in Mr. Hostetter's case,
by virtue of his beneficial ownership of APF Shares).
On May 4, 1998, the Special Committee met for the first time. In addition to
the members of the Special Committee, representatives of Shaw Pittman, Merrill
Lynch and Salomon Smith Barney were present at the meeting. The Special
Committee heard presentations from representatives of Merrill Lynch and Salomon
Smith Barney regarding their qualifications to advise the Special Committee on
the merits of implementing one or more of the Strategic Alternatives (as
defined below). In addition to the oral presentations made by Merrill Lynch and
Salomon Smith Barney, the Special Committee reviewed the written presentations
prepared by the two other investment banking firms that APF's management had
interviewed during the week of February 9.
The Special Committee also determined that it was in the best interests of
APF to select Merrill Lynch and Salomon Smith Barney (together, the "Financial
Advisors") as their financial advisors for the purposes of determining whether
to implement one or more of the following strategic alternatives (the
"Strategic Alternatives"):
. continuing to operate APF in its ordinary course of business and
consistent with past practice;
. considering whether APF should be acquired by a publicly-traded or
private company;
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. selling APF's entire real estate portfolio and subsequently liquidating;
. acquiring large real estate portfolios, including the Funds and eight
CNL Income & Growth Funds (the "CNL Growth Funds") and other affiliated
entities which have comparable properties leased on a triple-net basis;
. listing APF's stock on a national stock exchange or on an automated
quotation system, and if so, when such listing should take place;
. becoming internally advised (i) by acquiring the Advisor, (ii) by
acquiring an unaffiliated third-party advisor, (iii) by hiring the
current management of the Advisor or (iv) by hiring new management;
. acquiring the CNL Restaurant Financial Services Group;
. acquiring CNL Advisory Services, Inc., an affiliate of Advisor that
performs investment advisory services;
. acquiring real estate development capabilities by acquiring the
Development Company from the Advisor; and
. engaging in an underwritten public offering of its common stock subject
to favorable market conditions concurrently with or shortly after APF
lists its stocks on a national securities exchange or on an automated
quotation system.
On May 20, 1998, representatives of APF's management, including Mr. Bourne,
Shaw Pittman, the Financial Advisors and Rogers & Wells, counsel to the
Financial Advisors, met to discuss the various Strategic Alternatives and the
time frames for implementation of any of the Strategic Alternatives.
Representatives at the meeting discussed extensively the structure of APF's
potential acquisition of the Funds and the CNL Growth Funds, with particular
emphasis on the tax considerations to the limited partners of those funds.
On June 10, 1998, the Special Committee met for the second time. In addition
to the members of the Special Committee, representatives of APF management,
Shaw Pittman, the Financial Advisors and Rogers & Wells were present at the
meeting. The primary purpose of the meeting was to obtain an update from the
Financial Advisors regarding their evaluation of and recommendation to
implement the Strategic Alternatives.
On June 10, 1998, the Special Committee met for the second time. In addition
to the members of the Special Committee, representatives of APF management,
Shaw Pittman, the Financial Advisors and Rogers & Wells were present at the
meeting. The primary purpose of the meeting was to obtain an update from the
Financial Advisors regarding their evaluation of and recommendation to
implement the Strategic Alternatives.
On July 8, 1998, the Special Committee met for the third time by telephone.
In addition to the members of the Special Committee, present by telephone at
the meeting were representatives of APF management, Shaw Pittman, the Financial
Advisors and Rogers & Wells. The primary purpose of the meeting was to obtain
an update from the Financial Advisors regarding their evaluation of and
recommendation to implement one or more of the Strategic Alternatives. The
Financial Advisors stated that they would be in a position by July 17th to
present their analysis and conclusions of the Strategic Alternatives to the
Special Committee.
On July 17, 1998, the Special Committee met for the fourth time. In addition
to the members of the Special Committee, representatives of APF's management,
including Messrs. Seneff and Bourne, Shaw Pittman and the Financial Advisors
were present at the meeting. The Financial Advisors presented their analysis of
the Strategic Alternatives which included the advantages and disadvantages of
each Strategic Alternative and the methodologies employed to evaluate the
Strategic Alternatives. After a lengthy discussion among the members of the
Special Committee and representatives of the Financial Advisors, the Financial
Advisors concluded that acquiring the CNL Restaurant Businesses, the Funds and
the CNL Growth Funds and Listing were the Strategic Alternatives most likely to
maximize APF stockholder value. Mr. Hostetter, the Chairman of the Special
Committee, suggested that the members of the Special Committee further consider
the Financial Advisors' evaluation of the Strategic Alternatives and that the
Special Committee reconvene on July 20.
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On July 20, 1998, the Special Committee met for the fifth time by telephone.
Representatives of Shaw Pittman also participated by telephone. After
discussing the Financial Advisors' recommendation, the Special Committee
unanimously concluded that the best means to maximize stockholder value would
be for APF to:
. become internally advised and acquire internal real estate development
capability by acquiring the Advisor;
. expand its mortgage lending capabilities and develop securitization
capabilities by acquiring the CNL Restaurant Financial Services Group;
. significantly increase its size by acquiring from affiliates of the
Advisor, including the Funds and the CNL Growth Funds, portfolios of
properties similar to those currently held by APF; and
. list APF's common stock on a national stock exchange, if market
conditions are favorable.
On July 24, 1998, the Special Committee presented its findings to APF's full
Board of Directors and recommended that APF implement the selected Strategic
Alternatives approved by the Special Committee at the July 20th meeting.
Further, the Special Committee recommended that the Board evaluate the
feasibility of engaging in an underwritten public offering of APF Shares
concurrently with listing. After substantial discussion among the members of
the Board, the Board of Directors unanimously recommended that APF implement
the Strategic Alternatives. In addition, the Board unanimously recommended that
Merrill Lynch be retained by APF to provide a fairness opinion to APF that the
consideration to be paid by APF in connection with the implementation of any
applicable Strategic Alternative would be fair to APF from a financial point of
view.
During the week of September 7, 1998, representatives of APF management, the
Financial Advisors, Shaw Pittman, Rogers & Wells and PricewaterhouseCoopers LLP
("Pricewaterhouse Coopers"), APF's independent public accountants, gathered for
a two-day meeting to discuss the implementation of the Strategic Alternatives.
During the first day of meetings, the primary focus emphasized the manner in
which the Funds and the CNL Growth Funds could be acquired. After discussing
the advantages and disadvantages of each Strategic Alternative, the
representatives selected the acquisition of the Funds and the CNL Growth Funds
through the issuance of APF Shares in a transaction taxable to the limited
partners of the Funds and the CNL Growth Funds. The remaining portions of the
meetings during the week of September 7, 1998 dealt primarily with valuation
techniques and methodologies of the Advisor, the CNL Restaurant Financial
Services Group, the Funds and the CNL Growth Funds and the timelines and
responsibilities of each of the representatives.
On November 6, 1998, the members of the Special Committee met telephonically
to discuss with members of APF's management and their legal counsel the status
of determining the prices to be paid to the CNL Restaurant Businesses, the
Funds and the CNL Growth Funds in connection with the Acquisition. In addition,
Shaw Pittman provided to the members of the Special Committee an oral summary
by legal counsel on all significant matters regarding the progress of the
proposed acquisition.
On November 16, 1998, the members of the Special Committee, members of APF's
management and the Financial Advisors met, some in Orlando, Florida and some
telephonically, to discuss the status of determining the prices to be paid to
the CNL Restaurant Businesses, the Funds and the CNL Growth Funds in connection
with their proposed acquisition and the methodologies utilized in determining
the prices to be paid.
During the week of November 23, 1998, representatives of APF management, the
Financial Advisors, Shaw Pittman and PricewaterhouseCoopers gathered for a two-
day meeting. The primary purpose of the meeting was to provide APF's legal and
accounting advisors and the Financial Advisors with an overview (operational as
well as financial) of the Advisor, the CNL Restaurant Financial Services Group,
the Funds and CNL Growth Funds.
On December 1, 1998, the representatives discussed the viability of
acquiring the CNL Growth Funds. Because the CNL Growth Funds produce income
that would not be considered qualified REIT income and
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<PAGE>
therefore could restrict APF's ability to qualify as a REIT, the inclusion of
the CNL Growth Funds in the proposed acquisitions created additional
complexities for APF. These complexities would affect APF's ability to value
the CNL Growth Funds because, for federal tax purposes, certain assets would
have to be held in entities that APF did not control and that were subject to
federal corporate income tax. APF's inability to control these entities had a
negative impact on APF's valuation of the CNL Growth Funds. In addition, the
costs of acquiring the CNL Growth Funds would be significantly greater than
those of acquiring the Funds because APF would need to transfer the assets that
did not generate qualified REIT income from the CNL Growth Funds to entities
not controlled by APF.
After considering the negative tax consequences to the limited partners of
the CNL Growth Funds as a result of their acquisition through the issuance of
APF Shares in a taxable transaction, the reduced valuation of the CNL Growth
Funds as a result of the necessity of transferring certain assets to entities
not controlled by APF and the additional costs APF would incur as a result of
such transfers, the representatives concluded that it would be in the best
interests of APF's stockholders not to pursue the acquisition of the CNL Growth
Funds.
Following the decision to exclude the CNL Growth Funds from the
Acquisitions, representatives of the Financial Advisors presented their
valuations of the Advisor, the CNL Restaurant Financial Services Group and the
Funds to the members of the Special Committee and the full Board. Based in part
on such valuations, as well as the other factors the Special Committee had
considered during its months of deliberations, the members of the Special
Committee unanimously recommended to the full Board that the Board approve the
Acquisitions and that the consideration payable to the Advisor, the CNL
Restaurant Financial Services Group and the Funds, respectively, be $76,000,000
(or 7,600,000 APF Shares), $47,000,000 (or 4,700,000 APF Shares), and
$600,000,000 (or 60,000,000 APF Shares), in each case based on a price per APF
Share of $10.00. The members of the full Board unanimously approved the Special
Committee's recommendation.
On December 1, 1998, APF presented its offer to acquire each of the Advisor,
the CNL Restaurant Financial Services Group and the Funds.
On January 27, 1999, the Special Committee of the Board of Directors
received a counter-offer from the General Partners proposing an increase in the
consideration payable to the Funds from $600,000,000 to $610,000,000 (or from
60,000,000 to 61,000,000 APF Shares based on the assigned value of $10.00 per
APF Share). After discussing the proposed counter-offer, the Special Committee
unanimously agreed to accept the proposal, provided that the fairness opinion
from Merrill Lynch to be presented at the February 10, 1999 meeting of the
Board of Directors supported the Special Committee's acceptance of the counter-
offer of the consideration to be paid to the Funds based on the assigned value
of $10.00 per APF Share.
On February 10, 1999, Merrill Lynch provided two separate oral fairness
opinions (which were confirmed in written opinions) to the Special Committee
stating that the aggregate consideration to be paid by APF for the CNL
Restaurant Business Acquisitions and for the Fund Acquisitions is fair to APF
from a financial point of view. The fairness opinions are attached as Exhibit
D-1 and Exhibit D-2, respectively, to the Proxy Statement.
Recommendation on the CNL Restaurant Business Acquisitions
In reaching its conclusion that the CNL Restaurant Business Acquisitions are
in the best interests of APF and its stockholders, the Special Committee
considered, but did not assign relative weight to, the following factors, each
of which it believes weighs in favor of the CNL Restaurant Business
Acquisitions:
. the belief of the Special Committee that the addition of internal
development and increased financing capabilities would enhance the
competitive position of APF by enabling APF to offer comprehensive site
services to its tenants and clients;
. the ability of APF to control key functions that are important to the
growth of its business by acquiring the CNL Restaurant Businesses;
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<PAGE>
. the proven expertise and substantial experience of the employees of the
Advisor and the CNL Restaurant Financial Services Group who will become
employees of APF as a result of the CNL Restaurant Business Acquisitions
and the long-standing relationships of such employees with significant
tenants of APF and other operators of national and regional restaurant
chains;
. the opportunity to mitigate certain perceived conflicts of interest
between APF and its stockholders, on the one hand, and the stockholders
and employees of the Advisor and the CNL Restaurant Financial Services
Group, on the other hand, by more closely aligning the interests of such
stockholders and employees with those of APF's stockholders;
. the belief of the Special Committee that the CNL Restaurant Business
Acquisitions will enable APF to realize long-term cost savings from a
self-managed structure in that it will itself perform the management,
acquisition and development services that it currently pays the Advisor
to perform, thereby enabling APF to both eliminate the profits that were
previously being realized by the Advisor for providing such services and
potentially allowing APF to raise additional equity in the future
without proportionately increasing the fees paid to the Advisor or
another external advisor;
. the Special Committee's belief that an internally-advised structure will
make APF more attractive to investors and will enhance its perception in
the market;
. the Special Committee's belief that the principal alternatives available
to APF would not be as beneficial to APF and its stockholders as the CNL
Restaurant Business Acquisitions; in particular, the Special Committee
believes that (i) independently developing securitization capabilities
and expanding APF's mortgage lending capabilities would be more costly
and time-consuming than acquiring the CNL Restaurant Financial Services
Group, (ii) terminating the existing Advisory Agreement between APF and
the Advisor would cause a significant disruption in APF's affairs and
(iii) renegotiating the compensation formula contained in the existing
Advisory Agreement, even if successful, would not eliminate the
perceived conflicts of interest; and
. the Special Committee's belief that the consideration to be paid for the
CNL Restaurant Businesses is fair to APF from a financial point of view
based on the factors set forth below.
In reaching its conclusion that the consideration to be paid for the CNL
Restaurant Businesses is fair to APF from a financial point of view, the
Special Committee considered, but did not assign relative weight to, the
following factors:
. the existing conflicts of interest between APF and its external
management team, including the Principals, as well as the steps taken
(such as the creation of the Special Committee and the securing of a
fairness opinion from Merrill Lynch) to ensure that the CNL Restaurant
Business Acquisitions would not be affected by such conflicts;
. the terms and conditions of the Merger Agreements for the CNL Restaurant
Business Acquisitions, including the type, amount and timing of
consideration to be paid to the stockholders of the CNL Restaurant
Businesses; and
. the oral presentation of Merrill Lynch to the Special Committee on
February 10, 1999 and the written opinion of Merrill Lynch to the
Special Committee dated February 10, 1999 stating that on such date and
based upon the assumptions made, matters considered and limits of review
set forth therein, the consideration to be paid by APF for the
acquisition of the CNL Restaurant Businesses is fair to APF from a
financial point of view.
The Special Committee also took into account the effect the payment of the
consideration for the CNL Restaurant Businesses would have on funds from
operations or FFO per share, a commonly used indicator of REIT performance. The
Special Committee estimated, in light of the anticipated growth of APF's
portfolio, that the CNL Restaurant Business Acquisitions would be more
accretive on a FFO per share basis as compared to the FFO per share that would
be obtained under the same assumptions if the CNL Restaurant Business
Acquisitions did not occur.
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The Special Committee reviewed and considered internal management
projections for the three-year period from 1999 through 2001 regarding
management, acquisition and development activities, anticipated initial
acquisition yields and operating expenses under varying acquisition pace
scenarios and under the presumption that the CNL Restaurant Business
Acquisitions would be consummated as well as under the presumption that the
existing Advisory Agreement and other relationships with the CNL Restaurant
Businesses remained in place. These projections indicated that the CNL
Restaurant Business Acquisitions will be accretive to APF's FFO per share in
1999, 2000 and 2001.
There can be no assurance that these projections will be met and that the
assumptions relating to property acquisitions, development, equity capital,
pre-merger cap rates, interest rates and dividends, on which such projections
are based, are materially accurate. In addition, certain known and unknown
risks, uncertainties and other factors may cause actual results, performance or
achievements of APF with respect to the CNL Restaurant Business Acquisitions to
be materially different from the projected results. Accordingly, there can be
no assurance that the CNL Restaurant Business Acquisitions will be accretive to
APF's FFO per share should these projections and assumptions materially differ
from future results.
Recommendation on the Fund Acquisitions
In reaching its conclusion that the Fund Acquisitions are in the best
interests of APF and its stockholders, the Special Committee considered, but
did not assign relative weight to, the following factors, each of which it
believes weighs in favor of the Fund Acquisitions:
. the belief that the Fund Acquisitions and concurrent Listing will meet
the expectation of stockholders of enhanced liquidity and permit APF to
consummate future transactions using equity as consideration;
. the belief that the Fund Acquisitions present a unique opportunity for
APF to acquire a portfolio of restaurant properties similar to those
already owned by APF, increasing its size much more rapidly than through
its traditional means of acquiring one restaurant property at a time and
that APF's enhanced size will increase the interest of institutional
investors and research analysts in APF;
. the belief that the Fund Acquisitions and Listing will facilitate APF
becoming internally advised because the increase in the size of APF's
asset base as a result of the Fund Acquisitions will provide the
economies of scale needed to support more efficiently the extensive
general and administrative expenses of an in-house acquisition,
development, management and financing team;
. the belief of the Special Committee that the principal alternatives
available to APF would not be as beneficial to APF and its stockholders
as the transactions contemplated by the Fund Acquisitions and Listing;
in particular, the Special Committee believes that maintaining APF's
status quo would not enhance liquidity for stockholders, Listing without
consummating the Fund Acquisitions may impede APF's ability to grow and
the sale of APF for cash or stock of a public company would produce an
inferior return for APF stockholders; and
. the Special Committee's belief that the consideration to be paid for the
Funds is fair to APF from a financial point of view based on the factors
set forth below.
In reaching its conclusion that the Fund Acquisitions are in the best
interests of APF and its stockholders, the Special Committee also considered,
but did not assign relative weight to, the following factors. Although the
Special Committee viewed these as potentially negative factors with respect to
the Fund Acquisitions, it believed these factors to be outweighed by the
positive factors set forth above:
. the likelihood that the solicitation and filing processes relating to
the Fund Acquisitions will be time-consuming and costly; and
. the awareness that Listing will subject APF to market risks in
subsequent attempts to raise capital and may result in negative
recommendations by research analysts if APF fails to meet performance
projections.
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In reaching its conclusion that the consideration to be paid for the Funds
is fair to APF from a financial point of view, the Special Committee
considered, but did not assign relative weights to, the following factors:
. the existing conflicts of interest between APF and the Principals and
other affiliates of CNL Group, Inc., as well as the steps taken (such as
the creation of the Special Committee and the securing of a fairness
opinion from Merrill Lynch) to ensure that the Fund Acquisitions would
not be affected by such conflicts; and
. the oral presentation of Merrill Lynch to the Special Committee on
February 10, 1999 and the written opinion of Merrill Lynch to the
Special Committee dated February 10, 1999 stating that on such date and
based upon the assumptions made, matters considered and limits of review
set forth therein, the consideration to be paid by APF in the Fund
Acquisitions is fair to APF from a financial point of view.
Fairness Opinions
In connection with the Special Committee's consideration of the
Acquisitions, Merrill Lynch delivered two oral opinions (which were confirmed
in written opinions) on February 10, 1999 to the Special Committee to the
effect that, as of such date and based upon the assumptions made, matters
considered and limits of review set forth therein, (i) the consideration to be
issued by APF in connection with the CNL Restaurant Business Acquisitions, when
viewed together as a single transaction, is fair, from a financial point of
view, to APF (the "CNL Restaurant Business Opinion") and (ii) the consideration
to be issued by APF in connection with the Fund Acquisitions, when viewed
together as a single transaction, is fair, from a financial point of view, to
APF (the "Fund Opinion" and, together with the CNL Restaurant Business Opinion,
the "Fairness Opinions").
The full text of each of the Fairness Opinions, which sets forth the
assumptions made, matters considered, procedures followed and qualifications
and limitations of the review undertaken by Merrill Lynch, is attached to the
Proxy Statement as Exhibit D-1 and Exhibit D-2, respectively. The descriptions
of the Fairness Opinions set forth herein are qualified in their entirety by
reference to the full text of the Fairness Opinions.
The Fairness Opinions are addressed to, and are solely for the use and
benefit of, the Special Committee and address only the fairness, from a
financial point of view, to APF of the consideration to be issued by APF in
connection with the CNL Restaurant Business Acquisitions, when viewed together
as a single transaction, and the Fund Acquisitions, when viewed together as a
single transaction. The Fairness Opinions do not address the merits of the
underlying decisions by APF to engage in the Acquisitions and do not
constitute, nor should they be construed as, a recommendation to any
stockholder of APF as to how such shareholder should vote on any matter
presented to such stockholder, including any matter presented in the Proxy
Statement.
Merrill Lynch is an internationally recognized investment banking firm and,
as part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwritings, distributions of securities and similar
activities. The Special Committee engaged Merrill Lynch because of these
qualifications and because of its experience in valuation and financial
analysis with respect to franchised real estate, REITs and transactions similar
to the Acquisitions.
In preparing the CNL Restaurant Business Opinion, Merrill Lynch, among other
things (i) reviewed certain publicly available business and financial
information relating to the CNL Restaurant Businesses and APF that it deemed to
be relevant, (ii) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the CNL Restaurant Businesses and APF, as well as the amount and
timing of the cost savings and related expenses and synergies expected to
result from the CNL Restaurant Business Acquisitions (the "CNL Restaurant
Business Expected Synergies"), furnished to it by APF and the CNL Restaurant
Businesses, (iii) conducted discussions with members of senior management and
representatives of the CNL Restaurant Businesses and APF concerning the matters
described in clauses (i)
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and (ii) of this paragraph, as well as their respective businesses and
prospects before and after giving effect to the Acquisitions and the CNL
Restaurant Business Expected Synergies, (iv) reviewed valuation multiples for
the common stock of the CNL Restaurant Businesses and the APF Shares and
compared them with those of certain publicly-traded companies that it deemed to
be relevant, as well as conducted a discounted cash flow analysis of the free
cash flows of the CNL Restaurant Businesses and of APF, (v) reviewed the
results of operations of the CNL Restaurant Businesses and APF and compared
them with those of certain other comparable entities that it deemed to be
relevant, (vi) compared the proposed financial terms of the CNL Restaurant
Business Acquisitions with the financial terms of certain other transactions
that it deemed to be relevant; (vii) participated in certain discussions among
representatives of the CNL Restaurant Businesses and APF and their financial
and legal advisors, (viii) reviewed the potential pro forma impact of the CNL
Restaurant Business Acquisitions, (ix) reviewed drafts of the Merger Agreements
relating to the CNL Restaurant Business Acquisitions and (x) reviewed such
other financial studies and analyses and took into account such other matters
as it deemed necessary, including its assessment of general economic, market
and monetary conditions.
In preparing the Fund Opinion, Merrill Lynch, among other things (i)
reviewed certain publicly available business and financial information relating
to the CNL Income Funds and APF that it deemed to be relevant, (ii) reviewed
certain information, including financial forecasts, relating to the properties,
earnings, cash flow, assets, liabilities and prospects of the Funds and APF, as
well as the amount and timing of the cost savings and related expenses and
synergies expected to result from the Fund Acquisitions (the "Fund Expected
Synergies" and, together with the CNL Restaurant Business Expected Synergies,
the "Expected Synergies"), furnished to it by the General Partners and by APF
regarding the Funds, (iii) reviewed and analyzed the appraisals of the Funds
prepared by Valuation Associates, an independent real estate appraisal firm, as
well as conducted an independent summary valuation analysis of the Funds' real
estate assets, (iv) conducted discussions with members of senior management and
representatives of the Funds, the General Partners and APF concerning the
matters described in clauses (i) and (ii) of this paragraph, as well as their
respective businesses and prospects before and after giving effect to the Fund
Acquisitions and the Fund Expected Synergies, (v) reviewed valuation multiples
for the APF Shares and compared them with those of certain publicly-traded
companies that it deemed to be relevant, as well as conducted a discounted cash
flow analysis of the free cash flows and of the Funds' real estate assets and
of APF, (vi) reviewed the results of operations of the Funds and APF and
compared them with those of certain other comparable entities that it deemed to
be relevant, (vii) compared the proposed financial terms of the Fund
Acquisitions with the financial terms of certain other transactions that it
deemed to be relevant; (viii) participated in certain discussions among
representatives of the Funds, the General Partners and APF and their financial
and legal advisors, (ix) reviewed the potential pro forma impact of the Fund
Acquisitions, (x) reviewed drafts of the Merger Agreements relating to the Fund
Acquisitions and (xi) reviewed such other financial studies and analyses and
took into account such other matters as it deemed necessary, including its
assessment of general economic, market and monetary conditions.
In preparing the Fairness Opinions, Merrill Lynch assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for it, or publicly
available, and it has not assumed any responsibility for independently
verifying such information or, in the case of the CNL Restaurant Business
Opinion, undertaken an independent evaluation or appraisal of any of the assets
or liabilities of the CNL Restaurant Businesses or APF or been furnished with
any such evaluation or appraisal or, in the case of the CNL Restaurant Business
Opinion, undertaken an independent evaluation or appraisal of any of the assets
or liabilities of the Funds or an appraisal of any of the assets or liabilities
of APF. In addition, in preparing the Fairness Opinions, Merrill Lynch did not
assume any obligation to conduct any physical inspection of the properties or
facilities of the CNL Restaurant Businesses, the Funds or APF. With respect to
the financial forecast information and the Expected Synergies furnished to or
discussed with it by the CNL Restaurant Businesses, the Funds or APF, Merrill
Lynch assumed that they had been reasonably prepared and reflected the best
currently available estimates and judgment of the CNL Restaurant Businesses'
management, the General Partners or APF's management as to the expected future
financial performance of the CNL Restaurant Businesses, the Funds or APF, as
the case may be, and the Expected Synergies. Merrill Lynch
C-32
<PAGE>
also did not assume any obligation to review the income tax consequences of the
Acquisitions on the CNL Restaurant Businesses, the Funds or APF or their
respective equity holders. Merrill Lynch also assumed that the final form of
each of the Merger Agreements would be substantially similar to the last drafts
of such documents reviewed by Merrill Lynch.
The Fairness Opinions were necessarily based upon market, economic and other
conditions as they existed and could be evaluated on, and on the information
made available to Merrill Lynch as of the date of the Fairness Opinions.
Merrill Lynch assumed that in the course of obtaining the necessary consents or
approvals (contractual or otherwise) for the Acquisitions, no restrictions
would be imposed that will have a material adverse effect on the contemplated
benefits of the Acquisitions. The CNL Restaurant Business Opinion views the CNL
Restaurant Business Acquisitions together, as a single transaction, and does
not cover the acquisition of any CNL Restaurant Business as a stand-alone
transaction and the Fund Opinion views the Fund Acquisitions together as a
single transaction, and does not cover the acquisition of any Fund as a stand-
alone transaction. In addition, Merrill Lynch was advised by the Special
Committee, and assumed for purposes of the Fund Opinion, that the acquisitions
of each of the Funds would occur at the same time.
In connection with the rendering of the Fairness Opinions, Merrill Lynch
performed a variety of financial analyses. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to a partial analysis or summary description. In performing its
analyses, Merrill Lynch made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of Merrill Lynch, APF, the CNL Restaurant
Businesses, the Funds and the General Partners. The analyses performed by
Merrill Lynch are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Merrill Lynch did not assign any specific weight to any of the
analyses and did not draw any specific conclusions from or with regard to any
one method of analysis. In addition, the Fairness Opinions were just one of
many factors taken into consideration by the Special Committee.
Pursuant to a letter agreement dated December 4, 1998, APF agreed to pay
Merrill Lynch a fee on the date Merrill Lynch delivers the Fairness Opinions in
writing to the Special Committee as consideration for the rendering of the
Fairness Opinions, and if reasonably requested by APF prior to consummation of
the Acquisitions, any bring-down opinions. In addition, APF agreed to reimburse
Merrill Lynch for its reasonable out-of-pocket expenses incurred in connection
with its services provided under such letter agreement, including the
reasonable fees and disbursements of its legal counsel. APF also agreed to
indemnify Merrill Lynch and certain affiliated persons against certain
liabilities related to, based upon or arising out of its rendering of services
under such letter agreement.
Merrill Lynch is currently engaged by APF to act as underwriter or placement
agent in connection with certain proposed equity financings for APF that may in
the future be undertaken by APF and, if it acts in this capacity in connection
with such financings, it will receive customary compensation for this service
as provided under the terms of such engagement. In addition, Merrill Lynch was
retained (i) in June 1998 by APF as one of the Financial Advisors in connection
with the review of the Strategic Alternatives considered by APF (see "--
Chronology of the Acquisitions," above) and (ii) in July 1998 by the CNL
Financial Corp. and CNL Financial Services, Inc. to act as financial advisor
and lead placement agent in connection with the structuring and issuance of
certain franchise loan-backed securities and has received fees for the
rendering of such services. In addition, in the ordinary course of business,
Merrill Lynch may in the future actively trade APF Shares for its own account
and for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities.
C-33
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF APF
The following table sets forth certain financial information for APF, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations of APF" and the Financial
Statements included elsewhere in this Information Memorandum.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------- -------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 29,065,110 $ 12,252,450 $ 19,457,933 $ 6,206,684 $ 659,131
Net earnings............ 23,163,853 9,737,809 15,564,456 4,745,962 368,779
Cash distributions (1).. 26,460,446 10,879,969 16,854,297 5,436,072 638,618
Funds from operations
(2).................... 26,408,569 11,042,307 17,732,888 5,355,464 471,670
Earnings per APF Share.. 0.49 0.48 0.66 0.59 0.19
Cash distributions
declared per APF
Share.................. 0.57 0.55 0.74 0.71 0.31
Weighted average number
of APF Shares
outstanding (3)........ 47,633,909 20,368,867 23,423,868 8,071,670 1,898,350
<CAPTION>
September 30, December 31,
------------------------- -------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $566,383,967 $288,151,045 $339,077,762 $134,825,048 $33,603,084
Total stockholders' eq-
uity................... 551,905,382 255,603,278 321,638,101 122,867,427 31,980,648
</TABLE>
- --------
(1) Approximately 12%, 10%, 8%, 13% and 42% of cash distributions ($0.07,
$0.06, $0.06, $0.09 and $0.13 per APF Share) for the nine months ended
September 30, 1998 and 1997, and the years ended December 31, 1997, 1996
and 1995, respectively, represent a return of capital in accordance with
generally accepted accounting principles ("GAAP"). Cash distributions
treated as a return of capital on a GAAP basis represent the amount of cash
distributions in excess of accumulated net earnings on a GAAP basis.
(2) Funds from operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of restaurant properties, plus depreciation and
amortization of real estate assets, plus amortization of direct financing
leases, and after adjustments for unconsolidated partnerships and joint
ventures. (Net earnings determined in accordance with GAAP include the
noncash effect of straight-lining rent increases throughout the lease term
and/or rental payments during the construction of a restaurant property
prior to the date it is placed in service. Straight-lining rent is a GAAP
convention requiring real estate companies to report rental revenue based
on the average rent per year over the life of the lease. During the nine
months ended September 30, 1998 and 1997, and the years ended December 31,
1997, 1996 and 1995, net earnings included $2,315,968, $1,259,180,
$1,941,054, $517,067 and $39,142, respectively, of these amounts.) FFO was
restated by APF for the nine months ended September 30, 1998 and 1997, and
for the years ended December 31, 1997, 1996 and 1995 to add back the
amortization of direct financing leases. FFO was developed by NAREIT as a
relative measure of performance and liquidity of an equity REIT in order to
recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. However, FFO (i) does not
represent cash generated from operating activities determined in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events that enter into the determination of net
earnings), (ii) is not necessarily indicative of cash flow available to
fund cash needs and (iii) should not be considered as an alternative to net
earnings determined in accordance with GAAP as an indication of APF's
operating performance, or to cash flow from operating activities determined
in accordance with GAAP as a measure of either liquidity or APF's ability
to make distributions. Accordingly, APF believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of APF, FFO should be considered in conjunction with APF's net
earnings and cash flows as reported in the accompanying consolidated
financial statements and notes thereto.
(3) The weighted average number of APF Shares outstanding for the year ended
December 31, 1995 is based upon the period APF was operational.
C-34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF APF
Statements contained in this Information Memorandum, particularly in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections, including, without limitation, the Year 2000 compliance
disclosure, that are not historical facts may be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Although
APF believes that the expectations reflected in such forward-looking statements
are based upon reasonable assumptions, APF's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include the following: changes in
general economic conditions, changes in real estate conditions, APF's ability
to raise capital from debt and equity offerings, APF's ability to invest the
proceeds of its offerings, APF's ability to locate suitable tenants for its
restaurant properties and borrowers for its mortgage loans and the ability of
tenants and borrowers to make payments under their respective leases, secured
equipment leases or mortgage loans.
Overview
APF provides real estate financing to operators of national and regional
restaurant chains primarily through triple-net lease financing. As of September
30, 1998, APF had invested more than $480 million in 357 restaurant properties
diversified among 35 restaurant chains in 37 states.
The financial results for the nine months ended September 30, 1998 and 1997
and years ended December 31, 1997, 1996 and 1995 reflect the consolidated
results of APF. During 1998, APF formed two wholly-owned subsidiaries, which
serve as the general partner and limited partner of a newly formed umbrella
partnership REIT or an UPREIT. APF expects eventually to place all properties
currently owned by APF into the limited partnership of the UPREIT and operate
APF as a holding company which will conduct its business through this limited
partnership called CNL APF Partners, L.P. (the "Operating Partnership"). Upon
Listing, APF expects to use the Operating Partnership units (which mirror APF
Shares and will be exchangeable into APF Shares on a one-for-one basis) as
currency in acquisitions. APF's ability to make potential acquisitions using
Operating Partnership units may make certain acquisitions more attractive to
potential sellers because the transactions would permit a tax deferral and
would give the seller control over the timing of gain recognition and payment
of federal income taxes. Management anticipates that the use of the Operating
Partnership units will provide APF additional acquisition opportunities.
Results of Operations
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
APF's revenues and net earnings more than doubled for the nine months ended
September 30, 1998 as compared to the same period in 1997. Revenues increased
$16.8 million primarily a result of increased financing to operators of
national and regional restaurant chains totaling $168.9 million during the nine
months ended September 30, 1998 compared to $131.7 million for the same period
in 1997. APF continues to focus on providing net-lease and mortgage financing
to restaurant chains and top franchisees in certain restaurant systems. As of
September 30, 1998, approximately 90% of APF's financings was provided to
either the franchisor or the top five franchisees in a particular chain (based
on sales). Weighted average base lease rates on the new investments were 9.98%
for the nine months ended September 30, 1998 as compared to 10.80% for the
corresponding period in 1997. APF's growth has resulted in increased chain
diversification as APF's tenants and borrowers include 38 restaurant chains
compared to 26 at September 30, 1997. In addition, APF's restaurants are
geographically dispersed among 37 states at September 30, 1998 versus 32 states
at September 30, 1997.
The increase in other interest income to $4.8 million for the nine months
ended September 30, 1998 compared to $1.3 million for the corresponding period
in 1997 related to higher cash and cash equivalents
C-35
<PAGE>
balances pending investment. APF's weighted average cash and cash equivalents
balance was $87.7 million and $39.8 million during the nine months ended
September 30, 1998 and 1997, respectively. This increased cash balance resulted
from equity proceeds of $259.6 million raised during the nine months ended
September 30, 1998 compared to $149.2 million for the nine months ended
September 30, 1997.
Operating expenses, including depreciation and amortization, increased to
$5.9 million for the nine months ended September 30, 1998 compared to $2.5
million for the nine months ended September 30, 1997. The increased expense was
a function of a larger property portfolio. General operating and administrative
expenses decreased to 5.0% of revenues from 5.4% for the nine months ended
September 30, 1998 and 1997, respectively, as a result of the increase in APF's
assets and increased operating and administrative efficiencies.
In October 1998, Boston Chicken, Inc and its affiliates, tenants of 27
Boston Market restaurant properties, filed a voluntary petition for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code, and two additional
Boston Market operators, tenants in three additional Boston Market restaurant
properties, also filed voluntary petitions for bankruptcy protection. As a
result of these bankruptcy filings, these tenants have the legal right to
reject or affirm one or more leases with APF. To date the restaurants on 13 of
these restaurant properties have been closed. Of the 13 properties with closed
restaurants, the tenants have rejected 12 leases, accounting for approximately
3% of APF's rental, earned and interest income for the year ended December 31,
1998. While the tenants have not rejected or affirmed the remaining 18 leases,
there can be no assurance that some or all of these leases will not be rejected
in the future. The lost revenues resulting from the rejection of all 30 leases
could have an adverse effect on the results and operations of APF if APF is
unable to re-lease the restaurant properties in a timely manner. Currently, APF
is actively marketing the 13 closed restaurant properties to existing and
prospective clients and operators of local and regional restaurant chains.
During the nine months ended September 30, 1998, one of APF's lessees and
borrowers, Foodmaker, Inc., contributed more than 10% of APF's total rental,
earned and interest income relating to its restaurant properties, mortgage
loans, secured equipment leases and certificates. In addition, two restaurant
chains, Jack in the Box and Golden Corral Family Steakhouse Restaurants each
accounted for more than 10% of APF's total rental, earned and interest income
relating to restaurant properties. In the event that certain lessees, borrowers
or restaurant chains contribute more than 10% of APF's rental, earned income
and interest income in future years, any failure of such lessees, borrowers or
restaurant chains could materially affect APF's income. Each of these chains is
expected to be a relatively smaller portion of the entire portfolio as APF
grows.
Approximately 86% of APF's net leases provide a purchase option and
approximately 10% are currently exercisable. Generally, the purchase options
are exercisable at the greater of fair market value or 120% of the cost of the
restaurant property. APF does not expect the exercise of purchase options to be
significant. APF sold three and five properties during the nine months ended
September 30, 1998 and 1997, respectively. The properties were sold at their
carrying value and no gain or loss was recognized for financial reporting
purposes. APF reinvested the proceeds from the sale of restaurant properties in
additional restaurant properties. In addition, three restaurant properties were
exchanged for replacement properties during the nine months ended September 30,
1998. No gain or loss was recognized due to these transactions being accounted
for as nonmonetary exchanges of similar assets.
The Years Ended December 31, 1997, 1996 and 1995
APF's revenues and net earnings increased over the three year period.
Revenues increased to $19.5 million for the year ended December 31, 1997 from
$6.2 million and $659,131 for the years ended December 31, 1996 and 1995,
respectively. The increase was primarily a result of increased financing to
operators of national and regional restaurant chains totaling $179.1 million
during year ended December 31, 1997 compared to $69.0 million and $24 million
for the same period in 1996 and 1995, respectively. APF focused on providing
triple-net lease and mortgage financing to restaurant chains and top
franchisees of certain restaurant chains. At December 31, 1997, approximately
90% of APF's financing was provided to either the franchisor or top franchisee
in a particular restaurant chain (based on sales). Weighted average base lease
rates on the new
C-36
<PAGE>
investments were 10.69% in 1997 as compared to 11.15% and 11.09% in 1996 and
1995, respectively. APF's growth has resulted in increased restaurant chain and
geographic diversification. APF's tenants and borrowers include 29 restaurant
chains at December 31, 1997 compared to 13 at December 31, 1996 and six at
December 31, 1995. In addition, APF's restaurants were dispersed among 35
states at December 31, 1997 versus 20 at December 31, 1996.
The increase in other interest income to $2.3 million for the year ended
December 31, 1997 compared to $773,404 and $118,859 during 1996 and 1995,
respectively, was primarily a result of higher cash and cash equivalent
balances pending investment. APF's weighted average cash and cash equivalents
balance for 1997 was $42.1 million compared to $17.8 million and $2.9 million
in 1996 and 1995, respectively. This increased cash balance resulted from
equity proceeds of $222.5 million raised during 1997 compared to $100.8 million
in 1996 and $38.5 million in 1995.
Operating expenses, including depreciation and amortization, increased to
$3.9 million during 1997 from $1.4 million in 1996 and $290,276 in 1995. The
increasing expense was a function of a larger portfolio. Total assets increased
to $339 million at December 31, 1997 from $135 million at December 31, 1996.
General and administrative expenses decreased to 4.9% of total revenues during
1997 compared to 8.7% and 20.4% in 1996 and 1995, respectively, as a result of
the increase in APF's assets and increased operating and administrative
efficiencies.
During 1997, three of APF's lessees and borrowers, or affiliated groups of
lessees and borrowers, Castle Hill, Foodmaker, Inc. and Houlihan's Restaurants
Inc., each contributed more than 10% of APF's total rental, earned income and
interest income relating to its restaurant properties, mortgage loans and
secured equipment leases. Castle Hill is a Pizza Hut franchisee and Foodmaker
operates and franchises Jack in the Box restaurants. Houlihan's Restaurants is
the franchisor of a casual dining chain. In addition, four restaurant chains,
Pizza Hut, Golden Corral Family Steakhouse Restaurants, Jack in the Box and
Boston Market, each accounted for more than 10% of APF's total rental, earned
income and interest income relating to restaurant properties. In the event that
certain lessees, borrowers or restaurant chains contribute more than 10% of
APF's rental, earned income and interest income in future years, any failure of
such lessees, borrowers or restaurant chains could materially affect APF's
income.
Funds from Operations ("FFO")
FFO, as defined by the Board of Governors of the National Association of
Real Estate Investment Trusts ("NAREIT") and as used herein, means net income
(loss) (determined in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and amortization of
real estate assets, plus amortization of direct financing leases, and after
adjustments for unconsolidated partnerships and joint ventures. FFO was
restated by APF for the years ended December 31, 1997, 1996 and 1995. FFO was
developed by NAREIT as an alternative measure of performance and liquidity of
an equity REIT because income-producing real estate historically has not
depreciated on the basis determined under GAAP. FFO alone does not represent
cash generated from operating activities in accordance with GAAP and therefore
should not be considered an alternative to net earnings as an indication of
APF's performance. The following summarizes FFO of APF for the nine months
ended September 30, 1998 and 1997 and for each of the three years ended
December 31, 1997.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -------------------------------
1998 1999 1997 1996 1995
----------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net Earnings............ $23,163,853 $ 9,737,809 $15,564,456 $4,745,962 $368,779
Adjustments:
Depreciation and
amortization of real
estate assets.......... 2,690,021 1,101,590 1,791,064 517,870 101,813
Amortization of direct
financing leases....... 554,695 202,908 377,368 91,632 1,078
----------- ----------- ----------- ---------- --------
FFO..................... $26,408,569 $11,042,307 $17,732,888 $5,355,464 $471,670
=========== =========== =========== ========== ========
</TABLE>
C-37
<PAGE>
Liquidity and Capital Resources
During the nine months ended September 30, 1998, APF originated $189.4
million in triple-net lease and mortgage financing. The investments were funded
by equity proceeds received in offerings that totaled $233.6 million at
September 30, 1998, after offering expenses. Since inception, APF has raised
equity proceeds net of offering expenses of $557.2 million which has funded
more than $453.7 million in triple-net lease restaurant real estate and
mortgages. APF completed its most recent offering at the end of 1998 at which
time APF had an equity capitalization of approximately $750 million. The
uninvested offering proceeds will be used to invest in restaurant properties
and to originate mortgages.
APF invested $16.1 million of the offering proceeds in franchise loan
certificates in a mortgage loan securitization sponsored by an affiliate of the
Advisor. APF believes this investment represents an opportunity for APF to
achieve investment returns similar to those generated by its triple-net leased
restaurant properties. In addition, APF has pre-existing triple-net leasing
arrangements with the majority of the borrowers underlying the pool of loans.
Prior to acquiring the securitization interests, APF engaged a nationally
recognized investment banking firm to evaluate its investment in the
securitization interests and the firm provided a valuation letter to APF that
the purchase price paid by APF was consistent with the estimated value of the
cash flow expected to be generated from the securitization interests. APF
invested in securities rated BB and B as well as a non-rated class.
At September 30, 1998, APF had cash, cash equivalents and a certificate of
deposit of $90.7 million and had $28.2 million available on its $35 million
line of credit. These commitments were extended to several large operators of
national and regional restaurant chains such as Jack in the Box, RTM and Sybra,
which are large Arby's franchisees, Golden Corral and DenAmerica. APF's current
line of credit expires in July 1999 and provides financing for equipment
leases. The unsecured revolving line provides that borrowings thereunder bear
interest at the then current LIBOR plus a margin spread of 1.65%. Approximately
$27.7 million in equipment financing has been funded since inception. APF, from
time to time, uses uninvested net offering proceeds to repay a portion of or
all of the balance outstanding under the line of credit pending the investment
of such offering proceeds in restaurant properties or mortgage loans in order
to reduce APF's interest cost during such period.
APF anticipates that it will increase and renegotiate the line of credit in
the first quarter of 1999 increasing the line to approximately $250 million to
$300 million at which time it will provide equipment, triple net lease and
mortgage financing. The remaining equity financing combined with a larger
revolving line of credit is expected to provide adequate funding through 1999.
APF generated $27.0 million in operating cash flow during the nine months
ended September 30, 1998 and distributed $26.5 million to stockholders
representing a yield of 7.625%. Management anticipates that cash generated from
operations will be sufficient to meet operating requirements and provide the
level of stockholder distributions required to maintain APF's status as a REIT.
Generally, APF's leases as of September 30, 1998 were triple-net leases and
generally contain provisions that management believes will 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 APF's restaurant 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 restaurant properties.
Year 2000
The Year 2000 problem results from a programming convention in many computer
systems and applications that abbreviates dates by eliminating the first two
digits of the year, assuming that these two digits
C-38
<PAGE>
would always be "19". Unless corrected, this shortcut would cause system
malfunctions when the century date occurs. On or before that date, some
computer programs may misinterpret the date January 1, 2000 as January 1, 1900.
This could cause systems to incorrectly process critical financial and
operational information, or stop processing altogether.
APF does not currently have any information technology systems. To date the
Advisor has provided all services requiring the use of information technology
systems pursuant to a management agreement with APF. The maintenance of
embedded systems, if any, at APF's restaurant properties is the responsibility
of the tenants of the properties in accordance with the terms of APF's leases.
The Advisor and its affiliates have established a team dedicated to reviewing
the internal information technology systems used in the operation of APF, and
the information technology and embedded systems and the Year 2000 compliance
plans of APF's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of the Advisor consists of a
network of personal computers and servers that were obtained from major
suppliers. The Advisor utilizes various administrative and financial software
applications on that infrastructure to perform the business functions of APF.
The inability of the Advisor to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of APF's business activities or
operations. Accordingly, the Advisor has requested and is evaluating
documentation from the suppliers of the Advisor regarding the Year 2000
compliance of their products that are used in the business activities or
operations of APF. The costs expected to be incurred by the Advisor to become
Year 2000 compliant will be incurred by the Advisor.
APF has material third party relationships with its tenants, financial
institutions and transfer agent. APF depends on its tenants for rents and cash
flows, its financial institutions for availability of cash and its transfer
agent to maintain and track investor information. If any of these third parties
are unable to meet their obligations to APF because of the Year 2000
deficiencies, such a failure may have a material impact on APF. Accordingly,
the Advisor has requested and is evaluating documentation from APF's tenants,
financial institutions, and transfer agent to gauge whether they have fully
considered and investigated any potential material impact of the Year 2000
deficiencies. Therefore, the Advisor, does not, at this time, know of the
potential costs to APF of any adverse impact or effect of any Year 2000
deficiencies by these third parties.
The Advisor currently expects that all Year 2000 compliance testing and any
necessary remedial measures on the information technology systems used in the
business activities and operations of APF will be completed prior to June 30,
1999. Based on the progress the Advisor has made in identifying and addressing
APF's Year 2000 issues and the plan and timeline to complete the compliance
program, the Advisor does not foresee significant risks associated with APF's
Year 2000 compliance at this time.
APF does not believe that the CNL Restaurant Business Acquisitions,
including the costs of becoming Year 2000 compliant, will have any significant
impact on APF's Year 2000 readiness or on its results of operations.
Future Business Plans
Subsequent to consummating the Acquisitions, APF anticipates further
increasing its line of credit to fund future growth.
Assuming the Fund Acquisitions are completed in the fourth quarter of 1999,
APF anticipates a public offering of APF Shares either contemporaneously or
shortly thereafter. Management is unable to estimate the size or exact timing
of that offering but estimates it to be in the range of $200 million to $300
million. APF believes that the combination of equity financing, conduit
facilities, unsecured revolving line of credit and cash flow from operations
will adequately provide the necessary financing for APF through the year 2000.
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<PAGE>
Following its acquisition of the CNL Restaurant Financial Services Group,
APF expects to periodically securitize mortgage loans by issuing classes of
trust certificates. Periodic securitization is an effective method for
accessing capital and reducing debt on APF's balance sheet and makes APF less
dependent on the equity markets. APF anticipates holding certain non-rated
classes of the securitizations which management believes will enhance APF's
return on capital.
APF expects to use financial instruments to hedge against fluctuations in
interest rate risk.
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<PAGE>
APF'S BUSINESS AND THE RESTAURANT PROPERTIES
General
APF is a REIT formed in 1994, whose primary business is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net basis. As of September 30, 1998, APF had invested more
than $480 million in 357 restaurant properties diversified among 35 restaurant
chains in 37 states. Generally, the real estate owned by APF consists of land
and buildings. APF had gross revenues of approximately $29 million for the nine
months ended September 30, 1998.
APF also provides mortgage financing to tenants or third parties that own
the buildings constructed on the land leased from APF. The mortgage loans are
secured by the building and improvements on the land. To a lesser extent, APF
offers secured equipment leases to operators of national and regional
restaurant chains to finance, through direct financing leases or loans, the
furniture, fixtures and equipment located on the restaurant properties.
APF's address and telephone number are 400 East South Street, Orlando,
Florida 32801, telephone number (407) 650-1000.
Business Objectives and Strategies
The following paragraphs describe the business objectives and strategies
that APF currently employs and those that it will be able to employ as a result
of the Acquisitions. APF believes that these business objectives and strategies
will enhance its financial position and increase funds from operations.
. Providing a full range of real estate development and financing services
to operators of national and regional restaurant chains. As a result of
the CNL Restaurant Business Acquisitions, APF will be structured as a
"one-stop shop" for real estate services and financial products that will
allow the operators of national and regional restaurant chains to
concentrate on their core business of operating restaurants. APF will
provide operators of national and regional restaurant chains with a
variety of financing options such as triple-net leasing, mortgage
financing and secured equipment financing. APF also will be able to
provide restaurant property development services such as site selection,
due diligence, construction management and build-to-suit development to
operators of national and regional restaurant chains. The acquisition of
the Advisor also will provide APF with a strategic alliance with CAS
through which it will have a right of first refusal to provide financing
for restaurant properties in connection with any merger or acquisition
with respect to which CAS is providing advisory services. See "--
Strategic Alliance with CNL Advisory Services, Inc.," below. APF will
seek to be perceived by operators of national and regional restaurant
chains as their long-term, strategic partner by providing all of their
real estate financing and development needs.
. Focusing on strong, recognized brand name franchises and operators of
national and regional restaurant chains. APF believes that one of the
reasons for its success has been its focus on servicing operators of
national and regional restaurant chains. APF's management believes that,
due to the continuing consolidation of the national and regional
restaurant chain industry, it has additional growth opportunities through
the financing of restaurant chains' acquisitions and development. APF's
focus on operators of national and regional restaurant chains also
reduces its exposure to certain risks such as tenant defaults. In
addition to being better capitalized and more diversified, an operator of
a large restaurant chain of numerous restaurants is better equipped than
an operator of a small restaurant chain to absorb the financial
repercussions of an unprofitable or underperforming restaurant. Because
they are more likely to remain financially stable even when certain of
their restaurants are unprofitable or underperforming, the larger
restaurant chain operators to which APF has provided or will provide real
estate development and financing services are more likely than smaller
restaurant chain operators to remain financially reliable and to adhere
to their contractual obligations to APF, whether for a lease, a
C-41
<PAGE>
mortgage or a secured equipment loan. A majority of APF's financing
relationships were either with the franchisor or the top five franchisees
(based on sales) of the particular restaurant chain. Typically, multi-unit
restaurant operators are the most stable industry credits, providing
better risk-adjusted returns for stockholders.
. Structuring for long-term, stable cash flows. APF's restaurant properties
generally are leased on a long-term basis (generally 15-20 years) and are
structured as triple-net leases through which the tenant bears
responsibility for substantially all property costs and expenses
associated with ongoing maintenance and operation, including utilities,
property taxes, insurance and roof and structural repairs. Further, APF
acquires restaurant properties that are subject to an existing lease
which reduces the risks inherent in initial leasing. These factors
combine to yield stable cash flows for APF's restaurant property
investments.
APF's mortgage loans and the mortgage loans originated by the CNL
Restaurant Financial Services Group are similarly structured to provide
consistent returns. The mortgage loans are normally structured with 15-20
year base term and bear interest at a targeted premium over the
prevailing treasury bond rate. The loans contain strict operating
covenants and are fully amortizing. The restaurant chain operator
typically is required to maintain a fixed charge coverage ratio of at
least 1.20.
. Maintaining high-quality acquisition and development pipelines. As a one-
stop shop for operators of national and regional restaurant chains, APF
will be able to tailor its services, ranging from turn-key, build-to-suit
development to mortgage financing, to provide exactly the real estate
services that its clients need. This range of services will allow APF to
develop strategic relationships with operators of national and regional
restaurant chains which, in turn, is expected to result in a steady
pipeline of restaurant property acquisition and development
opportunities. This pipeline will be further enhanced by APF's strategic
alliance with CAS, as described above. APF's pipeline for restaurant
property financing includes a combination of new construction,
refinancing of existing restaurant properties or portfolios and
purchasing existing triple-net leased restaurant properties.
. Applying proven underwriting standards. As the Advisor does now, APF will
perform extensive due diligence before investing in a restaurant property
and will apply strict conservative underwriting criteria to all potential
acquisitions and financings. APF will evaluate factors such as
restaurant-level profitability, restaurant chain operator experience, the
position of the restaurant chain in the industry overall, local market
conditions, fixed charge coverage ratios, underlying property value,
physical condition of the restaurant property and environmental
considerations. APF also will evaluate the financial strength of the
tenant, borrower (if different from the tenant) and, if applicable,
guarantor to assess the availability of alternate sources of payment in
the event that a tenant or borrower defaults on its obligations to APF.
APF's investments generally have full tenant or borrower recourse, and
many of APF's leases and mortgage loans also have terms that give APF
recourse to guarantors who are owners or affiliates of the tenant or
borrower.
. Maintaining diversification. APF's real estate investments currently are
diversified geographically by restaurant chain, restaurant chain operator
and investment type. The acquisition by APF of the CNL Restaurant
Financial Services Group will increase the diversification of APF's
investments as it will result in a substantial increase in the number of
restaurant properties in which APF holds an interest. As of September 30,
1998, APF owned 357 restaurant properties located in 37 states. If APF
had acquired the CNL Restaurant Financial Services Group on September 30,
1998, its portfolio would have consisted of investments in 816 restaurant
properties located in 42 states, including the 357 properties represented
by APF's current real estate investments, 171 restaurant properties
represented by mortgage loans made by APF and the CNL Restaurant
Financial Services Group and 288 properties represented by securitized
mortgage loans in which the CNL Restaurant Financial Services Group held
a residual interest. APF also held title to the equipment on
approximately 3% of its 357 restaurant properties as of September 30,
1998.
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<PAGE>
. Managing and Monitoring Investments. As a result of the acquisition of
the Advisor, APF will assume responsibility for its day-to-day
operations, including actively managing its restaurant property portfolio
and administering its investments. APF will monitor property level issues
including restaurant sales, real estate taxes, assessments and insurance
payments and will actively analyze diversification, review
tenant/borrower financial statements and restructure investments in the
case of underperforming and non-performing investments. APF believes that
the Advisor's active management of APF's investments is responsible, in
large part, for the high tenant occupancy rate for APF's restaurant
properties. At September 30, 1998, APF's restaurant properties were
approximately 96% leased.
. Maintaining a conservative capital structure. APF operates with a
moderate use of indebtedness with the objective, set by its board of
directors, of maintaining debt to total assets ratio of less than 45%. As
of September 30, 1998, APF's debt to total assets ratio was 1.2% of total
assets (or 12.9% of total assets if APF had acquired the CNL Restaurant
Businesses as of that date). APF believes that its lack of substantial
indebtedness combined with its predictable cash flows will permit it to
continue to procure attractive debt and equity financing. APF, when
market conditions are suitable, also intends to access capital by
securitizing mortgage loans.
Competitive Advantages
APF believes it will have certain competitive advantages that will enable it
to be selective with respect to real estate investment opportunities. These
advantages, listed below, will enable APF to meet its investment objectives of
stockholder distributions, growth and enhanced stockholder value.
. Size. The Acquisitions will position APF as one of the largest REITs in
the United States providing financing to the restaurant industry and
restaurant property services. The large capitalization of APF will permit
it to obtain capital from numerous sources at competitive rates.
. Variety of Financing Options. Currently, APF is in a favorable position
to borrow funds at competitive rates to expand its portfolio while
maintaining a conservative capital structure. APF's ability to borrow and
to securitize its mortgage loans will enable it to continue to acquire
additional restaurant properties without the necessity of accessing the
equity capital markets by selling additional capital stock and exposing
current stockholders to potential dilution. APF's UPREIT structure with
the Operating Partnership also provides it with additional potential
access to capital through the sale of the Operating Partnership's units.
. Established Relationships with Clients. Through its acquisition of the
CNL Restaurant Businesses, APF will enhance its strong tenant
relationships and contacts with potential future tenants and mortgage
loan recipients. APF's management believes that its long-standing
relationships with its clients gives APF the opportunity to provide
additional restaurant property services and financial products to such
clients for their future business needs.
. Broad Array of Products and Services. Established in-house acquisition,
development and financing capabilities will provide APF with a
competitive advantage over most other triple-net lessors and traditional
real estate lenders that typically provide more limited scope of services
to their prospective restaurant clients. APF believes that its ability to
provide operators of national and regional restaurant chains with a
variety of financing alternatives, site-selection and development
services, as well as providing merger and acquisition advisory services
through CAS, will provide APF with a competitive advantage in the
restaurant finance business.
. Experienced Management. APF's acquisition of the CNL Restaurant
Businesses will provide it with a senior management team with an average
of more than 17 years of experience in developing and operating
restaurant properties and in real estate finance and capital markets. APF
believes that this management team, which will become APF's management
team following the CNL Restaurant Business Acquisitions, has a
specialized ability to invest in and manage restaurant real estate that
will decrease APF's investment risk and enhance stockholders' returns.
C-43
<PAGE>
Strategic Alliance with CNL Advisory Services, Inc.
As part of its acquisition of the Advisor, APF will assume the Advisor's
rights and obligations under a strategic alliance the Advisor entered into with
CAS, a wholly-owned subsidiary of CNL Group, Inc., which advises operators of
national and regional restaurant chains on the merger and acquisition of
restaurant businesses. Under the terms of the agreement between CAS and the
Advisor, APF has a right of first refusal to provide financing for restaurant
properties in connection with any merger or acquisition with respect to which
CAS is providing advisory services. APF did not attempt to acquire CAS because
the income generated by CAS does not qualify under the gross income tests for a
REIT. APF believes, however, that the agreement with CAS will generate
additional financing opportunities for APF and further enhance its
relationships with operators of national and regional restaurant chains.
APF's Restaurant Properties
Currently Owned Restaurant Properties. The following table provides certain
annualized information with respect to the restaurant properties owned and
leased on a triple-net basis by APF for restaurant properties owned as of
September 30, 1998.
<TABLE>
<CAPTION>
Total Number of Average Age Annualized Percent of
Restaurant Number of Restaurant Aggregate Total Total
Restaurant Chain Properties of States Properties Rental Revenue Revenue
- ---------------- --------------- --------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Golden Corral........... 33 13 2.5 $ 4,816,000 11.7%
Jack in the Box......... 40 7 2.2 4,250,000 10.3
Bennigan's.............. 20 7 15.3 3,749,000 9.1
Boston Market(1)........ 30 17 2.4 3,310,000 8.0
Steak and Ale
Restaurant............. 18 6 21.1 2,774,000 6.7
Black-eyed Pea.......... 20 7 5.8 2,177.000 5.3
Darryl's................ 15 7 17.8 2,125,000 5.2
IHOP.................... 14 7 2.4 1,892,000 4.6
Applebee's.............. 12 3 4.0 1,676,000 4.1
Pollo Tropical.......... 11 1 4.7 1,538,000 3.7
Ground Round............ 13 8 18.3 1,419,000 3.4
Arby's.................. 17 9 3.1 1,396,000 3.4
Burger King............. 9 5 4.9 1,185,000 2.9
Chevy's Fresh Mex....... 5 4 5.4 1,156,000 2.8
Tumbleweed Southwest
Mesquite Grill and
Bar.................... 7 2 8.9 1,036,000 2.5
Sonny's Real Pit Bar-B-
Q...................... 7 1 12.1 877,000 2.1
Pizza Hut............... 44 3 15.5 858,000 2.1
Wendy's................. 8 2 2.0 596,000 1.4
Shoney's................ 4 3 1.8 514,000 1.2
Houlihan's.............. 3 1 25.0 498,000 1.2
Denny's................. 4 3 8.8 442,000 1.1
Other................... 23 11 2.5 2,943,000 7.2
--- --- ---- ----------- -----
Total................. 357 $41,227,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) In October 1998, tenants of 29 Boston Market restaurant properties filed
voluntary petitions for bankruptcy under Chapter 11 of the U.S. Bankruptcy
Code. To date, the tenants have closed 13 of these restaurant properties.
APF is actively marketing these restaurant properties for release or sale.
C-44
<PAGE>
As of September 30, 1998, APF leased on a triple-net basis 357 restaurant
properties in 37 states and substantially all of the restaurant properties were
being leased. All nonperforming restaurant properties owned by APF are actively
being marketed for either re-lease or sale. Assuming that the Acquisitions had
occurred on September 30, 1998, APF would own 978 restaurant properties
available for triple-net leasing located in 45 states.
APF typically either acquires, owns and manages freestanding restaurant
properties leased to individual tenants or makes mortgage loans to operators of
national and regional restaurant chains. The restaurant properties typically
are located within intensive commercial traffic corridors near traffic
generators such as regional malls, business developments and major
thoroughfares. APF believes that restaurant properties with these
characteristics are desired by tenants because they offer high visibility to
passing traffic, ease of access, tenant control over the site's hours of
operation and maintenance standards and distinctive building design which
promotes greater customer identification. In addition, APF believes that
freestanding restaurant properties permit tenants to open new restaurants
quickly, due to the short development cycles generally associated with such
restaurant properties, and provide tenants with flexibility in responding to
changing retail trends.
The buildings on the restaurant properties owned by APF or with respect to
which APF extends mortgage loans are generally of the current design of the
restaurant chain. The restaurants are generally rectangular buildings and are
constructed from various combinations of stucco, steel, wood, brick and tile.
Buildings generally range from 1,300 to 12,700 square feet, with the larger
restaurants having a greater seating and equipment area. Building and site
preparation vary depending upon the size of the building and the site and the
area in which the restaurant is located. Buildings and site preparation costs
generally range from $250,000 to $1,250,000 for each restaurant. All buildings
owned by APF or with respect to which APF extends mortgage loans are
freestanding and surrounded by paved parking areas.
Restaurant Investments Following CNL Restaurant Business Acquisitions. If
APF had acquired the CNL Restaurant Financial Services Group as of September
30, 1998, APF's portfolio would have consisted of investments (which include
mortgage financings and securitizations) in 816 restaurant properties located
in 42 states. The following table sets forth certain information, by geographic
region, regarding the geographic diversification of those investments assuming
the CNL Restaurant Financial Services Group had been acquired as of September
30, 1998.
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<PAGE>
Regional Property Distribution
(as of September 30, 1998)
<TABLE>
<CAPTION>
Total Number of
Restaurant
Restaurant Chain Properties(1) West Central South East
- ---------------- --------------- ---- ------- ----- ----
<S> <C> <C> <C> <C> <C>
Taco Bell............................. 84 0 25 6 53
Burger King........................... 74 4 8 26 36
Applebee's............................ 69 10 0 38 21
Wendy's............................... 59 3 0 24 32
T.G.I. Friday's....................... 49 20 8 9 12
Pizza Hut............................. 46 0 0 0 46
Bennigan's............................ 42 0 15 19 8
Jack in the Box....................... 40 20 20 0 0
Papa John's........................... 39 1 0 21 17
Golden Corral......................... 35 0 17 12 6
Boston Market......................... 30 6 11 2 11
Steak and Ale Restaurant.............. 24 0 8 13 3
Arby's................................ 21 3 0 11 7
Black-eyed Pea........................ 20 7 11 1 1
Ruby Tuesday.......................... 20 7 11 0 2
Denny's............................... 16 1 3 11 1
Darryl's.............................. 15 0 0 13 2
Sonny's Real Pit Bar-B-Q.............. 15 0 0 15 0
IHOP.................................. 14 2 8 3 1
Ground Round.......................... 13 0 3 0 10
Fazoli's.............................. 12 0 0 12 0
KFC................................... 11 0 0 10 1
Shoney's.............................. 11 3 0 8 0
Pollo Tropical........................ 10 0 0 10 0
Tumbleweed Southwest Mesquite Grill &
Bar ................................. 7 0 1 6 0
Del Taco.............................. 6 6 0 0 0
Popeyes............................... 6 0 0 6 0
Chevy's Fresh Mex..................... 5 2 1 0 2
Houlihan's............................ 4 0 1 0 3
Other................................. 19 0 3 11 5
--- --- --- --- ---
Total............................... 816 95 154 287 280
=== === === === ===
</TABLE>
Restaurant Investments Following the Fund Acquisitions. Upon completion of
the Fund Acquisitions, assuming that APF had acquired all of the Funds as of
September 30, 1998 and assuming consummation of the CNL Restaurant Business
Acquisitions, APF would own and lease on a triple-net basis 978 restaurant
properties located in 45 states and would have investments (which include
mortgage financings and securitizations) in 1,437 restaurant properties.
Evaluation of Investment Opportunities
Restaurant properties acquired by APF are undeveloped, newly-constructed or
existing restaurant properties. The average age of the buildings in APF's
property portfolio is approximately 8.2 years. In addition, APF generally
acquires restaurant properties for which there is an existing lease in order to
avoid the risks inherent in initial leasing.
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<PAGE>
In addition to acquiring restaurant properties, APF also provides mortgage
loans to tenants. APF endeavors to structure the mortgage loans so that the
returns are comparable to the returns that APF receives on its triple-net
leases. To a lesser extent, APF offers secured equipment leases to operators of
national and regional restaurant chains pursuant to which APF will finance,
through direct financing leases or loans, the furniture, fixtures and equipment
located at the restaurant properties. This service is traditionally provided as
an accommodation to APF's tenants.
Since APF's inception, the Advisor has been responsible for evaluating
investment opportunities for APF. The Advisor has performed these services
generally through its departments that focus on various aspects of real
property investment. Following its acquisition of the Advisor, APF will perform
the services currently provided by the Advisor. It is expected that APF will
maintain the following departments established by the Advisor:
. Acquisitions. This department is responsible for originating new
investments with, and maintaining relationships within, the restaurant
chain industry. From APF's inception through September 30, 1998, APF and
the CNL Restaurant Businesses originated, for APF or certain affiliates,
a total of $1.2 billion in triple net-leases and mortgage loans in the
restaurant chain industry. The total volume of investments by APF and the
CNL Restaurant Businesses has increased from $146 million in 1995 to $254
million in 1998. In analyzing potential restaurant property acquisitions
and investments, APF will carefully underwrite each aspect of the
transaction, including the tenant, the real estate and the lease or
mortgage loan, to satisfy the acquisition criteria and enhance the value
of returns as described below.
Tenant and Borrower Evaluation -- Each potential tenant or mortgagor is
subjected to an extensive evaluation of its credit, management, ranking
in the industry, operating history and profitability. The Advisor
seeks, and APF will continue to seek, clients who have established
credit. APF may also seek a letter of credit or guaranty of lease
obligations from the tenant's corporate parent providing additional
financial security.
Leases with Increasing Rents -- Generally, clauses are included in the
leases providing for increases in rent over the term of the leases. The
increases are scheduled rental increases, are a percentage of gross
sales above a specific level or are tied to certain indices such as the
consumer price index.
Lease Provisions that Protect Value -- As appropriate, the Advisor
attempts to include provisions in APF's leases that require its consent
to certain tenant activity or the satisfaction of specific operating
tests. These provisions include, for example, operational and financial
covenants, prohibitions on a change of control and indemnification from
the tenant against environmental and other contingent liabilities.
These provisions enable APF to protect its investment from operational
and financial changes that could impact the client's ability to satisfy
its obligations or could reduce the value of the restaurant properties.
. Underwriting. This department performs detailed underwriting of
individual restaurant operators as well as restaurant chains. APF
believes that the Advisor's conservative underwriting has led to APF's
historically low default and loss experience.
The Advisor's investment committee, which APF intends to continue and
which is comprised of senior management, functions as a separate and
final step in the approval process. As part of the underwriting process,
the investment committee independently evaluates each investment
opportunity. As a transaction is structured, it is evaluated for its
expected financial returns, creditworthiness of the tenant, the real
estate characteristics, guarantors or other collateral, and the lease or
mortgage loan terms. As a result of the CNL Restaurant Business
Acquisitions, APF will become one of the industry leaders in triple-net
lease financing and mortgage loan origination. The proven systems of the
CNL Restaurant Businesses will enable APF to effectively underwrite
tenant or borrower financings.
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<PAGE>
. Development Services. This group provides a full range of real estate
development services, including market evaluation, site selection, due
diligence, construction management and turn-key, build-to-suit
development. The development services group will provide APF with a
pipeline of restaurant property financing transactions by overseeing the
initial development of sites for the client and establishing a
relationship with the client at the start of its use of the restaurant
property.
. Asset Management. This group is comprised of restaurant property real
estate and servicing specialists who monitor and manage the portfolio of
real estate and the real estate financings as well as any secured
equipment financing. The asset management group seeks to optimize the
performance of the current portfolio of restaurant properties through
timely dispositions and favorable lease modifications. It also monitors
payment receipts, property tax and insurance compliance, administers
underperforming and non-performing investments and oversees dispositions
and tenant substitutions. The asset management group is also responsible
for performing due diligence in advance of purchasing restaurant
properties, interfacing with legal counsel and other third-party service
providers and tracking the performance of tenants and restaurant concepts
to identify potential concerns in advance of default.
. Finance/Treasury. This group will be responsible for securitizing APF's
mortgage loan portfolios in the capital markets and ensuring that APF has
adequate capital sources and lending capacity to continue to develop
APF's triple-net lease and mortgage loan business. Additionally, this
group will be responsible for APF's compliance with the rules and
regulations of the Securities and Exchange Commission and financial and
tax reporting.
Financial Products and Services
Description of Leases. Initial lease terms for the restaurant properties
typically are, or are expected to be, 15 to 20 years, with up to five renewal
options for five year periods. As of September 30, 1998, the average remaining
initial lease term with respect to APF's 357 restaurant properties was
approximately 17 years. Leases accounting for 95% of annualized base rent for
restaurant properties owned as of September 30, 1998, have initial lease terms
extending until at least December 31, 2009.
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<PAGE>
The following table shows the number of leases in APF's restaurant property
portfolio which expire each calendar year through the year 2009, as well as the
number of leases which expire after December 31, 2009. The table does not
reflect the exercise of any of the renewal options provided to the tenant under
the terms of such leases.
Lease Expiration Table
<TABLE>
<CAPTION>
Base Rent
-------------------
Year Number Amount Percent
- ---- ------ ----------- -------
<S> <C> <C> <C>
1999................................................. -- $ -- -- %
2000................................................. -- -- --
2001................................................. -- -- --
2002................................................. 1 134,000 0.3
2003................................................. -- -- --
2004................................................. -- -- --
2005................................................. -- -- --
2006................................................. 1 109,000 0.3
2007................................................. -- -- --
2008................................................. 2 200,000 0.5
2009................................................. 1 95,000 0.2
Thereafter........................................... 337 39,555,000 98.7
--- ----------- -----
Totals(1).......................................... 342 $40,093,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) Excludes the leases of 15 restaurant properties with aggregate base rental
income of $1,608,000, including 13 Boston Market restaurant properties,
which have been terminated. APF is actively marketing the restaurant
properties for re-lease or sale.
As of September 30, 1998, leases in APF's restaurant property portfolio
representing approximately 18% of base rent include periodic contractual
increases in base rent only; leases representing approximately 16% of base rent
include percentage rent provisions only; and leases representing approximately
65% of base rent include both contractual increases in base rent and percentage
rent provisions. The contractual increases in base rent and the percentage rent
formulas are generally tied to increases in certain indices such as the
consumer price index, participation in gross sales above a stated level,
mandated rental increases on specific dates or by other methods. Leases which
provide for increases in annual base rent do so on a periodic basis. The first
such increase generally occurs after five years of the lease term. These
increases generally range in amount from 5% to 15% after every five years of
the lease term. Since all of APF's restaurant properties were acquired in 1995
or thereafter, a significant number of such contractual rent increases will not
become effective until 2000 or later. In addition, for those restaurant
properties that provide for the payment of percentage rent, such rent is
generally in the range of 4% to 8% of the tenant's annual gross sales, less the
amount of annual base rent payable in that lease year. For the nine months
ended September 30, 1998, APF recognized percentage rent of $46,151
(approximately 0.2% of total revenues).
Substantially all of APF's leases are triple-net leases that provide that
the tenants bear responsibility for substantially all of the costs and expenses
associated with the ongoing maintenance and operation of the leased properties,
including utilities, property taxes and insurance. The remainder of APF's
leases are on terms which management believes are substantially the same as
those of its triple-net leases. APF's leases generally also provide that the
tenants are responsible for roof and structural repairs. Structural repairs
generally are repairs and improvements required by law, long-term capital items
such as roof repair or replacement, and, in limited cases, replacement of
heating and air conditioning systems. It is not possible, however, in all
instances to completely insulate APF, which ultimately may, under some of its
leases, bear some of the costs and expenses normally associated with property
ownership. APF expects that it will be able to pay these expenses through
retained funds from operations or borrowings.
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<PAGE>
Lease provisions relating to casualty loss and condemnation vary among APF's
leases. The leases on restaurant properties generally obligate the tenant to
repair and restore the restaurant property or to substitute another restaurant
property for the damaged or condemned restaurant property. Under the leases of
the remaining restaurant properties, APF generally is required to repair or
restore a restaurant property in the event of casualty loss or condemnation,
although it is entitled to casualty insurance proceeds, including proceeds, if
any, for loss of rent, or condemnation proceeds in such circumstances. To the
extent that the tenant may abate its rent payments pending the repair or
restoration of a restaurant property and such abatement is not offset by
insurance proceeds, APF's rental income may be adversely affected. In a number
of APF's leases, the tenant may terminate its lease upon casualty or
condemnation. In substantially all of these leases, the tenant's right to
terminate the lease is conditioned on one or more of the following factors: (i)
the damage or the taking being of a material nature; (ii) the damage or taking
occurring within the last few years of the lease term (and the tenant not
exercising its option to extend the lease); or (iii) the period of time
necessary to repair the premises exceeding a specified number of months.
A substantial number of APF's leases include purchase options in favor of
the tenant, generally at no less than fair market value, or a right of first
refusal if APF should seek to sell a restaurant property. Under certain
circumstances, a tenant generally may assign its lease or sublet the property
without APF's approval, although the tenant typically remains liable under the
lease and the guarantor, if any, typically remains liable under its guaranty
subsequent to assignment or sublease. Under certain of the leases, the tenant
has a right, under specified circumstances, to substitute a comparable property
for a property leased from APF.
Mortgage Loans. APF provides mortgage loans to operators of national and
regional restaurant chains or their affiliates, to enable them to acquire
restaurant properties. APF's management believes that the criteria for
investing in the mortgage loans are substantially the same as those involved in
APF's investments in its triple-net-lease restaurant properties. Therefore, APF
uses the same underwriting criteria as described above in "-- Evaluation of
Investment Opportunities."
Generally, APF believes the rate of return and terms of these transactions
are similar to those of the leases. The borrower is responsible for all of the
expenses of owning the building and improvements, as with the triple-net
leases, including expenses for insurance and repairs and maintenance. The
mortgage loans are fully amortizing loans, generally over a period of 15 to 20
years, with payments of principal and interest due monthly. The interest rates
charged under the terms of the mortgage loans are fixed over the term of the
loan and generally are comparable to, or slightly lower than, lease rates
charged to tenants for the restaurant properties.
Build to Suit Development. Following the CNL Restaurant Business
Acquisitions, APF will provide build-to-suit construction services, including
market analysis, site selection, contract negotiation, permitting and
construction. APF will be able to provide all or a selected portion of these
services to operators of national and regional restaurant chains.
APF will review the appropriate trade areas in the markets identified by
each restaurant operator, and, by analyzing demographics, site criteria, costs
and traffic patterns, APF will determine the best potential target areas for
developing its client's restaurants. After consulting with its clients, APF
will then negotiate the real estate contract or lease agreement, as
appropriate. As part of its site acquisition/development services, APF will
perform preliminary due diligence on the restaurant property. APF will
coordinate all necessary architectural and engineering services related to the
restaurant property and will prepare preliminary and final construction
budgets. As the project progresses into the construction phase, APF will pre-
qualify various general contractors prior to issuing an invitation to bid and
will then select the general contractor from the bidding process, provide cost
comparisons among bidders and select the general contractor with approval of
the client.
The Food Service Industry
The food service industry, as defined by the U.S. Department of Commerce, is
one of the largest sectors of the nation's economy. During 1998, the industry
generated an estimated $338.4 billion of revenue, representing over 4% of the
Gross Domestic Product of the United States. The food service industry grew at
an estimated
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inflation-adjusted rate of 2.6% during 1998, representing the seventh
consecutive year of real sales growth for the industry.
The food service industry is typically divided into three major food
segments: commercial, institutional and military. The commercial food service
sector includes full-service and fast-food restaurants, cafeteria/buffet
restaurants, social caterers and ice cream/yogurt retail stores. Within the
restaurant industry, the fast-food group is typically defined as those
restaurants perceived by consumers as fast-food or take-out establishments
without table service, specializing in pizza, chicken, hamburgers and similar
food items. Full-service restaurants include those in the family, steak and
casual dining sections that have table service and generally have a broader
selection of menu items with longer preparation times than do fast-food
restaurants. Although these segments can be further differentiated by price, it
is consumer perception, as well as average meal price, that influences how
individual restaurant chains are categorized.
APF's business is focused exclusively on the restaurant industry. The
restaurant industry employs more people and has more locations than any other
retail industry in the United States. According to Nation's Restaurant News,
there were nearly 799,000 restaurants in the United States as of December 31,
1997. According to NPD Recount, a national consulting group which specializes
in the restaurant industry, restaurant chains having three or more properties
accounted for approximately 47% of all restaurants in the United States in
1997. The majority of these properties are fast food restaurants, with others
generally in the full service segment. Of the 210,000 chain restaurants having
an identified restaurant concept as of December 31, 1997, approximately 117,500
were within the 100 largest restaurant chains. Each of these restaurant chains
had 1997 projected total system-wide sales exceeding $182 million. According to
Nation's Restaurant News, the top 200 restaurant chains represented 42% of
restaurant properties. According to the National Restaurant Association, fast-
food restaurants experienced a 5.6% increase in overall sales and full-service
restaurants experienced a 5.3% increase in 1998.
Sales in the restaurant industry have increased from $173.7 billion in 1985
to a projected $354 billion for 1999. The top 200 franchisees of national
restaurant chains based on sales volume (APF's target market), increased from
$10.8 billion in 1995 to $11.7 billion in 1996 to $13.1 billion in 1997. The
number of restaurant properties for the same top franchisees increased from
12,325 in 1995 to 12,846 in 1996 and to 14,170 in 1997, reflecting a growth
rate of 10.3% compared with 1996.
As the restaurant chain industry has matured, APF has seen a trend toward
consolidation which offers opportunities for APF to provide its restaurant
property service and financing to leading franchisors which are accounting for
the majority of the growth in the industry. During the past decade, restaurant
chains have increased market position in comparison to independent restaurant
companies by achieving economies of scale and by developing strong brand
equity. Much of the chains' market share gains in the past came at the expense
of small, independent operators, who tended to be less sophisticated and less
focused on new restaurant development. The top chains may face greater chain-
versus-chain competition, however, rather than chain-versus-independent
competition. APF's target market remains national and regional franchisors and
franchisees within the top 200 restaurant operating companies. The top 100
restaurant chains have increased their share of restaurant units from 25% in
1980 to 32% of current U.S. units, and their revenues have increased in the
same period from 40% to 48% of total current domestic revenues.
Growth in the fast-food, family-dining and casual-dining sectors of the
restaurant industry are expected to remain strong for several reasons, but
primarily because the income of households continues to rise through the
maturation of the baby boomers as well as the number of women working outside
the home. Today's dual income lifestyle in American families continues to be
the norm. Consequently, the need for convenience food outside the home
continues to grow.
Restaurant Finance Industry
The restaurant finance industry has changed significantly in the past 20
years. In many respects this change has coincided with the maturation of the
franchising business in the restaurant industry and the increasing use
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of debt securitization in the capital markets. Restaurants were viewed as high-
risk investments by lenders. As a result, financing options were limited to
local banks or loans or equity investments from friends and family. The
development of marketing, brand identification and delivery systems in major
chain restaurants has dramatically reduced the failure rate of restaurants over
the last two decades and made them more attractive credit risks.
In the early 1990's, companies began to recognize the strengthening profile
of franchisees and franchise systems. Investment vehicles were designed to pool
and securitize restaurant loans. This securitization process has increased the
capital available to franchisees, especially smaller franchisees, and has
fueled much of the consolidation in the restaurant industry over the past three
years. As a result, a number of new competitors have entered the restaurant
finance arena.
Over the past six years, the total volume of commercial mortgage backed
securities has grown to more than $290 billion and is the fastest-growing
source of capital in the real estate market. Upon acquiring the CNL Restaurant
Financial Services Group, APF will increase its origination of mortgage loans,
will securitize those loans, when market conditions are suitable, and will
retain the servicing rights. APF believes that the economics of the
securitizations will permit APF to focus on and capitalize on financing
opportunities existing in a low interest rate environment. However, as interest
rates rise, restaurant chain operators will tend to prefer triple-net lease
financing. The ability to originate both triple-net lease and debt financing
will allow APF to provide restaurant chain operators with flexible financing
options in a changing economic environment.
Environmental Matters
APF will undertake a third-party Phase I investigation of potential
environmental risks when evaluating an acquisition. A "Phase I investigation"
is an investigation for the presence or likely presence of hazardous substances
or petroleum products under conditions which indicate an existing release, a
post release or a material threat of a release. A Phase I investigation does
not typically include any sampling. Where warranted, further assessments are
performed by third-party environmental consulting and engineering firms. APF
may acquire a restaurant property with environmental contamination, subject to
a determination of the level of risk and potential cost of remediation. APF
generally will require restaurant property tenants to fully indemnify it
against any environmental problem or condition existing as of the date of
purchase and will obtain environmental insurance for any contaminations on
restaurant properties. In some instances, APF will be the assignee of or
successor to the buyer's indemnification rights. Additionally, APF will
generally structure its leases to require the tenant to assume all
responsibility for environmental compliance or environmental remediation and to
provide that non-compliance with environmental laws be deemed a lease default.
Insurance
Under their leases, APF's tenants generally are responsible for providing
adequate insurance on the restaurant properties. APF believes its restaurant
properties are covered by adequate fire, flood, liability and property
insurance provided by reputable companies. Some of the restaurant properties,
however, are not covered by disaster-type insurance with respect to certain
hazards (such as earthquakes) for which coverage is not available or available
only at rates which, in the opinion of APF, are prohibitive.
Competition
The fast-food, family-style and casual dining restaurant business is
characterized by intense competition. The operators of the restaurants located
on the restaurant properties will 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.
Many successful fast-food, family-style and casual dining restaurants are
located in "eating islands," which are areas to which customers tend to return
frequently and within which they can diversify their eating
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habits, because in many cases the presence of some local competition may
enhance the restaurant's success instead of detracting from it. Fast-food,
family-style and casual dining restaurants frequently experience better
operating results when there are other restaurants in the same area.
APF itself will compete with other persons and entities both to locate
suitable restaurant properties for acquisition and to locate purchasers for its
restaurant properties. APF also will compete with other financing sources such
as banks, mortgage lenders and sale/leaseback companies for suitable restaurant
properties, tenants, mortgage loan borrowers and equipment tenants.
Regulation of Mortgage Loans and Equipment Leases
APF's mortgage loans and secured equipment leases may be subject to
regulation by federal, state and local authorities and subject to various laws
and judicial and administrative decisions imposing various requirements and
restrictions, including among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions and setting
collection, repossession, claims handling procedures and other trade practices.
In addition, certain states may have enacted legislation requiring the
licensing of mortgage bankers or other lenders, and these requirements may
affect APF's ability to effectuate its mortgage loans and secured equipment
leases. Whether APF can operate in these or other jurisdictions may be
dependent upon a finding by the appropriate authority in the jurisdiction of
financial responsibility, character and fitness of APF. APF may determine not
to make mortgage loans or enter into secured equipment leases in any
jurisdiction in which it believes APF has not complied in all material respects
with applicable requirements.
Franchise Regulation
Many states regulate the franchise or license relationship between a
tenant/franchisee and a restaurant chain. APF will not be an affiliate of any
restaurant chain, and is not currently aware of any states in which the
relationship between APF as lessor and the tenant will be subjected to those
regulations, but it will comply with such regulations in the future, if
required. Additionally, restaurant chains which franchise their operations are
subject to regulation by the Federal Trade Commission.
Employees
APF currently has no employees. Following the CNL Restaurant Business
Acquisitions, APF will employ approximately 135 individuals, who currently are
employed by the Advisor or the CNL Restaurant Financial Services Group. None of
APF's employees will be covered by a collective bargaining agreement.
Legal Proceedings
APF is not a party to any material legal proceedings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE FUNDS
"Management's Discussion and Analysis of the Financial Condition and Results
of Operations" of each Fund is included below. References to the "Income Fund,"
the "General Partners" and the "Limited Partners" are references to the
relevant Fund, that Fund's General Partners and that Fund's limited partners,
respectively. Complete financial statements for each of the Funds for the years
ended December 31, 1995, 1996 and 1997 are attached as Exhibit F to the Proxy
Statement.
Statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of each Fund, including, without
limitation, the Year 2000 compliance disclosure, that are not historical facts
may be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although the expectations reflected in such forward-
looking statements are based upon reasonable assumptions, the actual results of
the Fund could differ materially from those set forth in the forward-looking
statements. Certain factors that might cause such a difference include the
following: changes in general economic conditions, changes in real estate
conditions, APF's ability to successfully manage the restaurant properties it
will acquire as a result of the Fund Acquisitions and the ability of tenants of
those restaurant properties to make payments under their respective leases.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 26, 1985, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food
restaurant chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 17 restaurant
properties, which included interests in two restaurant properties owned by
joint ventures in which the Income Fund is a co-venturer and one restaurant
property owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $799,653 and $1,009,004, respectively. The decrease
in cash from operations for the nine months ended September 30, 1998, is
primarily a result of changes in the Income Fund's working capital and changes
in income and expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
In April 1998, the Income Fund sold its restaurant property in Kissimmee,
Florida, to the tenant for $680,000 and received net sales proceeds of
$661,300, resulting in a gain of $235,804 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in 1987 and
had a cost of approximately $475,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold this
restaurant property for approximately $185,900 in excess of its original
purchase price. In connection with the sale, the Income Fund incurred a
deferred, real estate disposition fee of $20,400. Payment of the real estate
disposition fee is subordinated to receipt by the Limited Partners of an
aggregate, ten percent, noncompounded annual return on their adjusted capital
contributions (the 10% Preferred Return) on a cumulative basis, plus their
adjusted capital contributions. The Income Fund distributed $586,300 of the net
sales proceeds as a special distribution to the Limited Partners and the
balance of the proceeds was retained by the Income Fund to meet the Income
Fund's working capital and other needs.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $285,367 invested in such short-term investments, as compared
to $184,130 at December 31, 1997. The increase in cash and cash equivalents is
primarily due to the Income Fund retaining a portion of the net sales proceeds
received from the sale of the restaurant property in Kissimmee, Florida in
April 1998. The funds remaining at September 30, 1998, will be used to pay
distributions and other liabilities.
Total liabilities of the Income Fund, including distributions payable,
decreased to $430,748 at September 30, 1998, from $471,028 at December 31,
1997, primarily as a result of a decrease in distributions payable to the
Limited Partners at September 30, 1998, as compared to December 31, 1997.
Liabilities at September 30, 1998, to the extent they exceed cash and cash
equivalents at September 30, 1998, will be paid from future cash from
operations and, in the event we elect to make additional capital contributions
or loans to the Income Fund, from future contributions or loans from us.
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Based on current and anticipated future cash from operations, and for the
nine months ended September 30, 1998, a portion of the proceeds received from
the sale of the restaurant property described above, the Income Fund declared
distributions to Limited Partners of $1,436,486 and $948,663 for the nine
months ended September 30, 1998 and 1997, respectively ($266,982 and $316,221
for the quarters ended September 30, 1998 and 1997, respectively). This
represents distributions of $47.88 and $31.62 per unit for the nine months
ended September 30, 1998 and 1997, respectively ($8.90 and $10.54 for the
quarters ended September 30, 1998 and 1997, respectively). The distribution for
the nine months ended September 30, 1998, included $586,300 of net sales
proceeds from the sale of the restaurant property in Kissimmee, Florida. This
special distribution was effectively a return of a portion of the Limited
Partners' investment, although, in accordance with the Income Fund agreement,
$216,361 was applied towards the 10% Preferred Return, on a cumulative basis,
and the balance of $369,939 was treated as a return of capital for purposes of
calculating the 10% Preferred Return. As a result of this return of capital,
the amount of the Limited Partners' invested capital contributions (which
generally is the Limited Partners' capital contributions, less distributions
from the sale of a restaurant property that are considered to be a return of
capital) was decreased; therefore, the amount of the Limited Partners' invested
capital contributions on which the 10% Preferred Return is calculated was
lowered accordingly. As a result of the sale of the Kissimmee restaurant
property, the Income Fund's total revenue was reduced, while the majority of
the Income Fund's operating expenses remained fixed. Therefore, distributions
of net cash flow were adjusted commencing in the quarter ended June 30, 1998.
No distributions were made to us for the quarters and nine months ended
September 30, 1998 and 1997. No amounts distributed to the Limited Partners for
the nine months ended September 30, 1998 and 1997, except for $369,939 as
described above, are required to be or have been treated by the Income Fund as
a return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distribution to the Limited Partners
on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We, as the general partners of the Income Fund, have the right, but not the
obligation, to make additional capital contributions if we deem it appropriate
in connection with the operations of the Income Fund in which event such
contributions will be returned to us from distributions of net sales proceeds
at the same time that our initial capital contributions of $1,000 are returned.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $1,316,816, $1,132,688 and
$1,182,514 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash from operations during 1997, as compared to 1996, and the
decrease during 1996, as compared to 1995, is primarily a result of changes in
the Income Fund's working capital during each of the respective years. Cash
from operations during the years ended December 31, 1997, 1996 and 1995, was
also affected by the following items.
In August 1996, the Income Fund entered into a lease amendment with the
tenant of the restaurant property in Mesquite, Texas, to provide for lower
initial base rent with scheduled rent increases retroactively effective March
1996. In anticipation of entering into this lease amendment, the Income Fund
accepted a promissory note in March 1996, in the amount of $156,308, for past
due rental and other amounts, and real estate taxes previously paid by the
Income Fund on behalf of the tenant. Payments were due in 60 monthly
installments of $3,492, including interest at a rate of 11% per annum, and
collections commenced on June 1, 1996. Receivables at December 31, 1996,
included $150,787 of such amounts, including accrued interest of $5,657 and
late fees of $1,222. During 1997, the Income Fund collected the full amount of
the promissory note.
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Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In June 1996, the Income Fund sold a small, undeveloped portion of the land
relating to its restaurant property in Mesquite, Texas. In connection with such
sale, the Income Fund received net sales proceeds of $20,000 and recognized a
gain for financial reporting purposes of $19,000. Proceeds from the sale were
used for operating activities of the Income Fund.
During 1996 and 1997, the Income Fund entered into various promissory notes
with CNL Realty Corp., the corporate general partner, for loans totaling
$83,100 and $133,000, respectively, in connection with the operations of the
Income Fund. The loans were uncollateralized, non-interest bearing and due on
demand. As of December 31, 1997, the Income Fund had repaid the loans in full
to the corporate general partner.
In August 1997, the Income Fund sold its restaurant property in Casa Grande,
Arizona, to a third party for $840,000 and received net sales proceeds (net of
$2,691 which represents prorated rent returned to the tenant) of $793,009,
resulting in a gain of $233,183 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in December 1986
and had a cost of approximately $667,300, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $128,400 in excess of its original
purchase price. In October 1997, the Income Fund reinvested the majority of the
net sales proceeds in a restaurant property in Camp Hill, Pennsylvania, as
described below. The transaction, or a portion thereof, relating to the sale of
the restaurant property in Casa Grande, Arizona, and the reinvestment of the
majority of the net sales proceeds in a restaurant property in Camp Hill,
Pennsylvania, was structured to qualify as a like-kind exchange transaction for
federal income tax purposes. However, the Income Fund distributed amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any, (at a level reasonably assumed by us) resulting from the sale.
In addition, in August 1997, Seventh Avenue Joint Venture, in which the
Income Fund owned a 50% interest, sold its restaurant property to its tenant
for $950,000 and received net sales proceeds (net of $2,678 which represents
prorated rent returned to the tenant) of $944,747, resulting in a gain to the
joint venture of approximately $295,100 for financial reporting purposes. The
restaurant property was originally acquired by Seventh Avenue Joint Venture in
June 1986 and had a total cost of approximately $770,000, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the restaurant property for approximately $177,400 in excess of its original
purchase price. During 1997, as a result of the sale of the restaurant
property, the joint venture was dissolved in accordance with the joint venture
agreement. As a result, the Income Fund received approximately $472,400,
representing its pro-rata share of the net sales proceeds received by the joint
venture. In October 1997, the Income Fund reinvested a portion of the return of
capital in a Ground Round restaurant property in Camp Hill, Pennsylvania, as
described below. In December 1997, the Income Fund reinvested the remaining
return of capital in a restaurant property located in Vancouver, Washington, as
tenants-in-common with certain of our affiliates. The Income Fund distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, if any (at a level reasonably assumed by us), resulting from the
sale.
None of the restaurant properties owned by the Income Fund or any joint
venture in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowings from us, however, the Income Fund
may borrow, in our discretion, for the purpose of maintaining the operations of
the Income Fund. The Income Fund will not encumber any of the restaurant
properties in connection with any borrowings or advances. The Income Fund will
not borrow for the purpose of returning capital to the Limited Partners. The
Income Fund also will not borrow under circumstances which would make the
Limited Partners liable to creditors of the Income Fund. From time to time, our
affiliates incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses such affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay
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Income Fund expenses or to make distributions to the partners. At December 31,
1997, the Income Fund had $184,130 invested in such short-term investments as
compared to $159,379 at December 31, 1996. The funds remaining at December 31,
1997, will be used for the payment of distributions and other liabilities.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $33,962, $40,510 and $50,300, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$48,991 and $28,262, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, as of December 31, 1997
and 1996, the Income Fund also owed affiliates $66,750 in real estate
disposition fees due as a result of services rendered in connection with the
sale of two restaurant properties in previous years. The payment of such fees
is deferred until the Limited Partners have received the sum of their
cumulative 10% Preferred Return and their adjusted capital contributions.
Amounts payable to other parties, including distributions payable, increased
to $319,550 at December 31, 1997, from $318,877 at December 31, 1996.
Liabilities at December 31, 1997, to the extent they exceed cash and cash
equivalents at December 31, 1997, will be paid from future cash from
operations, proceeds from the sale of restaurant properties as described above,
or, in the event we elect to make additional contributions or loans to the
Income Fund, from future contributions or loans from us.
Based primarily on current and anticipated future cash from operations,
proceeds from the sale of restaurant properties as described above, and to a
lesser extent additional loans received from us, the Income Fund declared
distributions to Limited Partners of $1,264,884 for each of the years ended
December 31, 1997 and 1996, and $1,264,883 for the year ended December 31,
1995. This represents distributions of $42.16 per Unit for each of the years
ended December 31, 1997, 1996, and 1995. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases for the Income Fund's restaurant properties are generally 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 15 wholly-owned restaurant properties (including one restaurant property
in Casa Grande, Arizona, which was sold in August 1997), and during the nine
months ended September 30, 1998, the Income Fund owned and leased 15 wholly
owned restaurant properties (including one restaurant property in Kissimmee,
Florida which was sold in April 1998), to operators of fast-food and family-
style restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $774,444 and $780,333,
respectively, in rental income from these restaurant properties, $243,612 and
$253,305 of which was earned during the quarters ended September 30, 1998 and
1997, respectively. The decrease in rental income during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is primarily attributable to a decrease in rental
income as a result of restaurant property sales during 1998 and
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1997. The decrease in rental income during the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, was partially offset by an increase in rental income due to the fact
that the Income Fund reinvested the majority of the net sales proceeds from the
sale of a restaurant property in August 1997, in a restaurant property in Camp
Hill, Pennsylvania in October 1997.
In addition, for the nine months ended September 30, 1997, the Income Fund
owned and leased three restaurant properties indirectly through joint venture
arrangements (including one restaurant property sold in August 1997) and for
the nine months ended September 30, 1998, the Income Fund owned and leased two
restaurant properties indirectly through joint venture arrangements and one
restaurant property with our affiliates as tenants-in-common. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $62,394 and $226,035, respectively, attributable to net income
earned by these joint ventures, $20,937 and $172,680 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
net income earned by joint ventures is primarily attributable to the fact that
in August 1997, Seventh Avenue Joint Venture, in which the Income Fund owned a
50 percent interest, sold its restaurant property resulting in a gain to the
joint venture of approximately $295,100 for financial reporting purposes. The
decrease is partially offset by the fact that in December 1997, the Income Fund
reinvested a portion of its pro rata share of the net sales proceeds in a
restaurant property located in Vancouver, Washington as tenants-in-common with
certain of our affiliates.
Operating expenses, including depreciation and amortization expense, were
$245,595 and $235,872 for the nine months ended September 30, 1998 and 1997,
respectively, of which $75,058 and $74,763 were incurred for the quarters ended
September 30, 1998 and 1997, respectively.
As a result of the sale of the restaurant property in Kissimmee, Florida, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $235,804 for financial reporting purposes for the nine
months ended September 30, 1998. During the quarter and nine months ended
September 30, 1997, the Income Fund sold the restaurant property in Casa
Grande, Arizona and recognized a gain of $233,183 for financial reporting
purposes.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1995 and 1996, the Income Fund owned and
leased 15 wholly owned restaurant properties and during the year ended December
31, 1997, the Income Fund owned and leased 16 wholly owned restaurant
properties (including one restaurant property in Casa Grande, Arizona, which
was sold in August 1997). During the years ended December 31, 1997, 1996 and
1995, the Income Fund was also a co-venturer in three separate joint ventures
that each owned and leased one restaurant property (including one restaurant
property owned and leased by Seventh Avenue Joint Venture, which was sold in
August 1997). In addition, during 1997, the Income Fund owned and leased one
restaurant property, with one of our affiliates, as tenants-in-common. As of
December 31, 1997, the Income Fund owned, either directly or through joint
venture arrangements, 18 restaurant properties which are, in general, subject
to long-term, triple net leases. The leases of the restaurant properties
provide for minimum base annual rental amounts (payable in monthly
installments) ranging from approximately $16,000 to $222,800. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount. In addition, certain leases provide for increases in the annual base
rent during the lease terms.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $1,038,443, $1,115,530 and $1,129,406, respectively, in base rental
income from the Income Fund's wholly owned restaurant properties described
above. The decrease in rental income during the years ended December 31, 1997
and 1996, each as compared to the previous year, is partially attributable to a
decrease of approximately $5,800 and $66,000, respectively, due to the fact
that effective February 1, 1996, the Income Fund ceased receiving rental
amounts from the former tenant of three restaurant properties. The rental
payments from this former tenant represented the difference between (i) the
payments due under the original leases entered into between the Income Fund and
the former tenant and (ii) the payments due under the current leases on the
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restaurant properties between the Income Fund and the new tenants (two of which
were re-leased to the corporate franchisor). In August 1997, the Income Fund
sold one of the three restaurant properties, a restaurant property in Casa
Grande, Arizona, and as a result of the sale, rental income decreased by
approximately $27,700 during 1997. The decrease in rental income during 1997
was partially offset by an increase in rental income of approximately $17,700
resulting from the Income Fund reinvesting the majority of these net sales
proceeds in a restaurant property in Camp Hill, Pennsylvania, in October 1997.
In addition, the decrease in rental income during 1996, as compared to 1995,
is partially attributable to a decrease of approximately $7,000 during 1996,
due to the fact that during 1996, the Income Fund wrote off as uncollectible
rental income amounts relating to the restaurant property in Oklahoma City,
Oklahoma. Effective January 1, 1997, the Income Fund entered into a lease
amendment with the tenant of this restaurant property to provide for lower base
rental income. The Income Fund does not anticipate that these reduced rents
will have a material adverse effect on operating results.
The decrease in rental income during 1997, as compared to 1996, is also
partially attributable to, and the decrease during 1996, as compared to 1995,
is partially offset by, the fact that during 1996, the Income Fund recognized
as income approximately $62,000 due under the promissory note with the tenant
of the restaurant property in Mesquite, Texas, for which the Income Fund had
previously established an allowance for doubtful accounts as the result of
collection being doubtful, as described above in "Liquidity and Capital
Resources."
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $22,205, $56,409 and $35,176, respectively, in contingent rental
income. The decrease in contingent rental income during 1997, as compared to
1996, and the increase during 1996, as compared to 1995, is attributable to the
fact that during 1996, the Income Fund recognized approximately $27,800 in
contingent rental income due under the promissory note with the tenant of the
restaurant property in Mesquite, Texas, for which the Income Fund had
previously established an allowance for doubtful accounts as the result of
collection being doubtful, as described above in "Liquidity and Capital
Resources."
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $22,210, $101,293 and $13,011, respectively, in interest and other
income. The decrease in interest and other income during 1997, as compared to
1996, and the increase during 1996, as compared to 1995, is primarily
attributable to the fact that during 1996, the Income Fund recognized
approximately $82,600 in interest and other income due under the promissory
note with the tenant of the restaurant property in Mesquite, Texas, for which
the Income Fund had previously established an allowance for doubtful accounts
due to collection being doubtful, as described above in "Liquidity and Capital
Resources."
In addition, during the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $250,142, $116,076 and $112,974, respectively, attributable
to net income earned by the three joint ventures in which the Income Fund is a
co-venturer (including one restaurant property owned and leased by Seventh
Avenue Joint Venture, which was sold in August 1997). The increase in net
income earned by joint ventures is primarily attributable to the fact that in
August 1997, Seventh Avenue Joint Venture, in which the Income Fund owns a 50
percent interest, recognized a gain of approximately $295,100 for financial
reporting purposes, as a result of the sale of its restaurant property, as
described above in "Liquidity and Capital Resources." The increase in net
income earned by joint ventures during 1997, was partially offset by a decrease
of $31,300 in base rental income earned by the joint venture due to the sale of
the restaurant property in August 1997.
During at least one of the years ended December 31, 1997, 1996 and 1995,
three of the Income Fund's lessees, Golden Corral Corporation, Wendy's
International, Inc. and Restaurant Management Services, Inc., each contributed
more than 10% of the Income Fund's total rental income (including the Income
Fund's share of the rental income from three restaurant properties owned by
joint ventures and one restaurant property owned with an affiliate as tenants-
in-common). As of December 31, 1997, Golden Corral Corporation was the lessee
under leases relating to five restaurants, Wendy's International, Inc. was the
lessee under leases relating to one restaurant and Restaurant Management
Services, Inc. was the lessee under leases relating to two restaurants. It is
anticipated that Golden Corral Corporation and Restaurant Management Services,
Inc. each
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will continue to contribute 10% or more of the Income Fund's total rental
income during 1998 and subsequent years. In addition, during at least one of
the years ended December 31, 1997, 1996 or 1995, three restaurant chains,
Golden Corral, Wendy's and Popeyes, each accounted for more than 10% of the
Income Fund's total rental income in 1997 (including the Income Fund's share of
the rental income from three restaurant properties owned by joint ventures and
one restaurant property owned with an affiliate as tenants-in-common). In
subsequent years, it is anticipated that these three Restaurant Chains each
will continue to account for more than 10% of the total rental income to which
the Income Fund is entitled under the terms of its leases. Any failure of these
lessees or restaurant chains could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$317,426, $325,199 and $328,465 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, is primarily attributable to a decrease in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties.
As a result of the sale of the restaurant property in Casa Grande, Arizona,
as described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $233,183 during 1997, for financial reporting purposes. In
1996, the Income Fund sold a portion of land related to the restaurant property
in Mesquite, Texas, as described above in "Liquidity and Capital Resources,"
and recognized a gain of $19,000 for financial reporting purposes. No
restaurant properties were sold during the year ended December 31, 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are, in general, triple-
net leases and contain provisions that we 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
(for certain restaurant properties) over time. Continued inflation also may
cause capital appreciation of the Income Fund's restaurant 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
restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's restaurant
properties is the responsibility of the tenants of the restaurant properties in
accordance with the terms of the Income Fund's leases. We and our affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Income Fund, and the
information technology and embedded systems and the Year 2000 compliance plans
of the Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or
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infrastructure could result in an interruption in, or failure of, certain of
the Income Fund's business activities or operations. Accordingly, we and our
affiliates have requested and are evaluating documentation from the suppliers
of our affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Income Fund. The costs
expected to be incurred by us and our affiliates to become Year 2000 compliant
will be incurred by us and our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND II, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 13, 1986, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food
restaurant chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 38 restaurant
properties, including three restaurant properties owned by joint ventures in
which the Income Fund is a co-venturer and six restaurant properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $1,601,005 and $1,579,694, respectively. The
increase in cash from operations for the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, is primarily a result
of changes in the Income Fund's working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
During January 1998, the Income Fund used a portion of the net sales
proceeds from the 1997 sale of two restaurant properties to acquire a
restaurant property in Overland Park, Kansas, and a restaurant property in
Memphis, Tennessee, as tenants-in-common with certain of our affiliates. In
connection therewith, the Income Fund and the affiliates entered into separate
agreements whereby each co-venturer will share in the profits and losses of
each restaurant property in proportion to its applicable percentage interest.
As of September 30, 1998, the Income Fund owned a 39.42% and a 13.38% interest
in the restaurant property in Overland Park, Kansas and the restaurant property
in Memphis, Tennessee, respectively.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $850,422 invested in such short-term investments, as compared
to $470,194 at December 31, 1997. The increase in cash and cash equivalents
during the nine months ended September 30, 1998, is primarily attributable to
the release of funds held in escrow at December 31, 1997 relating to the sales
of certain restaurant properties during 1997. The funds remaining at September
30, 1998, after payment of distributions and other liabilities, will be used to
meet the Income Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $741,613 at September 30, 1998, from $757,410 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on (i) current and anticipated future cash from operations, (ii) for
the nine months ended September 30, 1998, a portion of the proceeds received
from the 1997 sales of the restaurant properties as described above, and (iii)
for the nine months ended September 30, 1997, the $214,000 in termination fees
received in conjunction with the sale of the two restaurant properties in
Farmington Hills, Michigan, in October 1997, the Income Fund declared
distributions to the Limited Partners of $2,778,878 and $1,782,000 for the nine
months ended September 30, 1998 and 1997, respectively ($515,625 and $594,000
for the quarters ended
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September 30, 1998 and 1997, respectively). This represents distributions for
the applicable nine months of $55.58 and $35.64 per unit, respectively ($10.31
and $11.88 for the quarters ended September 30, 1998 and 1997, respectively).
Distributions for the nine months ended September 30, 1998 included $1,232,003
as a result of the distribution of the majority of the net sales proceeds from
the 1997 sale of the restaurant properties in Avon Park, Florida and Farmington
Hills, Michigan. This special distribution was effectively a return of a
portion of the Limited Partners' investment; although, in accordance with the
Income Fund agreement, it was applied to the Limited Partners' unpaid preferred
return. As a result of the sale of the restaurant properties, the Income Fund's
total revenue was reduced, while the majority of the Income Fund's operating
expenses remained fixed. Therefore, distributions of net cash flow were
adjusted for the nine months ended September 30, 1998. No distributions were
made to us for the quarters and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, are required to be or have been treated by the
Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We, as the general partners of the Income Fund, have the right, but not the
obligation, to make additional capital contributions if we deem it appropriate
in connection with the operations of the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $2,157,912, $2,347,731 and
$2,168,367 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, is
primarily a result of changes in the Income Fund's working capital, and the
increase in cash from operations during 1996, as compared to 1995, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below, and as a result of changes in the Income Fund's working
capital. Cash from operations was also affected by the following transactions
during the years ended December 31, 1997, 1996 and 1995.
In 1993, the Income Fund accepted a promissory note from the tenant of two
restaurant properties in Farmington Hills, Michigan, whereby $61,987, which had
been included in receivables for past due rents, was converted to a loan
receivable. The loan, which was non-interest bearing, was being collected in 48
monthly installments with collections commencing January 1993. The receivable
was collected in full during 1996.
In March 1996, the Income Fund accepted a promissory note from the former
tenant of the restaurant property in Gainesville, Texas, in the amount of
$96,502, representing past due rental and other amounts that had been included
in receivables and for which the Income Fund had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense by
the Income Fund. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11% per annum, commencing on June 1, 1996. Due
to the uncertainty of the collectibility of this note, the Income Fund
established an allowance for doubtful accounts and is recognizing income as
collected. During 1997, the Income Fund collected and recognized as income
approximately $18,100 relating to this promissory note. As of December 31, 1997
and 1996, the balances in the allowance for doubtful accounts relating to this
promissory note were $74,590 and $92,987, respectively, including accrued
interest of $2,654 and $3,493, respectively.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
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In November 1995, the Income Fund entered into a new lease for the
restaurant property in Lombard, Illinois. In connection therewith, the Income
Fund incurred approximately $40,600 in renovation costs which were paid during
the years ended December 31, 1996 and 1997. Additional renovation costs of
$25,000 were funded by the tenant, in accordance with the terms of the lease.
The renovations were completed in November 1996 and rental payments commenced
in July 1997, in accordance with the terms of the lease.
In January 1996, the Income Fund entered into a promissory note with CNL
Realty Corp., the corporate general partner, for a loan in the amount of
$26,300 in connection with the operations of the Income Fund. The loan, which
was uncollateralized and bore interest at a rate of prime plus 0.25% per annum
was due on demand. The Income Fund repaid the loan in full, along with
approximately $200 in interest, to the corporate general partner. In addition,
in 1996, the Income Fund entered into various promissory notes with the
corporate general partner for loans totalling $177,600 in connection with the
operations of the Income Fund. The loans were uncollateralized, non-interest
bearing and due on demand. As of December 31, 1996, the Income Fund had repaid
the loans in full to the corporate general partner. In addition, in 1997, the
Income Fund entered into various promissory notes with the corporate general
partner for loans totalling $721,000 in connection with the operations of the
Income Fund. The loans were uncollateralized, non-interest bearing and due on
demand. As of December 31, 1997, the Income Fund had repaid the loans in full
to the corporate general partner.
In January 1997, Show Low Joint Venture, in which the Income Fund owns a 64%
interest, sold its restaurant property to the tenant for $970,000, resulting in
a gain to the joint venture of approximately $360,000 for financial reporting
purposes. The restaurant property was originally contributed to Show Low Joint
Venture in July 1990 and had a total cost of approximately $663,500, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the joint
venture sold the restaurant property for approximately $306,500 in excess of
its original purchase price. In June 1997, Show Low Joint Venture reinvested
$782,413 of the net sales proceeds in a Darryl's restaurant property in
Greensboro, North Carolina. As of December 31, 1997, the Income Fund had
received approximately $124,400 representing a return of capital for its pro-
rata share of the uninvested net sales proceeds. The Income Fund used these
amounts to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners.
During 1997, the Income Fund sold its restaurant property in Eagan,
Minnesota, to the tenant, for $668,033 and received net sales proceeds of
$665,882, of which $42,000 were in the form of a promissory note, resulting in
a gain of $158,251 for financial reporting purposes. This restaurant property
was originally acquired by the Income Fund in August 1987 and had a cost of
approximately $601,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $64,800 in excess of its original purchase price. In October
1997, the Income Fund reinvested the net cash sales proceeds of approximately
$623,900 in a restaurant property in Mesa, Arizona, as tenants-in-common with
one of our affiliates. In connection therewith, the Income Fund and its
affiliate entered into an agreement whereby each co-venturer will share in the
profits and losses of the restaurant property in proportion to each co-
venturer's interest. The Income Fund owns a 57.77% interest in the restaurant
property. The Income Fund distributed amounts sufficient to enable the Limited
Partners to pay federal and state income taxes, if any (at a level reasonably
assumed by us), resulting from the sale.
In connection with the sale during 1997 of its restaurant property in Eagan,
Minnesota, the Income Fund accepted a promissory note in the principal sum of
$42,000. The promissory note bears interest at a rate of 10.50% per annum, is
collateralized by personal property and is being collected in 18 monthly
installments of interest only and thereafter, the entire principal balance
shall become due. As of December 31, 1997, the mortgage note receivable was
$42,734, including accrued interest of $734.
In addition, during 1997, the Income Fund sold its restaurant properties in
Jacksonville, Plant City and Avon Park, Florida; its restaurant property in
Mathis, Texas and two restaurant properties in Farmington Hills, Michigan to
third parties for aggregate sales prices of $4,162,006 and received aggregate
net sales proceeds (net of $18,430, which represents amounts due to the former
tenant for prorated rents) of $4,035,196, resulting in aggregate gains of
$1,317,873 for financial reporting purposes. These six restaurant properties
were
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originally acquired by the Income Fund during 1987 and had aggregate costs of
approximately $3,338,800, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold these six restaurant
properties for approximately $714,400, in the aggregate, in excess of their
original aggregate purchase prices. During 1997, the Income Fund reinvested
approximately $1,512,400 of these net sales proceeds in a restaurant property
in Vancouver, Washington, and a restaurant property in Smithfield, North
Carolina, as tenants-in-common with certain of our affiliates. As of December
31, 1997, remaining net sales proceeds from five of the six restaurant
properties of $2,470,175, including accrued interest of $12,505, were being
held in interest bearing escrow accounts. Some of the sales transactions, or
portions thereof, relating to the sales of these six restaurant properties and
the reinvestment of some of the net sales proceeds in additional restaurant
properties qualified as like-kind exchange transactions for federal income tax
purposes. However, the Income Fund distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes, if any (at a level
reasonably assumed by us), resulting from these sales and distributed the
remaining net sales proceeds to the Limited Partners in 1998. In connection
with the sale of both of the Farmington Hills, Michigan restaurant properties,
the Income Fund also received $214,000 as a lease termination fee from the
former tenant in consideration of the Income Fund's releasing the tenant from
its obligation under the terms of the leases.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing from us, however, the Income Fund
may borrow, in our discretion, for the purpose of maintaining the operations
and paying liabilities of the Income Fund including quarterly distributions.
The Income Fund will not borrow for the purpose of returning capital to the
Limited Partners. The Income Fund will not encumber any of the restaurant
properties in connection with any borrowing or advances. The Income Fund also
will not borrow under circumstances which would make the Limited Partners
liable to creditors of the Income Fund. Certain of our affiliates from time to
time incur certain operating expenses on behalf of the Income Fund for which
the Income Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At December 31, 1997, the
Income Fund had $470,194 invested in such short-term investments, as compared
to $318,756 at December 31, 1996.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $68,555, $103,909 and $95,036, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$126,284 and $45,078, respectively, to affiliates for such amounts and
accounting and administrative services. Amounts payable to other parties,
including distributions payable, decreased to $605,826 at December 31, 1997,
from $642,163 at December 31, 1996. Liabilities at December 31, 1997, to the
extent they exceed cash and cash equivalents at December 31, 1997, will be paid
from future cash from operations, from proceeds from sales of restaurant
properties as described above, from collections of amounts received in
accordance with the agreement relating to past due rents described above, and,
in the event we elect to make additional contributions or loans to the Income
Fund, from future contributions or loans from us.
Based primarily on current and anticipated future cash from operations, the
return of capital from Show Low Joint Venture, a portion of the proceeds
received from the sale of restaurant properties as described above, and loans
received from us, the Income Fund declared distributions to the Limited
Partners of $2,376,000 for each of the years ended December 31, 1997, 1996 and
1995. This represents distributions of $47.52 per Unit for each of the years
ended December 31, 1997, 1996 and 1995. In deciding whether to sell restaurant
properties, we will consider factors such as potential capital appreciation,
net cash flow, and federal income tax considerations. The reduced number of
restaurant properties for which the Income Fund receives rental payments, as
well as ongoing operations, is expected to reduce the Income Fund's revenues.
The decrease in Income Fund revenues, combined with the fact that a significant
portion of the Income Fund's expenses are fixed in nature, is expected to
result in a decrease in cash distributions to the Limited Partners during 1998.
No
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amounts distributed or to be distributed to the Limited Partners for the years
ended December 31, 1997, 1996 and 1995, are required to be treated by the
Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases for the Income Fund's restaurant 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 Income Fund has
insufficient funds for such purposes, we will contribute to the Income Fund an
aggregate amount of up to one percent of the offering proceeds for maintenance
and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 36 wholly-owned restaurant properties (including seven restaurant
properties sold in 1997), and during the nine months ended September 30, 1998,
the Income Fund owned and leased 29 wholly-owned restaurant properties, to
operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $1,323,420 and $1,589,749, respectively, in rental income and
contingent rental income from these restaurant properties, $452,276 and
$545,365 of which was earned during the quarters ended September 30, 1998 and
1997, respectively. The decrease in rental income and contingent rental income
during the quarter and nine months ended September 30, 1998, as compared to the
quarter and nine months ended September 30, 1997 is primarily attributable to a
decrease in rental income and contingent rental income as a result of the sales
of seven restaurant properties during 1997. The Income Fund reinvested the
majority of the net sales proceeds from the 1997 sales of several restaurant
properties in restaurant properties held as tenants-in-common with certain of
our affiliates resulting in an increase in equity in earnings of joint
ventures, as described below. Rental income and contingent rental income are
expected to remain at reduced amounts as a result of the Income Fund
distributing the majority of the net sales proceeds from the 1997 sales of the
restaurant properties in Avon Park, Florida and Farmington Hills, Michigan.
In addition, during the nine months ended September 30, 1998 and 1997, the
Income Fund earned $60,100 and $34,466, respectively in interest and other
income, $17,361 and $17,521 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in interest and other
income for the nine months ended September 30, 1998 is primarily due to an
increase in interest income earned on net sales proceeds relating to the sales
of several properties during 1997 described above, pending the reinvestment of
the net sales proceeds in additional restaurant properties and distributions to
Limited Partners.
For the nine months ended September 30, 1997, the Income Fund also owned and
leased four restaurant properties indirectly through joint venture arrangements
(including one restaurant property in Show Low Joint Venture, which was sold in
January 1997) and one restaurant property as tenants-in-common with one of our
affiliates. In addition, for the nine months ended September 30, 1998, the
Income Fund owned and leased three restaurant properties indirectly through
joint venture arrangements and six restaurant properties as tenants-in-common
with certain of our affiliates. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund earned $319,894 and
$333,517, respectively, attributable to net income earned by these joint
ventures, $104,979 and $40,610 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The decrease in net income earned by
joint ventures for the nine months ended September 30, 1998, is primarily
attributable to the fact that in January 1997, Show Low Joint Venture, in
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which the Income Fund owns a 64% interest, recognized a gain of approximately
$360,000 for financial reporting purposes as a result of the sale of its
restaurant property. Show Low Joint Venture reinvested the majority of the net
sales proceeds in an additional property in June 1997. The decrease in net
income earned by joint ventures during the nine months ended September 30,
1998, is partially offset by, and the increase in net income earned by joint
ventures during the quarter ended September 30, 1998 is primarily attributable
to, the fact that subsequent to September 30, 1997, the Income Fund reinvested
the net sales proceeds from the sale of five restaurant properties during 1997,
in five restaurant properties with certain of our affiliates as tenants-in-
common.
Operating expenses, including depreciation and amortization, were $424,970
and $448,861 for the nine months ended September 30, 1998 and 1997,
respectively, of which $153,104 and $138,539 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. Depreciation expense during
the quarter and nine months ended September 30, 1998, decreased, as compared to
the same periods in 1997, primarily as a result of the sales of several
restaurant properties during 1997. General operating and administrative
expenses increased during the quarter and nine months ended September 30, 1998,
primarily due to the Income Fund incurring roof repairs relating to the
restaurant property in Lombard, Illinois. The Income Fund has entered into a
new lease for this restaurant property and does not anticipate incurring such
expenses in future periods.
During the nine months ended September 30, 1998, the Income Fund recorded
deferred, subordinated real estate disposition fees of $45,150 payable to CNL
Fund Advisors, Inc. relating to the 1997 sales of the restaurant properties in
Avon Park, Florida and Farmington Hills, Michigan. Initially, the Income Fund
considered reinvesting the sales proceeds in additional restaurant properties
and therefore did not include these amounts in the determination of the gain on
sale for financial reporting purposes during 1997. However, during the nine
months ended September 30, 1998, the Income Fund declared a special
distribution of net sales proceeds from these restaurant properties payable to
the Limited Partners. Accordingly, the Income Fund recorded these subordinated
real estate disposition fees during the nine months ended September 30, 1998.
The payment of these fees is subordinated to the Limited Partners receiving
their 10% preferred return and their adjusted capital.
As a result of the sales of the restaurant properties in Eagan, Minnesota
and Jacksonville, Florida, during 1997, the Income Fund recognized gains of
$301,901 and $460,152 for financial reporting purposes during the quarter and
nine months ended September 30, 1997, respectively. No restaurant properties
were sold during the quarter and nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, 1996 and 1997, the Income Fund owned and leased 36 wholly-owned
restaurant properties (including seven restaurant properties, one in each of
Eagan, Minnesota, which was sold in June 1997, Jacksonville, Florida, which was
sold in September 1997, Plant City, Florida, which was sold in October 1997,
Mathis, Texas and Avon Park, Florida which were sold in December 1997 and two
restaurant properties in Farmington Hills, Michigan, which were sold in October
1997). In addition, during 1995, 1996 and 1997, the Income Fund was a co-
venturer in three separate joint ventures that each owned and leased one
restaurant property, and during 1995 and 1996, the Income Fund and an affiliate
owned and leased one restaurant property as tenants-in-common. During 1997, the
Income Fund owned and leased four restaurant properties with affiliates as
tenants-in-common. As of December 31, 1997, the Income Fund owned, either
directly, as tenants-in-common with affiliates, or through joint venture
arrangements, 36 restaurant properties, which are, in general, subject to long-
term triple-net leases. The leases of the restaurant properties provide for
minimum base annual rental amounts (payable in monthly installments) ranging
from approximately $8,100 to $222,800. Generally, the leases provide for
percentage rent based on sales in excess of a specified amount to be paid
annually. In addition, certain leases provide for increases in the annual base
rent during the lease term.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $2,024,119, $2,224,500 and $2,207,971, respectively, in rental income
from the Income Fund's wholly-owned restaurant
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properties described above. Rental income for 1997, as compared to 1996,
decreased approximately $218,900 primarily as the result of the sales during
1997 of the two restaurant properties in Farmington Hills, Michigan and the
restaurant properties in Plant City, Florida; Mathis, Texas; Jacksonville,
Florida; Eagan, Michigan and Avon Park, Florida. The decrease in rental income
was partially offset by an increase of approximately $12,200 during 1997 due to
the fact that rental payments began in July 1997 under the new lease for the
restaurant property in Lombard, Illinois, as described above in "Liquidity and
Capital Resources." Rental income earned from wholly-owned restaurant
properties is expected to decrease during 1998 as a result of the Income Fund
reinvesting the net sales proceeds in restaurant properties held as tenants-in-
common with certain of our affiliates, and distributing net sales proceeds to
the Limited Partners, as described above in "Liquidity and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $68,920, $79,313 and $70,159, respectively, in contingent rental
income. The decrease in contingent rental income for 1997, as compared to 1996,
is primarily due to the sales of several restaurant properties, the leases of
which required the payment of contingent rental income. Contingent rental
income for the year ended December 31, 1996, as compared to 1995, increased
primarily as a result of an increase in gross sales of certain restaurant
properties that are subject to leases requiring the payment of contingent
rental income.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $389,915, $130,996 and $153,677, respectively, attributable to net
income earned by joint ventures in which the Income Fund is a co-venturer. The
increase in net income earned by joint ventures is primarily attributable to
the fact that Show Low Joint Venture, in which the Income Fund owns a 64%
interest, recognized a gain of approximately $360,000 for financial reporting
purposes as a result of the sale of its restaurant property in January 1997, as
described above in "Liquidity and Capital Resources." Show Low Joint Venture
reinvested the majority of the net sales proceeds in an additional restaurant
property in June 1997. In addition, the increase in net income earned by joint
ventures during 1997, as compared to 1996, is attributable to the fact that
during 1997, the Income Fund acquired an interest in a restaurant property in
Mesa, Arizona, a restaurant property in Smithfield, North Carolina and a
restaurant property in Vancouver, Washington, all of which are owned with
affiliates as tenants-in-common, as described above in "Liquidity and Capital
Resources." The increase in net income earned by joint ventures during 1997, as
compared to 1996, and the decrease in net income earned by joint ventures
during 1996, as compared to 1995, is primarily a result of the fact that during
1996, the former tenant of the restaurant property in Arvada, Colorado, owned
with an affiliate as tenants-in-common, defaulted under the terms of its lease.
The Income Fund and the affiliate, as tenants-in-common, entered into a new
lease for this restaurant property with a new tenant during 1996.
During at least one of the years ended December 31, 1997, 1996 and 1995, two
of the Income Fund's lessees, Golden Corral Corporation and Restaurant
Management Services, Inc., each contributed more than 10% of the Income Fund's
total rental income (including the Income Fund's share of rental income from
three restaurant properties owned by joint ventures and four restaurant
properties owned with affiliates as tenants-in-common). As of December 31,
1997, Golden Corral Corporation was the lessee under leases relating to six
restaurants and Restaurant Management Services, Inc. was the lessee under
leases relating to four restaurants. It is anticipated that, based on the
minimum annual rental payments required by the leases, Golden Corral
Corporation will continue to contribute more than 10% of the Income Fund's
total rental income during 1998 and subsequent years. In addition, during at
least one of the three years ending December 31, 1997, 1996 and 1995, five
restaurant chains, Golden Corral, Popeyes, KFC, Denny's and Wendy's, each
accounted for more than 10% of the Income Fund's total rental income (including
the Income Fund's share of the rental income from three restaurant properties
owned by joint ventures and four restaurant properties owned with affiliates as
tenants-in-common). In subsequent years, it is anticipated that Golden Corral,
Popeyes, KFC and Wendy's each will continue to account for more than 10% of the
total rental income to which the Income Fund is entitled under the terms of its
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$598,098, $588,923 and $617,237 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating
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expenses during 1997, as compared to 1996, is partially due to the fact that
the Income Fund recorded bad debt expense for past due rental amounts relating
to the restaurant property in Eagan, Minnesota, due to financial difficulties
of the tenant. This restaurant property was sold in June 1997, as described
above in "Liquidity and Capital Resources." The increase in operating expenses
during 1997, as compared to 1996, was also attributable to, and the decrease in
operating expenses during 1996, as compared to 1995, was partially offset by,
an increase in accounting and administrative expenses associated with operating
the Income Fund and its restaurant properties.
The increase in operating expenses during 1997, as compared to 1996, was
partially offset by a decrease in depreciation expense which resulted from the
sale of the seven restaurant properties during 1997, as described above in
"Liquidity and Capital Resources." The decrease in operating expenses during
1996, as compared to 1995, was primarily a result of the fact that during 1995,
the Income Fund expensed the balance of unamortized lease costs totalling
approximately $35,600, relating to the original lease for the restaurant
property in Gainesville, Texas, following the termination of such lease during
the year ended December 31, 1995.
As a result of the sales of the two restaurant properties in Farmington
Hills, Michigan and the restaurant properties in Eagan, Minnesota;
Jacksonville, Florida; Plant City, Florida; Mathis, Texas and Avon Park,
Florida, as described above in "Liquidity and Capital Resources," the Income
Fund recognized gains totalling $1,476,124 during the year ended December 31,
1997, for financial reporting purposes. In addition, in connection with the
sale of the restaurant properties in Farmington Hills, Michigan, the Income
Fund also received $214,000 as a lease termination fee from the former tenant
in consideration of the Income Fund's releasing the tenant from its obligation
under the terms of the leases. No such transactions occurred during the years
ended December 31, 1996 and 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." The adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are, in general, triple-
net leases and contain provisions that we 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
(for certain restaurant properties) over time. Continued inflation also may
cause capital appreciation of the Income Fund's restaurant 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
restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
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The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of our affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND III, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on June
1, 1987, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of selected national and regional fast-food restaurant
chains. The leases generally are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 28 restaurant
properties which included interests in three restaurant properties owned by
joint ventures in which the Income Fund is a co-venturer and three restaurant
properties owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received,
less cash paid for expenses) of $1,376,910 and $1,500,218, respectively. The
decrease in cash from operations for the nine months ended September 30, 1998,
is primarily a result of changes in income and expenses as described in
"Results of Operations" below and changes in the Income Fund's working
capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In January 1998, the Income Fund used the net sales proceeds from the 1997
sale of the restaurant property in Mason City, Iowa to acquire a restaurant
property located in Overland Park, Kansas, as tenants-in-common with certain
of our affiliates. In connection therewith, the Income Fund and the affiliates
entered into an agreement whereby each co-venturer will share in the profits
and losses of the restaurant property in proportion to its applicable
percentage interest. As of September 30, 1998, the Income Fund owned a 25.84%
interest in this restaurant property.
During the nine months ended September 30, 1998, the Income Fund sold its
restaurant properties in Daytona Beach, Fernandina Beach and Punta Gorda,
Florida, and Hagerstown, Maryland, for a total of approximately $3,280,000 and
received net sales proceeds of $3,214,616, resulting in a total gain of
$596,586 for financial reporting purposes. In connection with the sales of the
restaurant properties in Daytona Beach and Fernandina Beach, Florida, the
Income Fund incurred deferred, subordinated, real estate disposition fees of
$53,400. The Income Fund distributed $1,477,747 of the net sales proceeds as a
special distribution to the Limited Partners, used a portion of the net sales
proceeds to acquire an interest in RTO Joint Venture, as described below, and
intends to use the remaining net sales proceeds to reinvest in additional
restaurant properties or use for other Income Fund purposes. The Income Fund
anticipates that it will distribute amounts sufficient to enable the Limited
Partners to pay federal and state income taxes, if any (at a level reasonably
assumed by us), resulting from these sales.
As described above, in May 1998, the Income Fund entered into a joint
venture, RTO Joint Venture, with one of our affiliates, to construct and hold
one restaurant property. As of September 30, 1998, the Income Fund had
contributed $629,925 to purchase land and pay for construction relating to the
joint venture. The Income Fund has agreed to contribute approximately $36,100
in additional construction costs to the joint venture. When construction is
completed, the Income Fund will have an approximate 47% interest in the
profits and losses of the joint venture.
In September 1998, the Income Fund entered into a new lease agreement for
the Golden Corral restaurant property located in Stockbridge, Georgia. In
connection therewith, the Income Fund funded $150,000 in renovation costs.
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In connection with the sale of the restaurant property in Roswell, Georgia,
in June 1997, the Income Fund accepted a promissory note in the principal sum
of $685,000 collateralized by a mortgage on the restaurant property. During the
nine months ended September 30, 1998, the Income Fund collected the full amount
of the outstanding mortgage note receivable balance. The Income Fund intends to
use the mortgage note proceeds to invest in an additional restaurant property
or for other Income Fund purposes.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts and other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,726,345 invested in such short-term investments, as compared
to $493,118 at December 31, 1997. The increase in cash and cash equivalents at
September 30, 1998, is primarily attributable to the remaining net sales
proceeds relating to the sale of the restaurant properties in Daytona Beach,
Punta Gorda and Fernandina Beach, Florida, and Hagerstown, Maryland, at
September 30, 1998, and the receipt of the balance of the mortgage note
receivable as described above. The funds remaining at September 30, 1998, will
be used to pay distributions and other liabilities, to make additional
contributions to RTO Joint Venture to pay for additional construction costs
relating to the restaurant property owned by the joint venture and to acquire
an additional restaurant property.
Total liabilities of the Income Fund, including distributions payable,
decreased to $696,791 at September 30, 1998, from $729,249 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on current and anticipated future cash from operations and proceeds
received from the sales of several restaurant properties during 1998 and 1997,
the Income Fund declared distributions to Limited Partners of $2,977,747 and
$1,782,000 for the nine months ended September 30, 1998 and 1997, respectively
($500,000 and $594,000 for the quarters ended September 30, 1998 and 1997,
respectively). This represents distributions of $59.55 and $35.64 per unit for
the nine months ended September 30, 1998 and 1997, respectively ($10.00 and
$11.88 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $1,477,747 as a result of the distribution of net sales proceeds from
the sale of the restaurant properties in Fernandina Beach and Daytona Beach,
Florida. This special distribution was effectively a return of a portion of the
Limited Partners' investment, although, in accordance with the Income Fund
agreement, it was applied to the Limited Partners' unpaid cumulative preferred
return. As a result of the sale of the restaurant properties, the Income Fund's
total revenue was reduced, while the majority of the Income Fund's operating
expenses remained fixed. Therefore, distributions of net cash flow were
adjusted for the nine months ended September 30, 1998. No distributions were
made to us for the quarter and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, are required to be or have been treated by the
Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest
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received, less cash paid for expenses). Cash from operations was $2,021,689,
$2,091,754 and $2,203,437 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in cash from operations during 1997 and 1996, each
as compared to the previous year, is primarily a result of changes in income
and expenses as described in "Results of Operations" below and changes in the
Income Fund's working capital during each of the respective years. Cash from
operations was also affected by the following transactions during the years
ended December 31, 1997, 1996 and 1995.
In February 1995, the tenant of the Po Folks restaurant property in
Hagerstown, Maryland, ceased operations of the restaurant business located on
such restaurant property and discontinued payment of rental amounts as provided
in its lease agreement. Due to the uncertainty of the collectibility of the
past due rental amounts, the Income Fund established an allowance for doubtful
accounts relating to the amount due from the former tenant. At December 31,
1995, the balance in the allowance for doubtful accounts for this restaurant
property was $259,242; therefore, no amount was included in receivables at
December 31, 1995, relating to this restaurant property. In addition, at
December 31, 1995, the balance in the allowance for doubtful accounts for the
Denny's restaurant property in Hagerstown, Maryland, (which was leased to the
same tenant of the Po Folks restaurant property) for past due rental amounts
was $76,948. In September 1996, the Income Fund agreed to accept $175,000 in
the form of promissory notes from the new tenant of the Denny's restaurant
property, as full satisfaction of past due rental amounts and past due real
estate taxes from the former tenant of the Denny's and Po Folks restaurant
properties. In connection therewith, during 1996, the Income Fund recognized
approximately $118,700 in base rental income for amounts which the Income Fund
had previously established an allowance for doubtful accounts, and wrote off
the remaining balances in the allowance for doubtful accounts. During 1996, the
Income Fund accepted a three year promissory note for $25,000, which bears
interest at 10% per annum and for which collections commenced in October 1996.
Receivables at December 31, 1997, include approximately $16,300 relating to
this promissory note. However, due to the uncertainty of the collectibility of
the remaining $150,000 to be received from the new tenant of the Denny's
restaurant property, the Income Fund established an allowance for doubtful
accounts of $150,000 during the year ended December 31, 1997. The Income Fund
sold this restaurant property in June 1998.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In January 1996, the Income Fund entered into a promissory note with CNL
Realty Corp., the corporate general partner, for a loan in the amount of
$86,200 in connection with the operations of the Income Fund. The loan was
uncollateralized, bore interest at a rate of prime plus 0.25% per annum and was
due on demand. The Income Fund repaid the loan in full, along with
approximately $660 in interest, to the corporate general partner. In addition,
during 1996, the Income Fund entered into various promissory notes with the
corporate general partners for loans totaling $575,200 in connection with the
operations of the Income Fund. The loans were uncollateralized, non-interest
bearing and due on demand. The Income Fund had repaid the loans in full to the
corporate general partner as of December 31, 1996. In addition, during 1997,
the Income Fund entered into various promissory notes with the corporate
general partner for loans totaling $117,000 in connection with the operations
of the Income Fund. The loans were uncollateralized, non-interest bearing and
due on demand. As of December 31, 1997, the Income Fund had repaid the loans in
full to the corporate general partner.
In January 1997, the Income Fund sold its restaurant property in Chicago,
Illinois, to a third party, for $505,000 and received net sales proceeds of
$496,418, resulting in a gain of $3,827 for financial reporting purposes. The
Income Fund used $452,000 of the nets sales proceeds to pay liabilities of the
Income Fund, including quarterly distributions to the Limited Partners. The
balance of the proceeds was used to pay past due real estate taxes on this
restaurant property incurred by the Income Fund as a result of the former
tenant declaring bankruptcy. The Income Fund distributed amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, if any, (at
a level reasonably assumed by us), resulting from the sale.
In March 1997, the Income Fund sold its restaurant property in Bradenton,
Florida, to the tenant, for $1,332,154 and received net sales proceeds (net of
$4,330 which represents real estate tax amounts due from
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tenant) of $1,305,671, resulting in a gain of $361,368 for financial reporting
purposes. This restaurant property was originally acquired by the Income Fund
in June 1988 and had a cost of approximately $1,080,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $229,500 in excess of its original
purchase price. In June 1997, the Income Fund reinvested approximately
$1,276,000 of the net sales proceeds received in a restaurant property
in Fayetteville, North Carolina. The Income Fund intends to use the remaining
net sales proceeds for other Income Fund purposes. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Bradenton, Florida, and the reinvestment of the proceeds in a
restaurant property in Fayetteville, North Carolina, qualified as a like-kind
exchange transaction for federal income tax purposes. However, the Income Fund
distributed amounts sufficient to enable the Limited Partners to pay federal
and state income taxes, if any (at a level reasonably assumed by us), resulting
from the sale.
In April 1997, the Income Fund sold its restaurant property in Kissimmee,
Florida, to a third party for $692,400 and received net sales proceeds of
$673,159, resulting in a gain of $271,929 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in March
1988 and had a cost of approximately $474,800, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $196,400 in excess of its original
purchase price. In July 1997, the Income Fund reinvested approximately $511,700
of these net sales proceeds in a restaurant property located in Englewood,
Colorado, as tenants-in-common with one of our affiliates. In connection
therewith, the Income Fund and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to each co-venturer's percentage interest. As of
December 31, 1997, the Income Fund owned a 32.77% interest in the restaurant
property. In January 1998, the Income Fund reinvested the remaining net sales
proceeds in the restaurant property in Overland Park, Kansas, with our
affiliates, as tenants-in-common. We believe that the transaction, or a portion
thereof, relating to the sale of the restaurant property in Kissimmee, Florida,
and the reinvestment of a portion of the proceeds in an IHOP restaurant
property in Englewood, Colorado, qualified as a like-kind exchange transaction
for federal income tax purposes. However, the Income Fund distributed amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any (at a level reasonably assumed by us), resulting from the sale.
In April 1996, the Income Fund received $51,400 as partial settlement in a
right of way taking relating to a parcel of land of the restaurant property in
Plant City, Florida. In April 1997, the Income Fund received the remaining
proceeds of $73,600 finalizing the sale of the land parcel. In connection
therewith, the Income Fund recognized a gain of $94,320 for financial reporting
purposes.
In addition, in June 1997, the Income Fund sold its restaurant property in
Roswell, Georgia, to a third party for $985,000 and received net sales proceeds
of $942,981, resulting in a gain of $237,608 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in June
1988 and had a cost of approximately $775,200, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $167,800 in excess of its original
purchase price. In connection therewith, the Income Fund received $257,981 in
cash and accepted the remaining sales proceeds in the form of a promissory note
in the principal sum of $685,000, collateralized by a mortgage on the
restaurant property. The promissory note bore interest at a rate of nine
percent per annum and was collected in full, with interest, during the nine
months ended September 30, 1998. In December 1997, the Income Fund reinvested a
portion of the net sales proceeds in a restaurant property located in Miami,
Florida, as tenants-in-common with one of our affiliates. In connection
therewith, the Income Fund and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to each co-venturer's percentage interest. As of
December 31, 1997, the Income Fund owned a 9.84% interest in the restaurant
property. The Income Fund distributed amounts sufficient to enable the Limited
Partners to pay federal and state income taxes, if any (at a level reasonably
assumed by us), resulting from the sale.
In October 1997, the Income Fund sold its restaurant property in Mason City,
Iowa, to the tenant for $218,790 and received net sales proceeds (net of $511
which represents prorated rent returned to the tenant) of
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$216,528, resulting in a gain of $58,538 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in March 1988
and had a cost of approximately $190,300, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $26,700 in excess of its original
purchase price. In January 1998, the Income Fund reinvested the net sales
proceeds in a restaurant property in Overland Park, Kansas, with certain of our
affiliates, as tenants-in-common. We believe that the transaction, or a portion
thereof, relating to the sale of the restaurant property in Mason City, Iowa,
and the reinvestment of the proceeds in a restaurant property in Overland Park,
Kansas, with affiliates as tenants-in-common qualified as a like-kind exchange
transaction for federal income tax purposes. However, the Income Fund
distributed amounts sufficient to enable the Limited Partners to pay federal
and state income taxes, if any (at a level reasonably assumed by us), resulting
from the sale.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowings from us, however, the Income Fund
may borrow, in our discretion, for the purpose of maintaining the operations of
the Income Fund. The Income Fund will not encumber any of the restaurant
properties in connection with any borrowings or advances. The Income Fund also
will not borrow under circumstances which would make the Limited Partners
liable to creditors of the Income Fund. Certain of our affiliates from time to
time incur certain operating expenses on behalf of the Income Fund for which
the Income Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At December 31, 1997, the
Income Fund had $493,118 invested in such short-term investments as compared to
$57,751 at December 31, 1996. The increase in cash and cash equivalents is
primarily attributable to the fact that during 1997, the Income Fund used net
sales proceeds from the sales of restaurant properties to pay a portion of the
liabilities of the Income Fund, including quarterly distributions to the
Limited Partners. During 1996, the Income Fund used cash generated from
operations to pay liabilities of the Income Fund.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $71,681, $108,900 and $149,252, respectively, for certain
operating expenses. At December 31, 1997 and 1996, the Income Fund owed $82,239
and $102,859, respectively, to affiliates for such amounts and accounting and
administrative services. In addition, during the year ended December 31, 1997,
the Income Fund incurred $15,150 in real estate disposition fees due to an
affiliate as a result of services provided in connection with the sale of the
restaurant property in Chicago, Illinois. The payment of such fees is deferred
until the Limited Partners have received the sum of their 10% Preferred Return
and their adjusted capital contributions. Amounts payable to other parties,
including distributions payable, decreased to $611,116 at December 31, 1997,
from $681,010 at December 31, 1996. The decrease in amounts payable to other
parties was primarily attributable to a decrease in accrued and escrowed real
estate taxes at December 31, 1997. Total liabilities at December 31, 1997, to
the extent they exceed cash and cash equivalents at December 31, 1997, will be
paid from future cash from operations, proceeds from the sales of restaurant
properties as described above, and in the event we elect to make additional
contributions or loans to the Income Fund, from future contributions or loans
from us.
Based primarily on current and anticipated cash from operations, the Income
Fund declared distributions to the Limited Partners of $2,376,000 for each of
the years ended December 31, 1997, 1996 and 1995. This represents distributions
of $47.52 per unit for each of the years ended December 31, 1997, 1996 and
1995. We expect to distribute some or all of the net sales proceeds from the
sales of the restaurant properties in Fernandina Beach and Daytona Beach,
Florida, to the Limited Partners. In deciding whether to sell restaurant
properties, we will consider factors such as potential capital appreciation,
net cash flow, and federal income tax considerations. The reduced number of
restaurant properties for which the Income Fund receives rental payments, as
well as ongoing operations, is expected to reduce the Income Fund's revenues.
The decrease in
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Income Fund revenues, combined with the fact that a significant portion of the
Income Fund's expenses are fixed in nature, is expected to result in a decrease
in cash distributions to the Limited Partners during 1998. No amounts
distributed to the Limited Partners for the years ended December 31, 1997, 1996
or 1995 are required to be or have been treated by the Income Fund as a return
of capital for purposes of calculating the Limited Partners return on their
adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases for the Income Fund's restaurant properties are generally 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 32
wholly-owned restaurant properties (including five restaurant properties which
were sold in 1997) and during the nine months ended September 30, 1998, the
Income Fund and its consolidated joint venture owned and leased 27 wholly-owned
restaurant properties (including four restaurant properties which were sold in
1998), to operators of fast-food and family-style restaurant chains. In
connection therewith, during the nine months ended September 30, 1998 and 1997,
the Income Fund and Tuscawilla Joint Venture earned $1,196,056 and $1,593,167,
respectively, in rental income from operating leases (net of adjustments to
accrued rental income), earned income from direct financing leases and
contingent rental income for these restaurant properties, $355,160 and $494,795
of which was earned during the quarters ended September 30, 1998 and 1997,
respectively. The decrease in rental, earned and contingent rental income
during the quarter and nine months ended September 30, 1998, as compared to the
quarter and nine months ended September 30, 1997, is partially attributable to
a decrease of approximately $73,500 and $325,200, respectively, as a result of
the sales of restaurant properties during 1997 and 1998. The decrease in rental
income was partially offset by an increase of approximately $69,100 for the
nine months ended September 30, 1998, due to the reinvestment of the majority
of the net sales proceeds from the 1997 sale of the restaurant property in
Bradenton, Florida, in a restaurant property in Fayetteville, North Carolina in
June 1997. The Income Fund reinvested the net sales proceeds from the 1997
sales of the restaurant properties in Kissimmee, Florida, Roswell, Georgia and
Mason City, Iowa, in restaurant properties held as tenants-in-common with
certain of our affiliates resulting in an increase in equity in earnings of
joint venture as described below.
Rental, earned and contingent rental income also decreased during the nine
months ended September 30, 1998 due to the fact that, during the nine months
ended September 30, 1998, (i) the tenant of the restaurant property in Canton
Township, Michigan, vacated the restaurant property and ceased operations and
(ii) the Income Fund terminated the lease with the tenant of the restaurant
property in Hazard, Kentucky. Due to the fact that the Income Fund had
recognized accrued rental income since the inception of these leases relating
to the straight lining of future scheduled rent increases in accordance with
generally accepted accounting principles, the Income Fund wrote off
approximately $80,800 of such accrued rental income relating to these
restaurant properties during the nine months ended September 30, 1998
approximately $29,500 of which was written off during the quarter ended
September 30, 1998. The Income Fund is currently seeking either replacement
tenants or purchasers for these restaurant properties. Rental and earned income
are expected to remain at reduced amounts until the Income Fund executes new
leases for these restaurant properties or
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until the restaurant properties are sold and the proceeds from such sales are
reinvested in additional restaurant properties.
Rental and earned income during the nine months ended September 30, 1998 and
1997, remained at reduced amounts due to the fact that the Income Fund did not
receive any rental income relating to the Po Folks restaurant property in
Hagerstown, Maryland. In June 1998, the Income Fund sold the restaurant
property to a third party. The Income Fund intends to reinvest the net sales
proceeds in an additional restaurant property.
During the nine months ended September 30, 1997, the Income Fund owned and
leased one restaurant property indirectly through a joint venture arrangement
and one restaurant property as tenants-in-common with one of our affiliates.
During the nine months ended September 30, 1998, the Income Fund owned and
leased three restaurant properties as tenants-in-common with certain of our
affiliates and three restaurant properties indirectly through joint venture
arrangements. In connection therewith, during the nine months ended September
30, 1998 and 1997, the Income Fund recorded a loss of $34,343 and $12,496,
respectively, attributable to losses recorded by these joint ventures, a loss
of $75,617 and $9,494 during the quarters ended September 30, 1998 and 1997,
respectively. The losses recorded during the quarter and nine months ended
September 30, 1998 and 1997 are primarily attributable to the fact that, during
July 1997, the operator of the restaurant property owned by Titusville Joint
Venture vacated the restaurant property and ceased operations. In conjunction
therewith, the joint venture established an allowance for doubtful accounts
during the quarter and nine months ended September 30, 1997, for past due
rental amounts. During the nine months ended September 30, 1998, the joint
venture wrote off all uncollected balances and established an allowance for
loss on land and building for its restaurant property in Titusville, Florida of
approximately $139,300. The allowance represents the difference between the
restaurant property's net carrying value at September 30, 1998, and the current
estimated net realizable value of the restaurant property. The joint venture is
currently seeking either a replacement tenant or purchaser for this restaurant
property. The losses recorded by Titusville Joint Venture during the quarter
and nine months ended September 30, 1998 and 1997, were partially offset by the
fact that the Income Fund reinvested a portion of the net sales proceeds it
received from the 1997 and 1998 sales of several restaurant properties, in
three restaurant properties with certain of our affiliates as tenants-in-common
and one restaurant property through a joint venture arrangement with one of our
affiliates.
Operating expenses, including depreciation and amortization expense, were
$392,662 and $425,173 for the nine months ended September 30, 1998 and 1997,
respectively, of which $113,310 and $131,090 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to a decrease in depreciation expense due to the sales of several
restaurant properties during 1998 and 1997.
As a result of the sales of three restaurant properties during the nine
months ended September 30, 1998, as described above in "Liquidity and Capital
Resources," and as a result of the sales of four restaurant properties during
the nine months ended September 30, 1997, the Income Fund recognized total
gains during the nine months ended September 30, 1998 and 1997, of $583,373 and
$969,052, respectively, for financial reporting purposes.
During the nine months ended September 30, 1997, the Income Fund recorded an
allowance for loss on land and building of $32,819, for financial reporting
purposes, relating to the Po Folks restaurant property in Hagerstown, Maryland.
The loss represented the difference between the restaurant property's net
carrying value at September 30, 1997 and the estimated net realizable value of
this restaurant property. During June 1998, the Income Fund sold this
restaurant property and recognized a gain of $13,213 for financial reporting
purposes.
In addition, during the nine months ended September 30, 1998, the Income
Fund recorded an allowance for loss on land and building of $99,865 for
financial reporting purposes, relating to the restaurant property in Hazard,
Kentucky. The loss represents the difference between the restaurant property's
net carrying value and the current estimated net realizable value of the
restaurant property.
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The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1995 and 1996, the Income Fund owned and
leased 30 wholly-owned restaurant properties and during 1997, the Income Fund
owned and leased 31 wholly-owned restaurant properties (including five
restaurant properties, one in each of Chicago, Illinois; Bradenton, Florida;
Kissimmee, Florida; Roswell, Georgia and Mason City, Iowa, which were sold
during the year ended December 31, 1997). In addition, during the years ended
December 31, 1997, 1996 and 1995, the Income Fund was a co-venturer in two
separate joint ventures that each owned and leased one restaurant property and
during 1997, the Income Fund owned and leased two restaurant properties, with
certain of our affiliates, as tenants-in-common. As of December 31, 1997, the
Income Fund owned, either directly or through joint venture arrangements, 30
restaurant properties which are, in general, subject to long-term, triple-net
leases. The leases of the restaurant properties provide for minimum base annual
rental amounts (payable in monthly installments) ranging from approximately
$23,000 to $191,900. All of the leases provide for percentage rent based on
sales in excess of a specified amount. In addition, some leases provide for
increases in the annual base rent during the lease term.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Tuscawilla Joint Venture, earned $1,930,486,
$2,273,850 and $2,188,000, respectively, in rental income from operating leases
and earned income from direct financing leases. The decrease in rental and
earned income during 1997, as compared to 1996, is partially attributable to a
decrease of approximately $219,700 as a result of the sales of the restaurant
properties in Chicago, Illinois (in January 1997), Bradenton, Florida (in March
1997), Kissimmee, Florida (in April 1997), Roswell, Georgia (in June 1997), and
Mason City, Iowa (in October 1997), as described above in "Liquidity and
Capital Resources." During 1997, the decrease in rental income was partially
offset by an increase of approximately $86,200 due to the reinvestment of a
portion of these net sales proceeds in a restaurant property in Fayetteville,
North Carolina, in June 1997, as described above in "Liquidity and Capital
Resources."
The decrease in rental and earned income during 1997, as compared to 1996,
and the increase during 1996, as compared to 1995, is partially attributable to
the fact that during 1996, the Income Fund entered into a new lease with a new
tenant for the Denny's restaurant property in Hagerstown, Maryland, and in
connection therewith, recognized as income approximately $118,700 for which the
Income Fund had previously established an allowance for doubtful accounts
relating to the Denny's and Po Folks restaurant properties in Hagerstown,
Maryland, as described above in "Liquidity and Capital Resources." The decrease
in 1997, as compared to 1996, is also partially attributable to the fact that
during 1997, the Income Fund established an allowance for doubtful accounts of
approximately $77,100 for past due amounts for these restaurant properties due
to the uncertainty of the collectibility of these amounts.
Rental and earned income during 1997 and 1996, continued to remain at
reduced amounts due to the fact that the Income Fund was not receiving any
rental income relating to the Po Folks restaurant property in Hagerstown,
Maryland. This restaurant property was sold in June 1998.
In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is partially attributable to the Income Fund increasing its
allowance for doubtful accounts by approximately $15,400 for rental amounts
relating to the restaurant property in Canton Township, Michigan, due to
financial difficulties the tenant is experiencing. We intend to pursue
collection of past due amounts relating to this restaurant property and will
recognize any such amounts as income if collected. No such allowance was
established during 1996 and 1995.
The increase in rental and earned income during 1996, as compared to 1995,
is partially offset by a decrease in rental income of approximately $31,000 due
to the fact that in September 1996, the tenant of the restaurant property in
Chicago, Illinois, ceased operations of the restaurant business located on such
restaurant property and the Income Fund ceased recording rental revenue
relating to such restaurant property. The tenant filed for bankruptcy and in
January 1997, the Income Fund sold this restaurant property to an unrelated
third party, as described above in "Liquidity and Capital Resources."
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During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $157,648, $157,993 and $143,039, respectively, in contingent rental
income. The increase in contingent rental income during 1996, as compared to
1995, is primarily attributable to an increase in gross sales of certain
restaurant properties requiring the payment of contingent rent.
In addition, during 1997, 1996 and 1995, the Income Fund earned $100,816,
$26,496 and $22,386, respectively, in interest and other income. The increase
in interest and other income during 1997, was partially attributable to the
interest earned on the net sales proceeds relating to the sales of the
restaurant properties in Chicago, Illinois; Bradenton, Florida; Kissimmee,
Florida; Roswell, Georgia and Mason City, Iowa temporarily invested in short-
term highly liquid investments pending reinvestment of such amounts in
additional restaurant properties or the use of such amounts for other Income
Fund purposes. In addition, interest and other income increased by
approximately $33,700 during 1997, as a result of the interest earned on the
mortgage note receivable accepted in connection with the sale of the restaurant
property in Roswell, Georgia, in June 1997. The increase in interest and other
income during 1997, was also attributable to the Income Fund recognizing
$15,000 in other income due to the fact that the purchase and sale agreement
between the Income Fund and a third party for the Po Folks restaurant property
located in Hagerstown, Maryland, was terminated. Based on the agreement, all
deposits received in connection with the purchase and sale agreement were
retained as other income by the Income Fund due to the termination of the
agreement.
The Income Fund recognized a loss of $148,170 during the year ended December
31, 1997 and income of $11,740 and $22,015 for the years ended December 31,
1996 and 1995, respectively, attributable to net income and net loss earned by
unconsolidated joint ventures in which the Income Fund is a co-venturer. The
decrease in net income earned by joint ventures is partially attributable to
the fact that, during July 1997, the operator of the restaurant property owned
by Titusville Joint Venture vacated the restaurant property and ceased
operations. In conjunction therewith, Titusville Joint Venture (in which the
Income Fund owns a 73.4% interest in the profits and losses of the joint
venture) established an allowance for doubtful accounts of approximately
$27,000 during 1997. No such allowance was established during 1996. In
addition, the joint venture recorded real estate tax expenses of approximately
$16,600 during 1997. No such real estate taxes were incurred during 1996. The
joint venture intends to pursue collection of these amounts from the former
tenant and will recognize such amounts as income if collected. In addition,
during 1997, the joint venture established an allowance for loss on land and
building for its restaurant property in Titusville, Florida, for approximately
$147,000. The allowance represents the difference between the restaurant
property's carrying value at December 31, 1997, and the estimated net
realizable value of the restaurant property. In addition, the joint venture
wrote off unamortized lease costs of $23,500 in 1997 due to the tenant vacating
the restaurant property. Titusville Joint Venture is currently seeking either a
replacement tenant or purchaser for this restaurant property. The decrease
during 1997, as compared to 1996, was partially offset by an increase in net
income earned by joint ventures due to the fact that in July 1997, the Income
Fund reinvested the majority of the net sales proceeds it received from the
sale of the restaurant property in Kissimmee, Florida, in an IHOP restaurant
property located in Englewood, Colorado, as tenants-in-common with one of our
affiliates. The decrease in net income earned during 1996, as compared to 1995,
is primarily attributable to the receipt by Titusville Joint Venture of
bankruptcy proceeds relating to the former tenant during 1995. These amounts
had previously been written off; therefore, they were recognized as income when
received, during 1995.
During the years ended December 31, 1997, 1996 and 1995, one lessee of the
Income Fund and its consolidated joint venture, Golden Corral Corporation,
contributed more than 10% of the Income Fund's total rental income (including
rental income from the Income Fund's consolidated joint venture and the Income
Fund's share of the rental income from one restaurant property owned by an
unconsolidated joint venture and two restaurant properties owned with
affiliates as tenants-in-common). As of December 31, 1997, Golden Corral
Corporation was the lessee under leases relating to six restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
this lessee will continue to contribute more than 10% of the Income Fund's
total rental income during 1998 and subsequent years. In addition, during at
least one of the years ended December 31, 1997, 1996 or 1995, six restaurant
chains, Golden Corral, Denny's, Perkins,
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Pizza Hut, KFC and Taco Bell, each accounted for more than 10% of the Income
Fund's total rental income (including rental income from the Income Fund's
consolidated joint venture and the Income Fund's share of the rental income
from one restaurant property owned by an unconsolidated joint venture and two
restaurant properties owned with affiliates as tenants-in-common). In
subsequent years, it is anticipated that Golden Corral, Denny's, Pizza Hut, KFC
and Taco Bell each will continue to account for more than 10% of total
rental income to which the Income Fund is entitled under the terms of the
leases. Any failure of Golden Corral Corporation or any of these restaurant
chains could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$626,431, $638,140 and $667,876 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, was partially attributable to a decrease of approximately $56,600 in
depreciation expense as a result of the sales of restaurant properties in 1997,
as described above in "Liquidity and Capital Resources." In addition, the
decrease during 1996, as compared to 1995, is partially attributable to a
decrease in depreciation expense relating to the Po Folks restaurant property
in Hagerstown, Maryland, due to the Income Fund establishing an allowance for
loss on land and building which represented the difference between the
restaurant property's carrying value at December 31, 1995, and the estimated
net realizable value of the restaurant property. This allowance reduced the
depreciable basis of the restaurant property.
The decrease in operating expenses during 1997, as compared to 1996, is
partially attributable to, and the decrease during 1996, as compared to 1995,
is partially offset by, the fact that during 1996, the Income Fund recorded
approximately $15,000, relating to legal fees associated with the tenant of the
restaurant property in Chicago, Illinois, filing bankruptcy. The Income Fund
sold this restaurant property in January 1997, as described above in "Liquidity
and Capital Resources." The decrease in operating expenses during 1997, as
compared to 1996, is also attributable to a decrease in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties.
The decrease in operating expenses during 1997, as compared to 1996, is
partially offset by an increase in operating expenses due to the fact that
during 1997 the Income Fund recognized real estate tax expense of approximately
$40,200 and bad debt expense of approximately $32,400, relating to the Denny's
and Po Folks restaurant properties in Hagerstown, Maryland. These amounts
relate to prior year amounts due from the former tenant that the current tenant
of this restaurant property had agreed to pay, as described above in "Liquidity
and Capital Resources." However, the Income Fund recorded these amounts as
expenses during 1997, due to the fact that payment of these amounts by the
current tenant now appears doubtful. We intend to pursue collection of past due
amounts relating to this restaurant property and will recognize any such
amounts as income if collected. The decrease in operating expenses during 1996,
as compared to 1995, was partially attributable to the fact that during 1996,
the Income Fund did not record real estate tax expense relating to the Denny's
restaurant property and Po Folks restaurant property in Hagerstown, Maryland,
as described above. The Income Fund recorded such expenses during 1995. As a
result of the former tenant of the Po Folks restaurant property in Hagerstown,
Maryland, defaulting under the terms of its lease in February 1995, the Income
Fund incurred real estate tax expense and insurance expense until the
restaurant property was sold in June 1998.
In addition, the decrease in operating expenses during 1996, as compared to
1995, is partially offset by an increase in accounting and administrative
expenses associated with operating the Income Fund and its restaurant
properties and an increase in insurance expense as a result of our obtaining
contingent liability and property coverage for the Income Fund beginning in May
1995.
As a result of the sales of the five restaurant properties during 1997, and
the sale of the parcel of land in Plant City, Florida, as described above in
"Liquidity and Capital Resources," the Income Fund recognized gains on sale of
land and buildings totaling $1,027,590 during the year ended December 31, 1997.
No restaurant properties were sold during 1996 or 1995. In addition, during the
years ended December 31, 1997 and 1995, the Income Fund recorded an allowance
for loss on land and building of $32,819 and $207,844,
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respectively, relating to the Po Folks restaurant property in Hagerstown,
Maryland. The allowance represented the difference between the carrying value
of the restaurant property at December 31, 1997 and 1995, and the net
realizable value of the restaurant property based on anticipated sales prices
at December 31, 1997 and 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases
and, in general, contain provisions that we 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
(for certain restaurant properties) over time. Continued inflation also may
cause capital appreciation of the Income Fund's restaurant 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
restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and by our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
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We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND IV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
November 18, 1987, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land 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 leases generally are triple-net leases,
with the lessees responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of September 30, 1998, the Income Fund owned 37
restaurant properties, which included interests in six restaurant properties
owned by joint ventures in which the Income Fund is a co-venturer and one
restaurant property owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $1,794,173 and $1,746,810, respectively. The
increase in cash from operations for the nine months ended September 30, 1998,
is primarily a result of changes in the Income Fund's working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
In July 1997, the Income Fund entered into new leases for the restaurant
properties in Portland and Winchester, Indiana, with a new tenant to operate
the restaurant properties as Arby's restaurants. In connection therewith, the
Income Fund paid a total of $250,000 in renovation costs during the nine months
ended September 30, 1998, which had been incurred and accrued as construction
costs payable at December 31, 1997.
In March 1998, the Income Fund sold its restaurant property in Fort Myers,
Florida, to a third party for $842,100 and received net sales proceeds of
$794,690, resulting in a gain of $225,902 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in December
1988 and had a cost of approximately $598,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $196,700 in excess of its original
purchase price. The Income Fund anticipates that it will distribute amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any (at a level reasonably assumed by us), resulting from the sale.
In addition, in March 1998, the Income Fund sold its restaurant property in
Union Township, Ohio, to an unrelated third party for $680,000 and received net
sales proceeds of $674,135, resulting in a loss of $104,987 for financial
reporting purposes. In connection with the sale of these restaurant properties,
the Income Fund incurred deferred, subordinated, real estate disposition fees
of $45,663. In April 1998, the Income Fund distributed $1,233,748 of the net
sales proceeds from these restaurant properties as a special distribution to
the Limited Partners.
In addition, in July 1998, the Income Fund sold its restaurant property in
Leesburg, Florida for $565,000 and received net sales proceeds of $523,931,
resulting in a total loss for financial reporting purposes of $135,509. Due to
the fact that at December 31, 1997, the Income Fund recorded a provision for
loss on the land and building in the amount of $70,337 for this restaurant
property, the Income Fund recognized the remaining loss of $65,172 for
financial reporting purposes at July 1998, relating to the sale. In September
1998, the Income Fund contributed $498,953 of the net sales proceeds from the
sale of the restaurant property in
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Leesburg, Florida, to a joint venture, Warren Joint Venture, to purchase and
hold one restaurant property. The Income Fund has an approximate 36% interest
in the profits and losses of Warren Joint Venture and the remaining interest in
this joint venture is held by one of our affiliates.
In September 1998, the Income Fund sold its restaurant property in Naples,
Florida, to a third party for $563,000 and received net sales proceeds of
$533,598, resulting in a gain of $170,281 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in December
1988 and had a cost of approximately $410,500 excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $123,100 in excess of its original
purchase price. The Income Fund intends to reinvest the net sales proceeds in a
replacement restaurant property. As of September 30, 1998, the net sales
proceeds were being held in an interest-bearing escrow account. We believe that
the transaction, or a portion thereof, relating to the sale of the restaurant
property in Naples, Florida will be structured to qualify as a like-kind
exchange transaction for federal income tax purposes. However, the Income Fund
will distribute amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any, (at a level reasonably assumed by us)
resulting from the sale.
Currently, rental income from the Income Fund's restaurant properties and
net sales proceeds are invested in money market accounts and other short-term,
highly liquid investments pending the Income Fund's use of such funds to pay
Income Fund expenses or to make distributions to the partners. At September 30,
1998, the Income Fund had $765,359 invested in such short-term investments as
compared to $876,452 at December 31, 1997. The decrease in cash and cash
equivalents during the nine months ended September 30, 1998 is primarily
attributable to the payment of construction costs accrued at December 31, 1997
relating to the Income Fund's restaurant properties located in Winchester and
Portland, Indiana, as described above. The decrease in cash and cash
equivalents was partially offset by an increase in rents paid in advance at
September 30, 1998, as compared to December 31, 1997. The funds remaining at
September 30, 1998 will be used toward the payment of distributions and other
liabilities.
Total liabilities of the Income Fund, including distributions payable,
decreased to $902,520 at September 30, 1998, from $1,157,589 at December 31,
1997, primarily as a result of the payment during the nine months ended
September 30, 1998 of construction costs accrued at December 31, 1997 relating
to the Income Fund's restaurant properties located in Winchester and Portland,
Indiana, as described above. Total liabilities at September 30, 1998, to the
extent they exceed cash and cash equivalents at September 30, 1998, will be
paid from future cash from operations, and in the event we elect to make
additional contributions, from future contributions from us.
During August 1998, the Income Fund entered into an agreement with an
unrelated third party to sell the Taco Bell property in Edgewood, Maryland. We
believe that the anticipated sales price will exceed the Income Fund's cost
attributable to the restaurant property; however, as of November 6, 1998, the
sale had not occurred.
Based on (i) current and anticipated future cash from operations (ii) for
the nine months ended September 30, 1998, net sales proceeds from the sale of
the restaurant properties in Fort Myers, Florida, and Union Township, Ohio, and
(iii) to a lesser extent, for the nine months ended September 30, 1997,
additional capital contributions from the corporate general partner received in
April, July and October 1997, the Income Fund declared distributions to Limited
Partners of $3,033,748 and $2,070,000 for the nine months ended September 30,
1998 and 1997, respectively ($600,000 and $690,000 for the quarters ended
September 30, 1998 and 1997, respectively). This represents distributions for
the nine months ended September 30, 1998 and 1997, of $50.56 and $34.50 per
unit, respectively ($10.00 and $11.50 per unit for the quarters ended September
30, 1998 and 1997, respectively). Distributions for the nine months ended
September 30, 1998 included $1,233,748 as a result of the distribution of net
sales proceeds from the sale of the restaurant properties in Fort Myers,
Florida and Union Township, Ohio. This special distribution was effectively a
return of a portion of the Limited Partners' investment, although, in
accordance with the Income Fund agreement, it was applied to the Limited
Partners' unpaid preferred return. As a result of the sale of the restaurant
properties, the Income Fund's total
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revenue was reduced, while the majority of the Income Fund's operating expenses
remained fixed. Therefore, distributions of net cash flow were adjusted for the
nine months ended September 30, 1998. No distributions were made to us for the
quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the Limited Partners for the nine months ended September 30,
1998 and 1997 are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distribution to the Limited Partners
on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and generally leasing them under triple-net leases to operators who
generally meet specified financial standards minimizes the Income Fund's
operating expenses. We believe that the leases will continue to generate cash
flow in excess of operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $2,417,972, $2,713,964 and
$2,670,393 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations for 1997, as compared to 1996, and the
increase in cash from operations for 1996, as compared to 1995, is primarily a
result of changes in income and expenses as described in "Results of
Operations" below and changes in the Income Fund's working capital. Cash from
operations during the years ended December 31, 1997, 1996 and 1995, was also
affected by the following:
In October 1992, the Income Fund accepted a promissory note from the former
tenant of the restaurant property in Maywood, Illinois, for $175,000 for
amounts due relating to past due rents and real estate taxes and other expenses
the Income Fund had incurred as a result of the former tenant's having
defaulted under the terms of the lease. The note was non-interest bearing and
was payable in 36 monthly installments of $2,500 through September 1995, and
thereafter in eight monthly installments of $10,000, with the balance due and
payable on February 20, 1996. The Income Fund discounted the note to a
principal balance of $138,094 using an interest rate of ten percent. During
1995, the former tenant defaulted under the terms of the note. Because of the
financial difficulties that the former tenant was experiencing, the Income Fund
established an allowance for doubtful accounts for the full amount of unpaid
principal and interest of $111,031 relating to this note; therefore, no amounts
were included in receivables at December 31, 1996. During 1997, the Income Fund
ceased collection efforts for this note and wrote off the related allowance for
doubtful accounts.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In December 1995, the Income Fund sold its restaurant property in Hastings,
Michigan, for $520,000 and received net sales proceeds of $518,650, resulting
in a gain of $128,547 for financial reporting purposes. This restaurant
property was originally acquired by the Income Fund in August 1988 and had a
cost of approximately $419,600, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $99,100 in excess of its original purchase price.
In January 1996, the Income Fund reinvested the net sales proceeds it
received from the 1995 sale of the restaurant property in Hastings, Michigan,
along with additional funds, in a Golden Corral restaurant property located in
Clinton, North Carolina, with certain of our affiliates as tenants-in-common.
In connection therewith, the Income Fund and its affiliates entered into an
agreement whereby each co-venturer will share in the profits and losses of the
restaurant property in proportion to its applicable percentage interest. As of
December 31, 1997, the Income Fund owned a 53.68% interest in this restaurant
property.
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In September 1996, the Income Fund sold its restaurant property in Tampa,
Florida, for $1,090,000 and received net sales proceeds of $1,049,550,
resulting in a gain of $221,390 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in December 1988
and had a cost of approximately $832,800, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $216,800 in excess of its original
purchase price. In December 1996, the Income Fund reinvested the majority of
the net sales proceeds in a Boston Market restaurant property, located in
Richmond, Virginia. The remaining net sales proceeds were used to meet other
working capital needs of the Income Fund.
In June 1997, the Income Fund terminated the leases with the tenant of the
restaurant properties in Portland and Winchester, Indiana. In connection
therewith, the Income Fund accepted a promissory note from the former tenant
for $32,343 for amounts relating to past due real estate taxes the Income Fund
had accrued as a result of the former tenant's financial difficulties. The
promissory note, which is uncollateralized, bears interest at a rate of 10% per
annum, and is being collected in 36 monthly installments. Receivables at
December 31, 1997 include $7,106 of such amounts. In July 1997, the Income Fund
entered into new leases for these restaurant properties in Portland and
Winchester, Indiana, with a new tenant to operate the restaurant properties as
Arby's restaurants. In connection therewith, the Income Fund agreed to fund up
to $125,000 in renovation costs for each restaurant property. As of December
31, 1997, such renovations had been completed.
In November 1997, the Income Fund sold its restaurant property in
Douglasville, Georgia to a third party for $402,000 and received net sales
proceeds of $378,149 (net of $2,546 which represents amounts due to the former
tenant for prorated rent). This restaurant property was originally acquired by
the Income Fund in December 1994 and had a cost of approximately $363,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant property for approximately $16,900 in
excess of its original purchase price. Due to the fact that the Income Fund had
recognized accrued rental income since the inception of the lease relating to
the straight-lining of future scheduled rent increases in accordance with
generally accepted accounting principles, the Income Fund wrote off the
cumulative balance of such accrued rental income at the time of the sale of
this restaurant property, resulting in a loss of $6,652 for financial reporting
purposes. Due to the fact that the straight-lining of future rent increases
over the term of the lease is a non-cash accounting adjustment, the write off
of these amounts is a loss for financial statement purposes only. The net sales
proceeds will be used to pay liabilities of the Income Fund, including
quarterly distributions to the Limited Partners, and to fund the renovation
costs described above. The Income Fund anticipates that it will distribute
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, if any (at a level reasonably assumed by us), resulting from the
sale.
During the years ended December 31, 1997 and 1996, the Income Fund received
$294,000 and $22,300, respectively, in capital contributions from CNL Realty
Corp., the corporate general partner, in connection with the operations of the
Income Fund. No such contributions were received during the year ended December
31, 1995.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At December 31, 1997, the
Income Fund had $876,452 invested in such short-term investments, as compared
to $554,593 at December 31, 1996. The
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increase in the amount invested in short-term investments is primarily a result
of the receipt of net sales proceeds from the sale of the restaurant property
in Douglasville, Georgia, during 1997.
During 1997, 1996 and 1995, our affiliates, incurred on behalf of the Income
Fund $85,702, $114,409 and $101,876, respectively, for certain operating
expenses. As of December 31, 1997 and 1996, the Income Fund owed $88,854 and
$67,153, respectively, to affiliates for such amounts and accounting and
administrative services. Amounts payable to other parties, including
distributions payable, increased to $1,068,735 at December 31, 1997, from
$766,108 at December 31, 1996. The increase in liabilities at December 31,
1997, is primarily the result of the Income Fund accruing renovation costs
during 1997 for the restaurant properties in Portland and Winchester, Indiana,
in connection with the new leases entered into in July 1997. In addition, the
increase in liabilities is due to the Income Fund accruing current real estate
taxes for its restaurant property in Palm Bay, Florida, during 1997, due to the
fact that the tenant vacated the restaurant property in October 1997. In
addition, the increase in liabilities is due to an increase in rents paid in
advance at December 31, 1997. Total liabilities at December 31, 1997, to the
extent they exceed cash and cash equivalents at December 31, 1997, will be paid
from future cash from operations and, in the event we elect to make additional
contributions, from future General Partner contributions.
Based primarily on current and anticipated future cash from operations, and
for the years ended December 31, 1997 and 1996, additional capital
contributions received from us, the Income Fund declared distributions to the
Limited Partners of $2,760,000 for each of the years ended December 31, 1997,
1996 and 1995. This represents distributions of $46 per Unit for each of the
years ended December 31, 1997, 1996 and 1995. We expect to distribute some or
all of the net sales proceeds from the sale of the restaurant property in Fort
Myers, Florida, to the Limited Partners. In deciding whether to sell restaurant
properties, we will consider factors such as potential capital appreciation,
net cash flow, and federal income tax considerations. The reduced number of
restaurant properties for which the Income Fund receives rental payments, as
well as ongoing operations, is expected to reduce the Income Fund's revenues.
The decrease in Income Fund revenues, combined with the fact that a significant
portion of the Income Fund's expenses are fixed in nature, is expected to
result in a decrease in cash distributions to the Limited Partners during 1998.
No amounts distributed or to be distributed to the Limited Partners for the
years ended December 31, 1997, 1996 and 1995, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases for the Income Fund's restaurant properties are generally 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 35 wholly-owned restaurant properties (including one restaurant property
in Douglasville, Georgia, which was sold in November 1997), and during the nine
months ended September 30, 1998, the Income Fund owned and leased 34 wholly-
owned restaurant properties (including four restaurant properties, which were
sold during 1998), generally to
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operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $1,694,465 and $1,657,307, respectively, in rental income from
operating leases and earned income from direct financing leases from these
restaurant properties, $579,483 and $541,416 of which was earned during the
quarters ended September 30, 1998 and 1997, respectively. The increase in
rental and earned income for the quarter and nine months ended September 30,
1998, was partially due to the fact that during the quarter and nine months
ended September 30, 1997, the Income Fund increased its allowance for doubtful
accounts for the restaurant property located in Palm Bay, Florida due to
financial difficulties the tenant was experiencing. No such allowance was
established during the quarter and nine months ended September 30, 1998, due to
the fact that the Income Fund re-leased this restaurant property to a new
tenant for which rent commenced subsequent to September 30, 1997. In addition,
the Income Fund collected and recognized as income past due rental amounts for
which the Income Fund had previously established an allowance for doubtful
accounts during the quarter and nine months ended September 30, 1998.
In addition, the increase in rental and earned income for the quarter and
nine months ended September 30, 1998 was partially due to the fact that during
the quarter and nine months ended September 30, 1997, the Income Fund increased
its allowance for doubtful accounts for the restaurant properties located in
Portland and Winchester, Indiana due to financial difficulties the tenants were
experiencing. No such allowance was established during the quarter and nine
months ended September 30, 1998, due to the fact that the Income Fund re-leased
these restaurant properties to new tenants for which rent commenced subsequent
to September 30, 1997.
The increase in rental and earned income for the quarter and nine months
ended September 30, 1998 was partially offset by a decrease in rental and
earned income due to the sale of the restaurant property in Douglasville,
Georgia in November 1997, the sale of the restaurant properties in Fort Myers,
Florida and Union Township, Ohio in March 1998, and the sale of the restaurant
property in Naples, Florida in September 1998. During the nine months ended
September 30, 1998, the Income Fund used the net sales proceeds from the sale
of the restaurant property in Douglasville, Georgia to fund renovation costs
for two restaurant properties and for other Income Fund purposes. Rental and
earned income are expected to remain at reduced amounts as a result of
distributing the net sales proceeds from the 1998 sales of the restaurant
properties in Fort Myers, Florida and Union Township, Ohio to the Limited
Partners, as described above in "Liquidity and Capital Resources."
For the nine months ended September 30, 1998 and 1997, the Income Fund also
earned $37,207 and $65,265, respectively, in contingent rental income, $20,661
of which was earned during the quarter ended September 30, 1997. The decrease
in contingent rental income during the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997, is primarily attributable
to the Income Fund adjusting estimated contingent rental amounts accrued at
December 31, 1997, to actual amounts during the nine months ended September 30,
1998. The decrease in contingent rental income for the quarter ended September
30, 1998 was primarily due to the fact that no contingent rents were recorded
during the quarter ended September 30, 1998 as a result of the Income Fund
adopting EITF 98-9, a consensus reached by the Financial Accounting Standards
Board entitled "Accounting for Contingent Rent in the Interim Financial
Periods," which states that a lessor should defer recognition of contingent
rental income in interim periods until the specified target that triggers the
contingent rental income is achieved. Adoption of this consensus did not have a
material effect on the Income Fund's financial position or results of
operations.
In October 1998, the tenant of one Boston Market restaurant property filed
for bankruptcy. If the lease is eventually rejected, the Income Fund
anticipates that rental income relating to this restaurant property will
terminate until a new tenant is located or until the restaurant property is
sold and the proceeds from such a sale are reinvested in an additional
restaurant property. However, we do not anticipate that any decrease in rental
income due to lost revenues relating to this restaurant property will have a
material effect on the Income Fund's financial position or results of
operations.
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During the nine months ended September 30, 1998 and 1997, the Income Fund
also owned and leased five restaurant properties indirectly through joint
venture arrangements and one restaurant property as tenants-in-common with
certain of our affiliates. In addition, during the nine months ended September
30, 1998, the Income Fund owned and leased one additional restaurant property
indirectly through a joint venture arrangement. In connection therewith, during
the nine months ended September 30, 1998 and 1997, the Income Fund recognized a
loss of $143,612 and income of $172,340, respectively, attributable to net
income and net loss earned by these joint ventures, income of $5,276 and
$52,359 of which was recognized during the quarters ended September 30, 1998
and 1997, respectively. The decrease in net income is primarily due to the fact
that Kingsville Real Estate Joint Venture (in which the Income Fund owns a
68.87% interest) established an allowance for loss on the land and net
investment in the direct financing lease for its restaurant property for
approximately $316,000 during the nine months ended September 30, 1998. The
allowance represents the difference between the restaurant property's carrying
value at September 30, 1998 and the estimated net realizable value of the
restaurant property. In addition, the joint venture established an allowance
for doubtful accounts of approximately $21,900 and $87,800 during the quarter
and nine months ended September 30, 1998, respectively, in accordance with its
collection policy. No such allowance was established during the quarter and
nine months ended September 30, 1997. Kingsville Real Estate Joint Venture is
currently seeking either a new tenant or purchaser for this restaurant
property.
The decrease during the quarter and nine months ended September 30, 1998 in
net income earned by joint ventures is also due to the fact that during July
1997, the operator of the restaurant property owned by Titusville Joint Venture
vacated the restaurant property and ceased operations. During the quarter and
nine months ended September 30, 1998, Titusville Joint Venture (in which the
Income Fund owns a 26.60% interest) established an allowance for loss on the
land and building for its restaurant property, of approximately $139,300. The
allowance represents the difference between the restaurant property's net
carrying value at September 30, 1998 and the estimated net realizable value of
the restaurant property. Titusville Joint Venture is currently seeking either a
replacement tenant or purchaser for this restaurant property.
Operating expenses, including depreciation and amortization expense, were
$550,017 and $532,282 for the nine months ended September 30, 1998 and 1997,
respectively, of which $182,378 and $154,792 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to the fact that during the quarter and nine months ended
September 30, 1998, the Income Fund recorded approximately $21,600 in real
estate tax expense due to the fact that in October 1998, the tenant of the
Boston Market restaurant property in Richmond, Virginia filed for bankruptcy,
as described above. As a result, if the tenant decides to reject the lease the
Income Fund will continue to incur certain expenses, such as real estate taxes,
insurance and maintenance until a replacement tenant or buyer for the
restaurant property is located.
As a result of the former tenant of the restaurant property in Leesburg,
Florida defaulting under the terms of its lease, the Income Fund incurred
certain expenses, such as real estate taxes, insurance and maintenance during
the quarters and nine months ended September 30, 1998 and 1997. The Income Fund
sold this restaurant property in July 1998, as described above, therefore the
Income Fund does not anticipate incurring such expenses in future periods.
As a result of the sales of the restaurant properties in Fort Myers,
Florida, Union Township, Ohio, and Leesburg, Florida the Income Fund recognized
a gain of $55,742 for financial reporting purposes during the nine months ended
September 30, 1998. In addition, during the quarter and nine months ended
September 30, 1998, the Income Fund recognized a gain of $170,281 for financial
reporting purposes as a result of the sale of its restaurant property in
Naples, Florida. No restaurant properties were sold during the quarter and nine
months ended September 30, 1997.
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The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 36 wholly-owned restaurant
properties (including one restaurant property in Hastings, Michigan, which was
sold in December 1995), during 1996, the Income Fund owned and leased 36
wholly-owned restaurant properties (including one restaurant property in Tampa,
Florida, which was sold in September 1996) and during 1997, the Income Fund
owned and leased 35 wholly-owned restaurant properties (including one
restaurant property in Douglasville, Georgia, which was sold in November 1997).
In addition, during 1997, 1996 and 1995, the Income Fund was a co-venturer in
five separate joint ventures that each owned and leased one restaurant
property. During 1997 and 1996, the Income Fund also owned and leased one
restaurant property with certain of our affiliates as tenants-in-common. As of
December 31, 1997, the Income Fund owned, either directly or through joint
venture arrangements, 40 restaurant properties, which are, in general, subject
to long-term, triple-net leases. The leases of the restaurant properties
provide for minimum base annual rental amounts (payable in monthly
installments) ranging from $18,100 to $135,800. Generally, the leases provide
for percentage rent based on sales in excess of a specified amount to be paid
annually. In addition, some of the leases provide that, commencing in the sixth
lease year the percentage rent will be an amount equal to the greater of the
percentage rent calculated under the lease formula or a specified percentage
(ranging from one-half to two percent) of the purchase price.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $2,189,386, $2,397,691 and $2,510,406, respectively, in rental income
from operating leases and earned income from direct financing leases from its
wholly-owned restaurant properties described above. Rental and earned income
decreased during 1997, as compared to 1996, as a result of the Income Fund
establishing an allowance for doubtful accounts totaling approximately $128,200
during 1997, for rental amounts relating to the restaurant property located in
Palm Bay, Florida, due to financial difficulties the tenant was experiencing.
The tenant vacated the restaurant property in October 1997, and the Income Fund
re-leased the restaurant property in February 1998, as discussed above.
In addition, rental and earned income decreased approximately $76,300 and
$29,300 during the years ended 1997 and 1996, respectively, as a result of the
sale of the restaurant property in Tampa, Florida, in September 1996. The
decrease in rental income for 1997 is partially offset by an increase of
approximately $118,300 in rental income attributable to the reinvestment of the
net sales proceeds in a restaurant property in Richmond, Virginia, in December
1996.
In addition, the decrease in rental and earned income during 1997 and 1996,
each as compared to the previous year, is partially attributable to the Income
Fund increasing its allowance for doubtful accounts by approximately $57,000
and $28,500, respectively, for rental income amounts relating to the Hardee's
restaurant properties located in Portland and Winchester, Indiana, which are
leased by the same tenant, due to financial difficulties the tenant was
experiencing. Rental and earned income also decreased by approximately $86,200
during 1997 due to the fact that the Income Fund terminated the lease with the
former tenant of the restaurant properties in Portland and Winchester, Indiana,
in June 1997, as described above in "Liquidity and Capital Resources." We have
agreed that they will cease collection efforts on past due rental amounts once
the former tenant of these restaurant properties pays all amounts due under the
promissory note for past due real estate taxes described above in "Liquidity
and Capital Resources." The decrease in rental and earned income for 1997, as
compared to 1996, was slightly offset by an increase of approximately $20,200
in rental income from the new tenant of this restaurant property who began
operating the restaurant property after it was renovated into an Arby's
restaurant property.
The decrease in rental and earned income during 1996, as compared to 1995,
is primarily attributable to a decrease of approximately $53,100 as a result of
the sale of the restaurant property in Hastings, Michigan, in December 1995.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund earned
$117,031, $97,318 and $94,101, respectively, in contingent rental income from
the Income Fund's wholly owned restaurant properties.
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The increase in contingent rental income in 1997, as compared to 1996, is
primarily attributable to an increase in gross sales for certain restaurant
properties whose leases require the payment of contingent rental income.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $189,747, $277,431 and $245,778, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The decrease in net income earned by these joint ventures during
1997, as compared to 1996, is partially attributable to the fact that, during
July 1997, the operator of the restaurant property owned by Titusville Joint
Venture vacated the restaurant property and ceased operations. In conjunction
therewith, Titusville Joint Venture (in which the Income Fund owns a 26.6%
interest in the profits and losses of the joint venture) established an
allowance for doubtful accounts of approximately $27,000 during 1997. No such
allowance was established during 1996. In addition, the joint venture recorded
real estate tax expense of approximately $16,600 during 1997. No such real
estate taxes were incurred during 1996. In addition, during 1997, the joint
venture established an allowance for loss on land and building for its
restaurant property in Titusville, Florida, for approximately $147,000. The
allowance represents the difference between the restaurant property's carrying
value at December 31, 1997, and the property manager's estimate of the net
realizable value of the restaurant property. In addition, the joint venture
wrote off unamortized lease costs of $23,500 in 1997 due to the tenant vacating
the restaurant property.
Net income earned by joint ventures also decreased during 1997, as compared
to 1996, due to the restaurant property in Clinton, North Carolina, held as
tenants-in-common, adjusting estimated contingent rental amounts accrued at
December 31, 1996, to actual amounts during the year ended December 31, 1997.
The increase in net income earned by joint ventures during 1996, as compared to
1995, is primarily attributable to the fact that in January 1996, the Income
Fund reinvested the net sales proceeds it received from the sale in December
1995 of the restaurant property in Hastings, Michigan, along with additional
funds, in a Golden Corral restaurant property in Clinton, North Carolina, with
certain of our affiliates as tenants-in-common, as described above in
"Liquidity and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995 two of the Income
Fund's lessees, Shoney's, Inc. and Tampa Foods, L.P., each contributed more
than 10% of the Income Fund's total rental income (including the Income Fund's
share of the rental income from five restaurant properties owned by joint
ventures and one restaurant property owned with certain of our affiliates as
tenant-in-common). As of December 31, 1997, Shoney's, Inc. was the lessee under
leases relating to six restaurants and Tampa Foods, L.P. was the lessee under
leases relating to two restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, Shoney's, Inc. will continue to
contribute more than 10% of the Income Fund's total rental income during 1998
and subsequent years. In addition, three restaurant chains, Shoney's, Denny's
and Wendy's Old Fashioned Hamburger Restaurants, each accounted for more than
10% of the Income Fund's total rental income in 1997, 1996 and 1995 (including
the Income Fund's share of the rental income from five restaurant properties
owned by joint ventures and one restaurant property owned with affiliates as
tenants-in-common). During the year ended December 31, 1997, another of the
Income Fund's restaurant chains, Taco Bell, accounted for more than 10% of
total rental income. In subsequent years, it is anticipated that these four
Restaurant Chains each will continue to account for more than 10% of the total
rental income to which the Income Fund is entitled under the terms of the
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$733,728, $694,518 and $789,780 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses for 1997, as compared to
1996, was partially due to the fact that during 1997, the Income Fund expensed
approximately $25,400 in current and past due real estate taxes for the
restaurant property in Palm Bay, Florida due to the tenant vacating the
restaurant property in October 1997. The restaurant property was re-leased and
the new tenant is responsible for these expenses beginning in December 1997. In
addition, the increase in operating expenses during 1997 was partially due to
the fact that the Income Fund recorded bad debt expense of $12,794 during 1997,
relating to the restaurant properties located in Portland and Winchester,
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Indiana, for past due rental income amounts. The Income Fund does not intend to
continue to pursue the collection of such amounts unless the former tenant
defaults under the promissory note, as described above in "Liquidity and
Capital Resources."
The decrease in operating expenses in 1996, as compared to 1995, is
primarily a result of the fact that the Income Fund's former tenant of the
restaurant property in Maywood, Illinois, defaulted under the terms of its
promissory note with the Income Fund, as described above in "Liquidity and
Capital Resources," and the Income Fund recorded bad debt expense of $102,431
relating to this restaurant property during 1995. The decrease in operating
expenses during 1996, as compared to 1995, was partially offset by an increase
in accounting and administrative expenses associated with operating the Income
Fund and its restaurant properties and an increase in insurance expense as a
result of our obtaining contingent liability and property coverage for the
Income Fund beginning in May 1995.
As the result of the former tenant of the Maywood restaurant property
defaulting under the terms of its lease, the Income Fund re-leased this
restaurant property during 1993, to two new operators subject to two separate
leases. In connection with one of the two new leases for the restaurant
property in Maywood, Illinois, the Income Fund is responsible for the
proportionate share of real estate taxes and insurance expense. In addition,
during 1997, 1996 and 1995, the Income Fund paid for a portion of the real
estate taxes that are the responsibility of the other tenant of the Maywood
restaurant property, due to a shortage of amounts collected from the tenant for
the payment of their proportionate share of real estate taxes. In addition, as
a result of the former tenant of the restaurant property in Leesburg, Florida,
defaulting under the terms of its lease, the Income Fund incurred certain
expenses, such as real estate taxes, insurance and maintenance expense relating
to this restaurant property during 1997, 1996 and 1995. The Income Fund is
currently seeking a replacement tenant for the restaurant property in Leesburg,
Florida, and expects to incur these expenses until such time as a new lease is
executed for this restaurant property.
As a result of the sale of the restaurant property in Douglasville, Georgia,
in November 1997, the Income Fund recognized a loss for financial reporting
purposes of $6,652 for the year ended December 31, 1997. In addition, as a
result of the sale of the restaurant property in Tampa, Florida, in September
1996 and the sale of the restaurant property in Hastings, Michigan, in December
1995, the Income Fund recognized gains for financial reporting purposes of
$221,390 and $128,547, for the years ended December 31, 1996 and 1995,
respectively.
During 1997, the Income Fund established an allowance for loss on land and
building in the amount of $70,337 for financial reporting purposes for the
restaurant property in Leesburg, Florida. The allowance represents the
difference between the restaurant property's carrying value at December 31,
1997, and the estimated net realizable value for this restaurant property based
on an anticipated sales price.
General
The Income Fund's leases as of September 30, 1998, are, in general, triple-
net leases and contain provisions that we 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
Income Fund's restaurant 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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
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The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and affiliates have made in identifying and
addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND V, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 17, 1988, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land 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 leases are generally triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 28 restaurant
properties which included interests in four restaurant properties owned by
joint ventures in which the Income Fund is a co-venturer and two restaurant
properties owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $1,230,725 and $1,297,828, respectively. The
decrease in cash from operations for the nine months ended September 30, 1998,
is primarily a result of changes in the Income Fund's working capital and
changes in income and expenses as described in "Results of Operations" below.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
In July 1997, the Income Fund entered into a new lease for the restaurant
property in Connersville, Indiana, with a new tenant to operate the restaurant
property as an Arby's restaurant. In connection therewith, during the nine
months ended September 30, 1998, the Income Fund paid $125,000 in renovation
costs, which had been incurred and accrued as construction costs payable at
December 31, 1997.
During the nine months ended September 30, 1998, the Income Fund sold its
restaurant properties in Port Orange, Florida, and Tyler, Texas to the tenants
for a total of $2,180,000 and received net sales proceeds of $2,125,220,
resulting in a total gain of $440,822 for financial reporting purposes. These
restaurant properties were originally acquired by the Income Fund in 1988 and
1989 and had costs totaling approximately $1,791,300, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant properties for approximately $333,900 in excess of their
original purchase prices. In connection with the sales, the Income Fund
incurred deferred, subordinated, real estate disposition fees of $65,400. The
Income Fund distributed $1,838,327 of the net sales proceeds from the 1997 and
1998 sales of the restaurant properties in Tampa and Port Orange, Florida,
respectively, as a special distribution to the Limited Partners in April 1998.
In addition, in May 1998, the Income Fund contributed the remainder of the net
sales proceeds from the sale of the restaurant property in Tyler, Texas in a
joint venture arrangement as described below. The Income Fund anticipates that
it will distribute amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any (at a level reasonably assumed by us),
resulting from the sale of the restaurant properties in Port Orange, Florida
and Tyler, Texas. The Income Fund will use the remaining net sales proceeds to
fund additional amounts to RTO Joint Venture, as described below, and to meet
the Income Fund's working capital and other Income Fund purposes.
As described above, in May 1998, the Income Fund entered into a joint
venture, RTO Joint Venture, a joint venture with one of our affiliates, to
construct and hold one restaurant property. As of September 30, 1998, the
Income Fund had contributed $713,480 to purchase land and pay for construction
relating to the joint venture. As of September 30, 1998, the Income Fund has
agreed to contribute approximately $40,900 in
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construction costs to the joint venture. When construction is completed, the
Income Fund expects to have an approximate 53% interest in the profits and
losses of the joint venture.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $481,185 invested in such short-term investments as compared to
$1,361,290 at December 31, 1997. The decrease in cash and cash equivalents is
primarily attributable to the fact that the Income Fund distributed amounts
held at December 31, 1997 relating to the net sales proceeds received from the
1997 sale of the restaurant property in Tampa, Florida, as a special
distribution to the Limited Partners during the nine months ended September 30,
1998, as described below. The funds remaining at September 30, 1998, will be
used to pay distributions and other liabilities.
Total liabilities of the Income Fund decreased to $771,412 at September 30,
1998, from $974,967 at December 31, 1997, partially due to a decrease in
construction costs payable as a result of the payment during the nine months
ended September 30, 1998, of construction costs accrued at December 31, 1997,
for renovation costs relating to the Income Fund's restaurant property located
in Connorsville, Indiana, as described above. The decrease in liabilities is
also partially attributable to a decrease in distributions payable to the
Limited Partners at September 30, 1998 as compared to December 31, 1997. Total
liabilities at September 30, 1998, to the extent they exceed cash and cash
equivalents at September 30, 1998, will be paid from future cash from
operations.
Based on current and anticipated future cash from operations, and for the
nine months ended September 30, 1998, proceeds received from the sales of
restaurant properties, the Income Fund declared distributions to Limited
Partners of $3,338,327 and $1,725,000 for the nine months ended September 30,
1998 and 1997, respectively ($500,000 and $575,000 for the quarters ended
September 30, 1998 and 1997, respectively). This represents distributions for
the nine months ended September 30, 1998 and 1997 of $66.77 and $34.50 per
unit, respectively ($10.00 and $11.50 per unit for the quarters ended September
30, 1998 and 1997, respectively). Distributions for the nine months ended
September 30, 1998, included $1,838,327 as a result of the distribution of net
sales proceeds from the sale of restaurant properties, as described above. This
special distribution was effectively a return of a portion of the Limited
Partners' investment, although, in accordance with the Income Fund's
partnership agreement, it was applied to the Limited Partners' unpaid
cumulative preferred return. As a result of the sale of the restaurant
properties, the Income Fund's total revenue was reduced, while the majority of
the Income Fund's operating expenses remained fixed. Therefore, distributions
of net cash flow were adjusted for the quarter and nine months ended September
30, 1998. No distributions were made to us for the quarters and nine months
ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions. The Income Fund intends to continue to make distributions of
cash available for distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and
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interest received, less cash paid for expenses). Cash from operations was
$1,813,231, $2,103,745 and $2,142,918 for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease in cash from operations during 1997
and 1996, each as compared to the previous year, is primarily a result of
changes in income and expenses as discussed in "Results of Operations" below
and changes in the Income Fund's working capital during each of the respective
years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
received $106,000, $159,700 and $31,500, respectively, in capital contributions
from the corporate General Partner in connection with the operations of the
Income Fund. We have the right, but not the obligation, to make additional
capital contributions, if we deem it appropriate, in connection with the
operations of the Income Fund.
In August 1995, the Income Fund sold its restaurant property in Myrtle
Beach, South Carolina, to the tenant of the restaurant property for $1,040,000,
and in connection therewith, accepted a promissory note in the principal sum of
$1,040,000, collateralized by a mortgage on the restaurant property. The note
bears interest at a rate of 10.25% per annum and is being collected in 59 equal
monthly installments of $9,319, with a balloon payment of $1,006,004 due in
July 2000. Collections commenced August 1, 1995. In accordance with Statement
of Financial Accounting Standards No. 66, "Accounting for Sales of Real
Estate," the Income Fund recorded the sale of the restaurant property using the
installment sales method. Therefore, the gain on the sale of the restaurant
property was deferred and is being recognized as income proportionately as
payments of principal under the mortgage note are collected. The Income Fund
recognized a gain of $1,024, $924 and $1,571 for financial reporting purposes
for the years ended December 31, 1997, 1996 and 1995, respectively. The
mortgage note receivable balance relating to this restaurant property at
December 31, 1997 and 1996, was $883,417 and $889,891, respectively, including
accrued interest of $8,665 and $8,729, respectively, and net of the remaining
deferred gain of $139,693 and $140,717, respectively. We anticipate that
payments collected under the mortgage note will be reinvested in additional
restaurant properties or used for other Income Fund purposes.
In addition, in October 1996, the Income Fund sold its restaurant property
in St. Cloud, Florida, to the tenant for $1,150,000. In connection therewith,
the Income Fund received $100,000 in cash and accepted the remaining sales
proceeds in the form of a promissory note in the principal sum of $1,057,299,
representing the balance of the sales price of $1,050,000 plus tenant closing
costs in the amount of $7,299 the Income Fund financed on behalf of the tenant.
The promissory note bears interest at a rate of 10.75% per annum, is
collateralized by a mortgage on the restaurant property, and is being collected
in 12 monthly installments of interest only and thereafter in 168 equal monthly
installments of principal and interest. This sale is also being accounted for
under the installment sales method for financial reporting purposes; therefore,
the gain on the sale of the restaurant property was deferred and is being
recognized as income proportionately as payments of principal under the
mortgage note are collected. The Income Fund recognized a gain of $338 and
$18,445 for financial reporting purposes for the years ended December 31, 1997
and 1996, respectively, and had a deferred gain in the amount of $183,465 and
$183,802 at December 31, 1997 and 1996. The mortgage note receivable balance
relating to this restaurant property at December 31, 1997 and 1996, was
$874,443 and $882,967, including accrued interest of $2,747 and $9,471, and net
of the remaining deferred gain of $183,465 and $183,802. Payments collected
under the mortgage note totaling $100,000 were used to pay liabilities of the
Income Fund, including quarterly distributions to the Limited Partners. We
anticipate that payments collected under the mortgage note in the future will
be reinvested in additional restaurant properties or used for other Income Fund
purposes.
In January 1997, the Income Fund sold its restaurant property in Franklin,
Tennessee, to the tenant, for $980,000 and received net sales proceeds of
$960,741. Since the Income Fund had previously established an allowance for
loss on land and building of $169,463 as of December 31, 1996 relating to this
restaurant property, no loss was recognized during 1997 as a result of this
sale. The Income Fund used $360,000 of the
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net sales proceeds to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners. In addition, in June 1997, the Income
Fund entered into an operating agreement for the restaurant property located in
South Haven, Michigan, with an operator to operate the restaurant property as
an Arby's restaurant. In connection therewith, the Income Fund used
approximately $120,400 of the net sales proceeds from the sale of the
restaurant property in Franklin, Tennessee, to fund conversion costs associated
with the Arby's restaurant property. In December 1997, the Income Fund
reinvested approximately $244,800 of the net sales proceeds in a restaurant
property located in Sandy, Utah, and approximately $150,000 in a restaurant
property located in Vancouver, Washington, as tenants-in-common with certain of
our affiliates, as described below. The Income Fund intends to use the
remaining net sales proceeds from the sale of the restaurant property in
Franklin, Tennessee to fund additional renovation costs relating to the
restaurant property in South Haven, Michigan, described above, and to pay
liabilities of the Income Fund, including quarterly distributions to the
Limited Partners.
In May 1997, the Income Fund sold its restaurant property in Smyrna,
Tennessee, to a third party for $655,000 and received net sales proceeds of
$634,310, resulting in a gain of $101,995 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in March
1989 and had a cost of approximately $569,500, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $64,800 in excess of its original
purchase price. The Income Fund used approximately $82,500 of the net sales
proceeds to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners. In addition, in October 1997, the Income
Fund reinvested approximately $460,900 of the net sales proceeds in a
restaurant property in Mesa, Arizona, as tenants-in-common with one of our
affiliates. In December 1997, the Income Fund reinvested remaining net sales
proceeds in a restaurant property located in Vancouver, Washington, as tenants-
in-common with certain of our affiliates, as described below. The Income Fund
anticipates that it will distribute amounts sufficient to enable the Limited
Partners to pay federal and state taxes, if any (at a level reasonably assumed
by us), resulting from the sale.
In June 1997, the Income Fund terminated the leases with the tenant of the
restaurant properties in Connorsville and Richmond, Indiana. In connection
therewith, the Income Fund accepted a promissory note from the former tenant
for $35,297 for amounts relating to past due real estate taxes as a result of
the former tenant's financial difficulties. The promissory note, which is
uncollateralized, bears interest at a rate of 10% per annum and is being
collected in 36 monthly installments. Receivables at December 31, 1997 included
$37,099 of such amounts, including accrued interest of $1,802. In July 1997,
the Income Fund entered into a new lease for the restaurant property in
Connorsville, Indiana, with a new tenant to operate the restaurant property as
an Arby's restaurant. In connection therewith, the Income Fund incurred
$125,000 in renovation costs which were paid in 1998.
In September 1997, the Income Fund sold its restaurant property in Salem,
New Hampshire, to the tenant for $1,295,172 and received net sales proceeds
(net of $1,773 which represents prorated rent returned to the tenant) of
$1,270,365, resulting in a gain of approximately $141,508 for financial
reporting purposes. This restaurant property was originally acquired by the
Income Fund in May 1989 and had a cost of approximately $1,085,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the Income
Fund sold the restaurant property for approximately $187,000 in excess of its
original purchase price. In December 1997, the Income Fund reinvested the net
sales proceeds in a restaurant property located in Sandy, Utah, as described
below. We believe that the transaction, or a portion thereof, relating to the
sale of the restaurant property in Salem, New Hampshire, and the reinvestment
of the proceeds qualified as a like-kind exchange transaction for federal
income tax purposes. However, the Income Fund distributed amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, if any (at a
level reasonably assumed by us), resulting from the sale.
In addition, in September 1997, the Income Fund sold its restaurant property
in Port St. Lucie, Florida, to the tenant for $1,220,000 and received net sales
proceeds of $1,216,750, resulting in a gain of approximately $125,309 for
financial reporting purposes. This restaurant property was originally acquired
by
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the Income Fund in November 1989 and had a cost of approximately $1,176,100,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant property for approximately $40,700 in
excess of its original purchase price. In November 1997, the Income Fund
reinvested the majority of the net sales proceeds in an IHOP restaurant
property located in Houston, Texas. We believe that the transaction, or a
portion thereof, relating to the sale of the restaurant property in Port St.
Lucie, Florida, and the reinvestment of the proceeds qualified as a like-kind
exchange transaction for federal income tax purposes. However, the Income Fund
distributed amounts sufficient to enable the Limited Partners to pay federal
and state income taxes, if any (at a level reasonably assumed by us), resulting
from the sale.
During the year ended December 31, 1996, the Income Fund established an
allowance for the restaurant property in Richmond, Indiana, in the amount of
$70,062 which represented the difference between the restaurant property's
carrying value at December 31, 1996, and the property manager's estimate of net
realizable value of the restaurant property based on an anticipated sales price
of this restaurant property. In November 1997, the Income Fund sold this
restaurant property to a third party for $400,000 and received net sales
proceeds of $385,179. As a result of this transaction, the Income Fund
recognized a loss of $141,567 for financial reporting purposes. In December
1997, the Income Fund reinvested the net sales proceeds in a restaurant
property located in Vancouver, Washington, as tenants-in-common with certain of
our affiliates, as described below.
In addition, in December 1997, the Income Fund sold its restaurant property
in Tampa, Florida, to a third party for $850,000 and received net sales
proceeds (net of $724 which represents prorated rent returned to the tenant) of
$804,451 resulting in a gain of $180,704 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in February 1989
and had a cost of approximately $673,200, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $132,000 in excess of its original
purchase price. The Income Fund intends to use $50,000 of the net sales
proceeds to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners. The Income Fund intends to distribute
some or all of the remaining net sales proceeds to the Limited Partners. The
Income Fund will distribute amounts sufficient to enable the Limited Partners
to pay federal and state income taxes, if any (at a level reasonably assumed by
us), resulting from the sale. The remaining net sales proceeds, if any, will be
used for other Income Fund purposes.
As described above, in December 1997, the Income Fund used the majority of
the net sales proceeds from the sale of the restaurant properties in Franklin,
Tennessee and Salem, New Hampshire, to acquire a restaurant property located in
Sandy, Utah. In addition, in December 1997, the Income Fund used the majority
of the net sales proceeds from the sale of the restaurant properties in
Franklin and Smyrna, Tennessee and Richmond, Indiana, in a restaurant property
located in Vancouver, Washington, as tenants-in-common with certain of our
affiliates.
In January 1998, the Income Fund sold its restaurant property in Port
Orange, Florida, to the tenant, for $1,330,000 and received net sales proceeds
(net of $2,909 which represents prorated rent returned to the tenant) of
$1,283,096, resulting in a gain of approximately $350,300 for financial
reporting purposes. The Income Fund intends to distribute some or all of the
net sales proceeds to the Limited Partners. The remaining net sales proceeds,
if any, will be used for other Income Fund purposes. In addition, in February
1998, the Income Fund sold its restaurant property in Tyler, Texas, to the
tenant, for $850,000 and received net sales proceeds of $844,229, resulting in
a gain of approximately $155,900 for financial reporting purposes. The Income
Fund intends to reinvest the sales proceeds in an additional restaurant
property during 1998, or use the net sales proceeds for other Income Fund
purposes.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund.
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Certain of our affiliates from time to time incur certain operating expenses on
behalf of the Income Fund for which the Income Fund reimburses the affiliates
without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At December 31, 1997, the
Income Fund had $1,361,290 invested in such short-term investments as compared
to $362,922 at December 31, 1996. The increase in cash and cash equivalents
during 1997, is primarily attributable to the receipt of net sales proceeds
relating to the sales of several restaurant properties, as described above.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $77,353, $113,560 and $114,204, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$109,367 and $121,464, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, as of December 31, 1997,
the Income Fund had incurred $34,500 in a real estate disposition fee due to an
affiliate as a result of its services in connection with the sale during 1996,
of the restaurant property in St. Cloud, Florida. Amounts payable to other
parties, including distributions payable, increased to $817,621 at December 31,
1997, from $705,130 at December 31, 1996, primarily as a result of incurring
$125,000 in renovation costs relating to the Income Fund's restaurant property
located in Connorsville, Indiana, which were paid in the nine months ended
September 30, 1998. Liabilities at December 31, 1997, to the extent they exceed
cash and cash equivalents (excluding the net sales proceeds held at December
31, 1997 from the sale of restaurant properties, as described above), at
December 31, 1997, will be paid from future cash from operations, from amounts
collected under the mortgage notes described above or, in the event we elect to
make additional capital contributions, from future contributions from us.
Based primarily on current and anticipated future cash from operations, a
portion of the sales proceeds received from the sales of the restaurant
properties and additional capital contributions from us, the Income Fund
declared distributions to the Limited Partners of $2,300,000 for each of the
years ended December 31, 1997, 1996 and 1995. This represents distributions of
$46 per Unit for each of the years ended December 31, 1997, 1996 and 1995. As
noted above, we distributed some of the net sales proceeds from the sales of
the restaurant properties in Tampa and Port Orange, Florida, to the Limited
Partners in April 1998. In deciding whether to sell restaurant properties, we
will consider factors such as potential capital appreciation, net cash flow,
and federal income tax considerations. The reduced number of restaurant
properties for which the Income Fund receives rental payments, as well as
ongoing operations, is expected to reduce the Income Fund's revenues. The
decrease in Income Fund revenues, combined with the fact that a significant
portion of the Income Fund's expenses are fixed in nature, is expected to
result in a decrease in cash distributions to the Limited Partners during 1998.
No amounts distributed or to be distributed to the Limited Partners for the
years ended December 1997, 1996 and 1995, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because all
leases of the Income Fund's restaurant 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 Income Fund has
insufficient funds for such purposes, we will contribute to the Income Fund an
aggregate amount of up to one percent of the offering proceeds for maintenance
and repairs.
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Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, CNL/Longacre Joint Venture, owned and leased 26
wholly-owned restaurant properties (including six restaurant properties which
were sold during 1997) and during the nine months ended September 30, 1998, the
Income Fund and CNL/Longacre Joint Venture owned and leased 25 wholly-owned
restaurant properties (including two restaurant properties sold in 1998), to
operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund and CNL/Longacre Joint Venture earned $1,028,589 and $1,160,634,
respectively, in rental income from operating leases and earned income from
direct financing leases, $338,068 and $378,168 of which was earned during the
quarters ended September 30, 1998 and 1997, respectively. Rental and earned
income decreased approximately $142,600 and $481,600 during the quarter and
nine months ended September 30, 1998, respectively, as compared to the quarter
and nine months ended September 30, 1997, as a result of the sales of
restaurant properties during 1997 and 1998. The decrease in rental and earned
income was partially offset by an increase of approximately $81,200 and
$243,600 during the quarter and nine months ended September 30, 1998,
respectively, due to the reinvestment of a portion of net sales proceeds from
the 1997 sales, in two restaurant properties in Houston, Texas and Sandy, Utah,
in November 1997 and December 1997, respectively.
The decrease in rental income was partially offset by the fact that during
the nine months ended September 30, 1997, the Income Fund increased its
allowance for doubtful accounts for the restaurant properties located in
Connorsville and Richmond, Indiana, due to financial difficulties the tenant
was experiencing. No such allowance was established during the nine months
ended September 30, 1998, due to the fact that the Income Fund re-leased the
restaurant property located in Connorsville, Indiana, to a new tenant for which
rent commenced subsequent to September 30, 1997 and sold the restaurant
property located in Richmond, Indiana in November 1997.
Rental and earned income also decreased during the quarter and nine months
ended September 30, 1998, by approximately $9,000 and $26,300, respectively,
due to the fact that in August 1998, the Income Fund retroactively terminated
the lease with the tenant of the restaurant property in Daleville, Indiana. The
Income Fund is currently seeking a new tenant or purchaser for this restaurant
property. Rental and earned income are expected to remain at reduced amounts
until such time as the Income Fund executes a new lease or until the restaurant
property is sold and the proceeds from such sale is reinvested in an additional
restaurant property.
Rental and earned income during the nine months ended September 30, 1998 and
1997, continued to remain at reduced amounts due to the fact that the Income
Fund is not receiving any rental income relating to the restaurant properties
in Belding, Michigan, and Lebanon, New Hampshire. We are currently seeking
purchasers or new tenants for these restaurant properties. Rental and earned
income are expected to remain at reduced amounts until such time as the Income
Fund executes new leases for these restaurant properties or until the
restaurant properties are sold and the proceeds from such sales are reinvested
in additional restaurant properties.
For the nine months ended September 30, 1998 and 1997, the Income Fund also
earned $33,412 and $68,056, respectively, in contingent rental income, $10,084
and $15,404 which were earned during the quarters ended September 30, 1998 and
1997, respectively. The decrease in contingent rental income during the quarter
and nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is primarily attributable to restaurant
property sales during 1997 and 1998 and decreases in restaurant sales of
restaurant properties, the leases of which require the payment of contingent
rental income.
During the nine months ended September 30, 1997, the Income Fund owned and
leased two restaurant properties indirectly through other joint venture
arrangements. During the nine months ended September 30, 1998, the Income Fund
owned and leased two restaurant properties as tenants-in-common with certain of
our
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affiliates and three restaurant properties indirectly through joint venture
arrangements. In connection therewith, during the nine months ended September
30, 1998 and 1997, the Income Fund earned $112,418 and $33,549, respectively,
attributable to net income earned by unconsolidated joint ventures in which the
Income Fund is a co-venturer, $40,315 and $11,144 of which were earned during
the quarters ended September 30, 1998 and 1997, respectively. The increase in
net income earned by these joint ventures during the quarter and nine months
ended September 30, 1998, as compared to the quarter and nine months ended
September 30, 1997, is primarily attributable to the fact that subsequent to
September 30, 1997, the Income Fund reinvested a portion of the net sales
proceeds it received from the 1997 and 1998 sales of several restaurant
properties in two restaurant properties in Mesa, Arizona and Vancouver,
Washington, with certain of our affiliates as tenants-in-common and acquired an
interest in RTO Joint Venture with one of our affiliates, as described above in
"Liquidity and Capital Resources."
During at least one of the nine months ended September 30, 1998 and 1997,
five lessees of the Income Fund and its consolidated joint venture, Golden
Corral Corporation, Slaymaker Group, Inc., DenAmerica, Inc., Shoney's, Inc.,
and Tampa Foods, L.P., each contributed more than 10% of the Income Fund's
total rental income (including rental income from the Income Fund's
consolidated joint venture, the Income Fund's share of the rental income from
restaurant properties owned by unconsolidated joint ventures in which the
Income Fund is a co-venturer and restaurant properties owned with affiliates as
tenants-in-common). As of September 30, 1998, Golden Corral Corporation was the
lessee under the leases relating to two restaurants, Slaymaker Group, Inc. was
the lessee under a lease relating to one restaurant, DenAmerica, Inc. was the
lessee under leases relating to two restaurants, Shoney's, Inc. was the lessee
under the leases relating to two restaurants, and Tampa Foods, L.P. was the
lessee under the leases relating to one restaurant. It is anticipated that
based on the minimum rental payments required by the leases, Slaymaker Group,
Inc. and Golden Corral Corporation each will continue to contribute more than
10% of the Income Fund's total rental income during the remainder of 1998 and
subsequent years. In addition, during at least one of the nine months ended
September 30, 1998 and 1997, five restaurant chains, Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), Wendy's Old Fashioned Hamburger
Restaurants ("Wendy's"), Tony Roma's Famous for Ribs Restaurant ("Tony
Roma's"), Denny's, and Perkins each accounted for more than 10% of the Income
Fund's total rental income. It is anticipated that, based on the minimum rental
payments required by the leases, Golden Corral and Tony Roma's each will
continue to contribute more than 10% of the Income Fund's total rental income
during the remainder of 1998 and subsequent years. Any failure of these lessees
or restaurant chains could materially affect the Income Fund's income.
Interest and other income was $223,647 and $227,320 for the nine months
ended September 30, 1998 and 1997, respectively, $58,791 and $93,169 of which
was earned during the quarters ended September 30, 1998 and 1997, respectively.
The decrease in interest and other income during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is primarily
attributable to interest earned on the sales proceeds received during the
quarter ended September 30, 1997, from the 1997 sales of restaurant properties
which had not been reinvested as of September 30, 1997.
Operating expenses, including depreciation expense, were $370,142 and
$448,852 for the nine months ended September 30, 1998 and 1997, respectively,
of which $120,809 and $150,248 were incurred for the quarters ended September
30, 1998 and 1997, respectively. The decrease in operating expenses during the
quarter and nine months ended September 30, 1998, as compared to the quarter
and nine months ended September 30, 1997, was primarily attributable to a
decrease in depreciation expense due to the sales of several restaurant
properties during 1997 and 1998.
Due to the tenant defaults under the leases for the restaurant properties in
Belding, Michigan, and Lebanon, New Hampshire, the Income Fund and its
consolidated joint venture, CNL/Longacre Joint Venture, expect to continue to
incur operating expenses relating to such restaurant properties until the
restaurant properties are sold or re-leased to new tenants.
As a result of the sale of the restaurant properties in Myrtle Beach, South
Carolina and St. Cloud, Florida, in August 1995 and October 1996, respectively,
and recording the gains from such sales using the installment
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method, the Income Fund recognized gains for financial reporting purposes of
$2,621 and $758, during the nine months ended September 30, 1998 and 1997,
respectively, $838 and $259 of which were recognized during the quarters ended
September 30, 1998 and 1997, respectively.
As a result of the sales of two restaurant properties during the nine months
ended September 30, 1998, as described above in "Liquidity and Capital
Resources," the Income Fund recognized total gains of $440,822 for financial
reporting purposes. As a result of the sale of three restaurant properties
during the nine months ended September 30, 1997, the Income Fund recognized a
gain of $368,812 for financial reporting purposes, $266,817 of which was
recognized during the quarter ended September 30, 1997.
During the nine months ended September 30, 1997, the Income Fund recorded an
allowance for loss on land and building of $142,990 for financial reporting
purposes, relating to the restaurant property in Richmond, Indiana. The loss
represented the difference between the restaurant property's net carrying value
at September 30, 1997 and the estimated net realizable value. This restaurant
property was sold in November 1997.
In addition, during the quarter and nine months ended September 30, 1998,
the Income Fund established an allowance for loss on land and buildings of
$120,508 and $273,141, respectively, for financial reporting purposes relating
to the restaurant properties in Daleville, Indiana and Belding, Michigan,
respectively. The allowances represent the aggregate difference between the net
carrying value at September 30, 1998 and the current estimated net realizable
value at September 30, 1998 for each restaurant property.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 27 wholly-owned restaurant
properties (including one restaurant property in Myrtle Beach, South Carolina,
which was sold in August 1995), during 1996, the Income Fund owned and leased
26 wholly-owned restaurant properties (including one restaurant property in St.
Cloud, Florida, which was sold in October 1996) and during 1997, the Income
Fund owned 27 wholly-owned restaurant properties (including six restaurant
properties, one in each of Franklin and Smyrna, Tennessee; Salem, New
Hampshire; Port St. Lucie and Tampa, Florida and Richmond, Indiana, which were
sold during the year ended December 31, 1997). In addition, during 1997, 1996
and 1995, the Income Fund was a co-venturer in three separate joint ventures
that each owned and leased one restaurant property and during 1997, the Income
Fund owned and leased two restaurant properties, with certain of our
affiliates, as tenants-in-common. As of December 31, 1997, the Income Fund
owned, either directly or through joint venture arrangements, 26 restaurant
properties which are, in general, subject to long-term, triple-net leases. The
leases of the restaurant properties provide for minimum base annual rental
amounts (payable in monthly installments) ranging from approximately $37,800 to
$222,800. Generally, the leases provide for percentage rent based on sales in
excess of a specified amount to be paid annually. In addition, a majority of
the leases provide that, commencing in the sixth lease year, the percentage
rent will be an amount equal to the greater of (i) the percentage rent
calculated under the lease formula or (ii) a specified percentage (ranging from
one-fourth to five percent) of the purchase price paid by the Income Fund for
the restaurant property.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, CNL/Longacre Joint Venture, earned $1,500,967,
$1,931,573 and $2,068,342, respectively, in rental income from operating leases
and earned income from direct financing leases. The decrease in rental and
earned income during the year ended December 31, 1997, as compared to 1996, was
partially attributable to a decrease of approximately $322,300 as a result of
the sale of its restaurant properties in St. Cloud, Florida (in October 1996),
Franklin, Tennessee (in January 1997), Smyrna, Tennessee (in May 1997), Salem,
New Hampshire (in September 1997), Port St. Lucie, Florida (in September 1997)
and Tampa, Florida (in December 1997), as described above in "Liquidity and
Capital Resources." During 1997, the decrease in rental income was partially
offset by an increase of approximately $24,700 due to the reinvestment of a
portion of these net sales proceeds in a restaurant property in Houston, Texas
and Sandy, Utah, in November 1997 and December 1997, respectively, as described
above in "Liquidity and Capital Resources."
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Rental and earned income also decreased in 1997 and 1996, each as compared
to the previous year, as a result of the Income Fund increasing its allowance
for doubtful accounts by approximately $57,700 and $29,500, respectively, for
rental and other amounts relating to the Hardee's restaurant properties located
in Connorsville and Richmond, Indiana, which were leased by the same tenant,
due to financial difficulties the tenant was experiencing. Rental and earned
income decreased by approximately $79,200 during 1997 due to the fact that the
Income Fund terminated the lease with the former tenant of these restaurant
properties in June 1997, as described above in "Liquidity and Capital
Resources." We have agreed that they will cease collection efforts on past due
rental amounts once the former tenant of these restaurant properties pays all
amounts due under the promissory note for past due real estate taxes described
above in "Liquidity and Capital Resources." The decrease in rental and earned
income was slightly offset by an increase of $8,500 in rental income from the
new tenant of the restaurant property in Connorsville, Indiana, who began
operating the restaurant property after it was renovated into an Arby's
restaurant property. In November 1997, the Income Fund sold its restaurant
property in Richmond, Indiana, as described above in "Liquidity and Capital
Resources."
The decrease in rental and earned income during 1996, as compared to 1995,
was partially attributable to a decrease of approximately $95,000 as a result
of the sale of its restaurant properties in Myrtle Beach, South Carolina and
St. Cloud, Florida, in August 1995 and October 1996, respectively, as described
above in "Liquidity and Capital Resources." As a result of accepting promissory
notes in conjunction with each of these sales of restaurant properties, as
described above in "Liquidity and Capital Resources," interest income increased
during 1997 and 1996 as described below.
Rental and earned income also decreased by approximately $8,100 during 1996,
as compared to 1995, due to the fact that in October 1995, the tenant ceased
operations of the restaurant property in South Haven, Michigan. In June 1997,
the Income Fund incurred renovation costs to convert the restaurant property
into an Arby's restaurant and entered into an operating agreement for this
restaurant property with an operator, as described above in "Liquidity and
Capital Resources," and earned approximately $5,100 in rental income during
1997 from the operator of the restaurant property.
Rental and earned income in 1997, 1996 and 1995, continued to remain at
reduced amounts due to the fact that the Income Fund is not receiving any
rental income from the restaurant properties in Belding and South Haven,
Michigan and Lebanon, New Hampshire, as a result of the tenants defaulting
under the terms of their leases and ceasing operations of the restaurants on
the restaurant properties during 1995. During 1997, the Income Fund located a
new tenant for the restaurant property in South Haven, Michigan, as described
above. We are still seeking replacement tenants or purchasers for the
restaurant properties in Belding, Michigan and Lebanon, New Hampshire.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund earned
$233,633, $130,167 and $104,455, respectively, in contingent rental income. The
increase in contingent rental income during 1997, as compared to 1996, is
primarily attributable to amounts collected under the operating agreement with
the new operator of the restaurant property located in South Haven, Michigan.
The operating agreement provides for payment to the Income Fund of reduced base
rents and a percentage of the net operating income generated by the restaurant.
The Income Fund expects to continue to receive such amounts until a lease is
entered into with the current operator, at which time contingent rental income
is expected to decrease, but at which time base rent is expected to increase.
The increase in contingent rental income during 1996, as compared to 1995, is
partially attributable to increased gross sales of certain restaurant
properties requiring the payment of contingent rent.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $288,637, $137,385 and $55,785, respectively, in interest income. The
increase in interest income during 1997 and 1996, each as compared to the
previous year, was primarily attributable to the interest earned on the
mortgage notes receivable accepted in connection with the sale of the
restaurant properties in St. Cloud, Florida and Myrtle Beach, South Carolina in
October 1996 and August 1995, respectively. In addition, interest income
increased during 1997 due to interest earned on the net sales proceeds received
relating to the sales of the restaurant properties in Smyrna, Tennessee; Salem,
New Hampshire; Port St. Lucie, Florida; Richmond, Indiana and
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Tampa, Florida. Interest income is expected to decrease during 1998 as net
sales proceeds held at December 31, 1997, are reinvested in additional
restaurant properties, distributed to the Limited Partners or used for other
Income Fund purposes.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $56,015, $46,452 and $47,018, respectively, attributable to
net income earned by unconsolidated joint ventures in which the Income Fund is
a co-venturer. The increase in net income earned by joint ventures during 1997,
as compared to 1996, is primarily attributable to the fact that in October
1997, the Income Fund acquired an interest in a restaurant property in Mesa,
Arizona, with affiliates as tenants-in-common, as described above in "Liquidity
and Capital Resources." Net income earned by this joint venture is expected to
increase during 1998 as a result of the Income Fund acquiring an interest in a
restaurant property in Vancouver, Washington, in December 1997, with certain of
our affiliates, as described above in "Liquidity and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, two lessees of the
Income Fund and its consolidated joint venture, Shoney's, Inc. and Golden
Corral Corporation, each contributed more than 10% of the Income Fund's total
rental income (including rental income from the Income Fund's consolidated
joint venture and the Income Fund's share of the rental income from two
restaurant properties owned by unconsolidated joint ventures and two restaurant
properties owned with affiliates as tenants-in-common). As of December 31,
1997, Shoney's, Inc. was the lessee under leases relating to four restaurants
and Golden Corral Corporation was the lessee under leases relating to two
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, these two lessees will continue to contribute more than
10% of the Income Fund's total rental income during 1998 and subsequent years.
In addition, three restaurant chains, Perkins, Denny's and Wendy's Old
Fashioned Hamburger Restaurants, each accounted for more than 10% of the Income
Fund's total rental and mortgage interest income during 1997, 1996 and 1995
(including rental income from the Income Fund's consolidated joint venture and
the Income Fund's share of the rental income from two restaurant properties
owned by unconsolidated joint ventures and two restaurant properties owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these three restaurant chains each will continue to account for more than 10%
of the total rental and mortgage interest income to which the Income Fund is
entitled under the terms of the leases and mortgage note. Any failure of these
lessees or restaurant chains could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$574,472, $631,565 and $640,922 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997 and 1996,
each as compared to the previous year, was partially attributable to a decrease
in depreciation expense as a result of the sales of restaurant properties in
1997, 1996 and 1995, as described above in "Liquidity and Capital Resources."
Operating expenses also decreased during 1996, as compared to 1995, due to
the fact that the Income Fund and its consolidated joint venture, CNL/Longacre
Joint Venture, recorded approximately $35,100, $40,700 and $47,200 during the
years ended December 31, 1997, 1996 and 1995, respectively, for real estate
taxes relating to the restaurant properties in Lebanon, New Hampshire and
Belding and South Haven, Michigan, as a result of lease terminations. The
Income Fund entered into an operating agreement with an operator for the
restaurant property in South Haven, Michigan, as described above in "Liquidity
and Capital Resources," and is currently seeking either a replacement tenant or
a purchaser for the restaurant properties in Lebanon, New Hampshire and
Belding, Michigan, as described above in "Liquidity and Capital Resources." The
Income Fund expects to continue to incur real estate taxes, insurance and
maintenance expense for its restaurant properties in Lebanon, New Hampshire and
Belding, Michigan, until such time as a new lease is executed for each
restaurant property or until each restaurant property is sold.
The decrease in operating expenses during 1996, as compared to 1995, is
partially offset by an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
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In connection with the sale of its restaurant properties in St. Cloud,
Florida and Myrtle Beach, South Carolina, during 1996 and 1995, respectively,
as described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain for financial reporting purposes of $1,362, $19,369 and
$1,571 for the years ended December 31, 1997, 1996 and 1995, respectively. In
accordance with Statement of Financial Accounting Standards No. 66, "Accounting
for Sales of Real Estate," the Income Fund recorded the sales using the
installment sales method. As such, the gain on the sales was deferred and is
being recognized as income proportionately as payments under the mortgage notes
are collected. Therefore, the balance of the deferred gain of $323,157 at
December 31, 1997, will be recognized as income in future periods as payments
are collected. For federal income tax purposes, gains of approximately $194,100
and $136,900 from the sale of the restaurant properties in St. Cloud, Florida,
and Myrtle Beach, South Carolina, respectively, were also deferred and are
being recognized as payments under the mortgage notes are collected.
As a result of the sales of the restaurant properties in Smyrna, Tennessee;
Salem, New Hampshire; and Port St. Lucie and Tampa, Florida, as described above
in "Liquidity and Capital Resources," the Income Fund recognized gains totaling
$549,516 during 1997, for financial reporting purposes. The gains for 1997,
were partially offset by a loss of $141,567 for financial reporting purposes,
resulting from the November 1997 sale of the restaurant property in Richmond,
Indiana, as described above in "Liquidity and Capital Resources." In October
1995, the Income Fund also sold a portion of the land relating to its
restaurant property in Dalesville, Indiana, as the result of a right of way
taking and recognized a gain for financial reporting purposes of $4,353 during
the year ended December 31, 1995.
During 1997, the Income Fund established an allowance for loss on land and
building of $151,671 for financial reporting purposes relating to the
restaurant property in Belding, Michigan. The allowance represents the
difference between the restaurant property's carrying value at December 31,
1997 and the estimated net realizable value for this restaurant property. In
addition, an allowance was established for loss on land and building of $99,023
for financial reporting purposes relating to the restaurant property in
Lebanon, New Hampshire, owned by the Income Fund's consolidated joint venture.
The allowance represents the difference between the restaurant property's
carrying value at December 31, 1997 and the estimated new realizable value,
based on an anticipated sales price for the restaurant property.
At December 31, 1996, the Income Fund established an allowance for loss on
land and building in the amount of $169,463 for financial reporting purposes.
The allowance represented the difference between (i) the restaurant property's
carrying value at December 31, 1996, plus the additional rental income (accrued
rental income) that the Income Fund had recognized since inception of the lease
relating to the straight-lining of future scheduled rent increases minus (ii)
the net realizable value of $960,741 received as net sales proceeds in
conjunction with the sale of the restaurant property in January 1997, as
described above in "Liquidity and Capital Resources."
In addition, during 1996, the Income Fund established an allowance for loss
on land and building for its restaurant property in Richmond, Indiana. The
allowance of $70,062 represented the difference between the restaurant
property's carrying value at December 31, 1996, and the estimated fair value of
the restaurant property based on an anticipated sales price of this restaurant
property. This restaurant property was sold in November 1997, as described
above in "Liquidity and Capital Resources."
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are, in general, triple-
net leases and contain provisions that we 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
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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 (for certain
restaurant properties) over time. Continued inflation also may cause capital
appreciation of the Income Fund's restaurant 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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VI, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 17, 1988, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurant properties, as
well as land upon which restaurants were to be constructed, which are leased
primarily to operators of selected national and regional fast-food and family-
style restaurant chains. The leases are triple-net leases, with the lessees
generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of September 30, 1998, the Income Fund owned 41
restaurant properties, which included six restaurant properties owned by joint
ventures in which the Income Fund is a co-venturer and five restaurant
properties owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $2,445,813 and $2,375,171. The increase in cash from
operations for the nine months ended September 30, 1998, is primarily a result
of changes in the Income Fund's working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
In July 1997, the Income Fund entered into a new lease for the restaurant
property in Greensburg, Indiana, with a new tenant to operate the restaurant
property as an Arby's restaurant. In connection therewith, the Income Fund paid
$125,000 during the nine months ended September 30, 1998, in renovation costs,
which had been incurred and accrued as construction costs payable at December
31, 1997.
In January 1998, the Income Fund used the net sales proceeds from the 1997
sale of several restaurant properties to acquire a restaurant property in
Overland Park, Kansas, and a restaurant property in Memphis, Tennessee, as
tenants-in-common with certain of our affiliates. In connection therewith, the
Income Fund and the affiliates entered into separate agreements whereby each
co-venturer will share in the profits and losses of each restaurant property in
proportion to its applicable percentage interest. As of September 30, 1998, the
Income Fund had contributed $558,064 and $694,806 to own a 34.74% and 46.2%
interest, respectively, in the restaurant properties in Overland Park, Kansas,
and Memphis, Tennessee, respectively.
In January 1998, the Income Fund sold its restaurant property in Deland,
Florida, to the tenant, for $1,250,000 and received net sales proceeds of
$1,234,122, resulting in a gain of $345,122 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in October
1989 and had a cost of approximately $1,000,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $234,100 in excess of its original
purchase price. In June 1998, the Income Fund reinvested $1,250,350 of the net
sales proceeds in a restaurant property in Fort Myers, Florida, with one of our
affiliates as tenants-in-common. We believe that the transaction, or a portion
thereof, relating to the sale of the restaurant property in Deland, Florida,
and the reinvestment of the net sales proceeds, will qualify as a like-kind
exchange transaction for federal income tax purposes. However, the Income Fund
will distribute amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any (at a level reasonably assumed by us),
resulting from the sale.
In February 1998, the Income Fund sold its restaurant property in Melbourne,
Florida, for $590,000 and received net sales proceeds of $552,910. Due to the
fact that during 1997, the Income Fund recorded an allowance for loss of
$158,239 for this restaurant property, no gain or loss was recognized for
financial
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reporting purposes in February 1998, relating to the sale. In April 1998, the
Income Fund contributed a portion of the net sales proceeds in Melbourne Joint
Venture, with one of our affiliates, to construct and hold one restaurant
property. As of September 30, 1998, the Income Fund had contributed $314,011 to
purchase land and pay construction costs relating to the property owned by the
joint venture. The Income Fund has agreed to contribute approximately $212,300
in additional construction costs to the joint venture. The Income Fund expects
to have a 50% interest in the profits and losses of the joint venture.
In addition, in February 1998, the Income Fund sold its restaurant property
in Liverpool, New York, for $157,500 and received net sales proceeds of
$145,221. Due to the fact that in prior years the Income Fund recorded an
allowance for loss of $181,970 for this restaurant property, no gain or loss
was recognized for financial reporting purposes in February 1998, relating to
the sale. The Income Fund intends to reinvest the net sales proceeds from the
sale of this restaurant property in an additional restaurant property.
In June 1998, the Income Fund sold its restaurant property in Bellevue,
Nebraska, to a third party and received sales proceeds of $900,000. Due to the
fact that during 1998 the Income Fund wrote off $155,528 in accrued rental
income, representing a portion of the accrued rental income that the Income
Fund had recognized since the inception of the lease relating to the straight-
lining of future scheduled rent increases in accordance with generally accepted
accounting principles, no gain or loss was recorded for financial reporting
purposes in June 1998 relating to this sale. This restaurant property was
originally acquired by the Income Fund in December 1989 and had a cost of
approximately $899,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $500 in excess of its original purchase price. In September
1998, the Income Fund contributed $898,094 of the net sales proceeds in Warren
Joint Venture. The Income Fund has an approximate 64% interest in the profits
and losses of Warren Joint Venture and the remaining interest in this joint
venture is held by one of our affiliates.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,353,864 invested in such short-term investments as compared
to $1,614,759 at December 31, 1997. The decrease in cash and cash equivalents
during the nine months ended September 30, 1998, is primarily attributable to
the payment of construction costs accrued at December 31, 1997, relating to the
Income Fund's restaurant property located in Greensburg, Indiana, as described
above. The funds remaining at September 30, 1998, after payment of
distributions and other liabilities, will be used to meet the Income Fund's
working capital and other needs and to acquire additional restaurant
properties.
Total liabilities of the Income Fund, including distributions payable,
decreased to $847,595 at September 30, 1998, from $1,054,345 at December 31,
1997, primarily as the result of a decrease in construction costs payable as a
result of the payment during the nine months ended September 30, 1998 of
construction costs accrued at December 31, 1997, relating to the Income Fund's
restaurant property in Greensburg, Indiana, as described above. The decrease in
liabilities was also partially due to a decrease in rents paid in advance and
amounts due to related parties at September 30, 1998, as compared to December
31, 1997. We believe the Income Fund has sufficient cash on hand to meet the
Income Fund's current working capital needs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $2,362,500 for each of the nine months ended September 30,
1998 and 1997 ($787,500 for each of the quarters ended September 30, 1998 and
1997). This represents distributions for each applicable nine months of $33.75
per unit ($11.25 per unit for each of the quarters ended September 30, 1998 and
1997). No distributions were made to us for the quarters and nine months ended
September 30, 1998 and 1997. No amounts distributed to the Limited Partners for
the nine months ended September 30, 1998 and 1997, are required to be or have
been treated by the Income Fund as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions. The Income Fund intends to continue to make distributions of
cash available to the Limited Partners on a quarterly basis.
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The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $3,156,041, $3,310,762 and
$3,222,430 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, and the
increase during 1996, as compared to 1995, are primarily a result of changes in
income and expenses as discussed in "Results of Operations" below and changes
in the Income Fund's working capital during each of the respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In June 1995, the Income Fund sold its restaurant property in Little Canada,
Minnesota, for $904,000 and received net sales proceeds of $899,503, resulting
in a gain of $103,283 for financial reporting purposes. This restaurant
property was originally acquired by the Income Fund in October 1989 and had a
cost of approximately $823,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $75,600 in excess of its original purchase price. In August
1995, the Income Fund reinvested $724,612 in a restaurant property in Broken
Arrow, Oklahoma. In addition, in August 1995, the Income Fund sold a small
parcel of vacant land adjacent to its restaurant property in Orlando, Florida,
for $7,500, resulting in a loss of $7,370 for financial reporting purposes. In
connection therewith, the Income Fund accepted a promissory note for $6,000.
The promissory note was collateralized by a mortgage on the restaurant
property, bore interest at a rate of nine percent per annum and was scheduled
to be collected in six monthly installments of $1,026, with collections
commencing September 1995. Receivables include $3,056 from the note at December
31, 1995. The receivable was collected in full during 1996.
In January 1996, the Income Fund reinvested the remaining net sales proceeds
from the 1995 sale of the restaurant property in Little Canada, Minnesota, in a
Golden Corral restaurant property located in Clinton, North Carolina, with
certain of our affiliates of as tenants-in-common. In connection therewith, the
Income Fund and its affiliates entered into an agreement whereby each co-
venturer will share in the profits and losses of the restaurant property in
proportion to its applicable percentage interest. As of December 31, 1997, the
Income Fund owned a 17.93% interest in this restaurant property.
In March 1996, the Income Fund entered into an agreement with the tenant of
the restaurant properties in Chester, Pennsylvania, and Orlando, Florida, for
payment of certain rental payment deferrals the Income Fund had granted to the
tenant through March 31, 1996. Under the agreement, the Income Fund agreed to
abate approximately $42,700 of the rental payment deferral amounts. The tenant
made payments of approximately $18,600 in each of April 1996 and March 1997 in
accordance with the terms of the agreement, and has agreed to pay the Income
Fund the remaining balance due of approximately $90,900 in six remaining annual
installments through 2002.
In December 1996, the Income Fund sold its restaurant property in Dallas,
Texas, to an unrelated third party for $1,016,000 and received net sales
proceeds of $982,980. This restaurant property was originally acquired by the
Income Fund in June 1994 and had a cost of approximately $980,900, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the Income
Fund sold the restaurant property for
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approximately $2,100 in excess of its original purchase price. Due to the fact
that the Income Fund had recognized accrued rental income since the inception
of the lease relating to the straight-lining of future scheduled rent increases
in accordance with generally accepted accounting principles, the Income Fund
wrote off the cumulative balance of such accrued rental income at the time of
the sale of this restaurant property, resulting in a loss on land and building
of $1,706 for financial reporting purposes. Due to the fact that the straight-
lining of future rent increases over the term of the lease is a non-cash
accounting adjustment, the write-off of these amounts is a loss for financial
statement purposes only. As of December 31, 1996, the net sales proceeds of
$977,017, plus accrued interest of $739, were being held in an interest bearing
escrow account pending the release of funds by the escrow agent to acquire an
additional restaurant property. In February 1997, the Income Fund reinvested
the net sales proceeds, along with additional funds, in a Bertucci's restaurant
property located in Marietta, Georgia, for a total cost of approximately
$1,112,600. We believe that the transaction, or a portion thereof, relating to
the sale of the restaurant property in Dallas, Texas and the reinvestment of
the net sales proceeds qualified as a like-kind exchange transaction for
federal income tax purposes. However, the Income Fund distributed amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any (at a level reasonably assumed by us), resulting from the sale.
In January 1997, Show Low Joint Venture, in which the Income Fund owns a 36%
interest, sold the restaurant property to the tenant for $970,000, resulting in
a gain to the joint venture of approximately $360,000 for financial reporting
purposes. The restaurant property was originally contributed to Show Low Joint
Venture in July 1990 and had a total cost of approximately $663,500, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the joint
venture sold the restaurant property for approximately $306,500 in excess of
its original purchase price. In June 1997, Show Low Joint Venture reinvested
$782,413 of the net sales proceeds in a restaurant property in Greensboro,
North Carolina. As of December 31, 1997, the Income Fund had received
approximately $70,000 representing a return of capital for its pro-rata share
of the uninvested net sales proceeds.
In July 1997, the Income Fund sold the restaurant property in Whitehall,
Michigan, to an unrelated third party, for $665,000 and received net sales
proceeds (net of $2,981 which represents amounts due to the former tenant for
prorated rent) of $626,907, resulting in a loss of $79,777 for financial
reporting purposes, as described below in "Results of Operations." The net
sales proceeds were reinvested in a restaurant property in Overland Park,
Kansas, with certain of our affiliates as tenants-in-common, in January 1998 as
described above.
In addition, in July 1997, the Income Fund sold its restaurant property in
Naples, Florida, to an unrelated third party, for $1,530,000 and received net
sales proceeds (net of $9,945 which represents amounts due to the former tenant
for prorated rent) of $1,477,780, resulting in a gain of $186,550 for financial
reporting purposes. This restaurant property was originally acquired by the
Income Fund in December 1989 and had a cost of approximately $1,083,900,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant property for approximately $403,800 in
excess of its original purchase price. In December 1997, the Income Fund
reinvested the net sales proceeds in an IHOP restaurant property in Elgin,
Illinois, for a total cost of approximately $1,484,100. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Naples, Florida, and the reinvestment of the net sales proceeds
qualified as a like-kind exchange transaction for federal income tax purposes.
However, the Income Fund distributed amounts sufficient to enable the Limited
Partners to pay federal and state income taxes, if any (at a level reasonably
assumed by us), resulting from the sale.
In addition, in July 1997, the Income Fund sold its restaurant property in
Plattsmouth, Nebraska, to the tenant, for $700,000 and received net sales
proceeds (net of escrow fees of $1,750) of $697,650, resulting in a gain of
$156,401 for financial reporting purposes. This restaurant property was
originally acquired by the Income Fund in January 1990 and had a cost of
approximately $561,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $138,400 in excess of its original purchase price. As
described above, in January 1998, the Income Fund reinvested the net sales
proceeds in an IHOP restaurant property in Memphis, Tennessee, with certain of
our affiliates as tenants-in-common. We believe that the transaction, or a
portion thereof, relating to the sale of the
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restaurant property in Plattsmouth, Nebraska, and the reinvestment of the net
sales proceeds qualified as a like-kind exchange transaction for federal income
tax purposes. However, the Income Fund distributed amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any (at a level
reasonably assumed by us), resulting from the sale.
In June 1997, the Income Fund terminated the lease with the tenant of the
restaurant property in Greensburg, Indiana. In connection therewith, the Income
Fund accepted a promissory note from this former tenant for $13,077 for amounts
relating to past due real estate taxes the Income Fund had incurred as a result
of the former tenant's financial difficulties. The promissory note, which is
uncollateralized, bears interest at a rate of 10% per annum, and is being
collected in 36 monthly installments. Receivables at December 31, 1997,
included $13,631 of such amounts, including accrued interest of $554. As
described above, in July 1997, the Income Fund entered into a new lease for the
restaurant property in Greensburg, Indiana, with a new tenant to operate the
restaurant property as an Arby's restaurant. In connection therewith, the
Income Fund agreed to fund $125,000 in renovation costs. The renovations were
completed in October 1997, at which time rent commenced.
In September 1997, the Income Fund sold its restaurant property in Venice,
Florida, to an unrelated third party, for $1,245,000 and received net sales
proceeds (net of $5,048 which represents amounts due to the former tenant for
prorated rent) of $1,201,648, resulting in a gain of $283,853 for financial
reporting purposes. This restaurant property was originally acquired by the
Income Fund in August 1989 and had a cost of approximately $1,032,400,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant property for approximately $174,300 in
excess of its original purchase price. In December 1997, the Income Fund
reinvested the net sales proceeds in an IHOP restaurant property in Manassas,
Virginia, for a total cost of approximately $1,126,800. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Venice, Florida, and the reinvestment of the net sales proceeds
qualified as a like-kind exchange transaction for federal income tax purposes.
However, the Income Fund distributed amounts sufficient to enable the Limited
Partners to pay federal and state income taxes if any (at a level reasonably
assumed by us), resulting from the sale.
In October 1997, the Income Fund and an affiliate, as tenants-in-common,
sold the restaurant property in Yuma, Arizona, in which the Income Fund owned a
51.67% interest, for a total sales price of $1,010,000 and received net sales
proceeds of $982,025, resulting in a gain, to the tenancy-in-common, of
approximately $128,400 for financial reporting purposes. The restaurant
property was originally acquired in July 1994 and had a total cost of
approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the restaurant property was sold for
approximately $120,300 in excess of its original purchase price. The Income
Fund received approximately $455,000, representing a return of capital for its
pro-rata share of the net sales proceeds. In December 1997, the Income Fund
reinvested the amounts received as a return of capital from the sale of the
Yuma, Arizona restaurant property, in a restaurant property in Vancouver,
Washington, as tenants-in-common with certain of our affiliates. We believe
that the transaction, or a portion thereof, relating to the sale of the
restaurant property in Yuma, Arizona and the reinvestment of the net sales
proceeds will qualify as a like-kind exchange transaction for federal income
tax purposes. However, the Income Fund will distribute amounts sufficient to
enable the Limited Partners to pay federal and state income taxes, if any (at a
level reasonably assumed by us), resulting from the sale.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At December 31, 1997, the
Income Fund had
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$1,614,759 invested in such short-term investments as compared to $1,127,930 at
December 31, 1996. The increase in cash and cash equivalents during 1997, is
primarily due to the receipt of $626,907 in net sales proceeds form the sale of
the restaurant property in Whitehall, Michigan in July 1997. This increase is
partially offset by a decrease in cash and cash equivalents due to the Income
Fund investing approximately $134,900 in a Bertucci's restaurant property, as
described above.
During 1997, 1996 and 1995, certain of our affiliates, incurred on behalf of
the Income Fund $82,503, $96,112 and $95,898, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$32,019 and $2,633, respectively, to affiliates for such amounts and accounting
and administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such amounts. Other liabilities of the Income
Fund, including distributions payable, increased to $1,022,326 at December 31,
1997, from $917,704 at December 31, 1996. The increase in other liabilities is
partially attributable to the Income Fund accruing renovation costs for the
restaurant property in Greensburg, Indiana, in connection with the new lease
entered into in July 1997, as described above. In addition, the increase in
other liabilities for 1997 was due to an increase in accrued and escrowed real
estate taxes payable due to the Income Fund accruing current real estate taxes
relating to its restaurant property in Melbourne, Florida, due to the fact that
the tenant vacated the restaurant property in October 1997. Other liabilities
also increased due to an increase in rents paid in advance. The increase in
other liabilities is partially offset by a decrease in distributions payable as
a result of the Income Fund accruing a special distribution payable to the
Limited Partners of $70,000 at December 31, 1996, which was paid in January
1997 from excess operating reserves.
Based on cash from operations, and cumulative excess operating reserves for
the year ended December 31, 1996, the Income Fund declared distributions to the
Limited Partners of $3,150,000, $3,220,000 and $3,150,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. This represents distributions
of $45, $46 and $45 per Unit for the years ended December 31, 1997, 1996 and
1995, respectively. No amounts distributed to the Limited Partners for the
years ended December 31, 1997, 1996 and 1995, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because the
leases of the Income Fund's restaurant 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 Income Fund has
insufficient funds for such purposes, we will contribute to the Income Fund an
aggregate amount of up to one percent of the offering proceeds for maintenance
and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, Caro Joint Venture, owned and leased 38 wholly-
owned restaurant properties (including four restaurant properties which were
sold in 1997), and during the nine months ended September 30, 1998, the Income
Fund and Caro Joint Venture owned and leased 35 wholly-owned restaurant
properties (including four restaurant properties which were sold in 1998) to
operators of fast-food and family-style restaurant chains. In connection
therewith, the Income Fund and Caro Joint Venture earned $2,092,304 and
$2,259,488 during the nine months ended September 30, 1998 and 1997,
respectively, in rental income from operating leases (net of adjustments to
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accrued rental income) and earned income from direct financing leases from
these restaurant properties, $708,045 and $701,591 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income for the nine months ended September 30, 1998 was
partially due to a decrease in rental and earned income as a result of the
sales of four restaurant properties during 1997 and the sales of four
restaurant properties during 1998. During the nine months ended September 30,
1998, the decrease in rental income was partially offset by an increase in
rental income, due to the reinvestment of the net sales proceeds from the 1996
sale of the restaurant property in Dallas, Texas, in a restaurant property in
Marietta, Georgia, in February 1997 and the reinvestment of the net sales
proceeds from the 1997 sales of two restaurant properties in two additional
restaurant properties, one in each of Elgin, Illinois and Manassas, Virginia,
in 1997.
The decrease in rental and earned income for the nine months ended September
30, 1998 was partially offset by an increase in rental income due to the fact
that during the nine months ended September 30, 1997, the Income Fund increased
its allowance for doubtful accounts for the restaurant property located in
Greensburg, Indiana, due to financial difficulties the tenant was experiencing.
No such allowance was recorded during the nine months ended September 30, 1998,
due to the fact that in October 1997 a new tenant began operating this
restaurant property for which rent commenced in October 1997. In addition, the
decrease in rental and earned income for the nine months ended September 30,
1998 was partially offset by the fact that during the nine months ended
September 30, 1998, the Income Fund's consolidated joint venture collected and
recognized as income past due rental amounts for which the Income Fund had
previously established an allowance for doubtful accounts.
For the nine months ended September 30, 1997, the Income Fund owned and
leased four restaurant properties indirectly through joint venture arrangements
(including one restaurant property in Show Low Joint Venture, which was sold in
January 1997) and two restaurant properties as tenants-in-common with one of
our affiliates. For the nine months ended September 30, 1998, the Income Fund
owned and leased five restaurant properties indirectly through joint venture
arrangements and five restaurant properties as tenants-in-common with certain
of our affiliates. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $212,408 and $194,079,
respectively, attributable to net income earned by these joint ventures,
$94,509 and $24,723 of which was earned for the quarters ended September 30,
1998 and 1997, respectively. The increase in net income earned by joint
ventures during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
due to the fact that in 1998, the Income Fund reinvested the net sales proceeds
it received from the 1997 and 1998 sales of the restaurant properties in
Whitehall, Michigan; Plattsmouth, Nebraska and Deland, Florida, in additional
restaurant properties in Overland Park, Kansas; Memphis, Tennessee and Fort
Myers, Florida, with certain of our affiliates as tenants-in-common. The
increase in net income earned by joint ventures during the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997, is
partially offset by the fact that in January 1997, Show Low Joint Venture, in
which the Income Fund owns a 36% interest, recognized a gain of approximately
$360,000 for financial reporting purposes as a result of the sale of its
restaurant property. Show Low Joint Venture reinvested the majority of the net
sales proceeds in a replacement restaurant property in June 1997.
During at least one of the nine months ended September 30, 1998 and 1997,
four of the Income Fund's lessees, Golden Corral Corporation, Restaurant
Management Services, Inc., Mid-America Corporation and IHOP Restaurant
Properties, Inc., each contributed more than 10% of the Income Fund's total
rental income (including rental income from the Income Fund's consolidated
joint venture and the Income Fund's share of the rental income from restaurant
properties owned by unconsolidated joint ventures in which the Income Fund is a
co-venturer and restaurant properties owned with affiliates as tenants-in-
common). As of September 30, 1998, Golden Corral Corporation and IHOP
Restaurant Properties Inc., were each lessees under leases relating to five
restaurants, Restaurant Management Services, Inc. was the lessee under leases
relating to seven restaurants and Mid-America Corporation was the lessee under
leases relating to four restaurants. It is anticipated that, based on the
minimum annual rental payments required by the leases, these four lessees each
will continue to
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contribute more than 10% of the Income Fund's total rental income during the
remainder of 1998 and subsequent years. In addition, three restaurant chains,
Golden Corral Family Steakhouse Restaurants, IHOP and Burger King, each
accounted for more than 10% of the Income Fund's total rental income during at
least one of the nine months ended September 30, 1998 and 1997 (including the
Income Fund's consolidated joint venture and the Income Fund's share of the
rental income from the restaurant properties owned by unconsolidated joint
ventures in which the Income Fund is a co-venturer and restaurant properties
owned with affiliates as tenants-in-common). During the remainder of 1998 and
in subsequent years, it is anticipated that these three restaurant chains each
will continue to account for more than 10% of the Income Fund's total rental
income to which the Income Fund is entitled under the terms of the leases. Any
failure of these lessees or restaurant chains could materially affect the
Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$519,868 and $524,650 for the nine months ended September 30, 1998 and 1997,
respectively, $163,736 and $166,380 of which were incurred for the quarters
ended September 30, 1998 and 1997.
As a result of the sale of the restaurant property in Deland, Florida, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $345,122 during the nine months ended September 30, 1998,
for financial reporting purposes. As a result of the sales of the restaurant
properties in Naples, Florida; Plattsmouth, Nebraska, and Venice, Florida, the
Income Fund recognized a gain of $626,804 during the quarter and nine months
ended September 30, 1997, for financial reporting purposes. The gain for the
nine months ended September 30, 1997, was partially offset by a loss of $79,777
for financial reporting purposes, resulting from the July 1997 sale of the
restaurant property in Whitehall, Michigan.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 38 wholly-owned restaurant
properties (including one restaurant property in Little Canada, Minnesota,
which was sold in June 1995), during 1996, the Income Fund owned and leased 37
wholly-owned restaurant properties (including one restaurant property in
Dallas, Texas, which was sold in December 1996), and during 1997, the Income
Fund owned and leased 39 wholly-owned restaurant properties (including three
restaurant properties, one in each of Naples, Florida; Plattsmouth, Nebraska
and Whitehall, Michigan, which were sold in July 1997 and one restaurant
property in Venice, Florida, which was sold in September 1997). In addition,
during 1995 and 1996, the Income Fund was a co-venturer in four separate joint
ventures that each owned and leased one restaurant property, and during 1997,
the Income Fund was a co-venturer in four separate joint ventures that owned
and leased a total of five restaurant properties (including one restaurant
property in Show Low, Arizona, which was sold in January, 1997). During 1995,
the Income Fund owned and leased one restaurant property with an affiliate as
tenants-in-common, during 1996, the Income Fund owned and leased two properties
with affiliates as tenants-in-common and during 1997, the Income Fund owned and
leased four restaurant properties with affiliates as tenants-in-common
(including one restaurant property in Yuma, Arizona, which was sold in October,
1997). As of December 31, 1997, the Income Fund owned, either directly, as
tenants-in-common with affiliates, or through joint venture arrangements, 41
restaurant properties which are subject to long-term, triple-net leases. The
leases of the restaurant properties provide for minimum base annual rental
amounts (payable in monthly installments) ranging from approximately $38,100 to
$185,700. Generally, the leases provide for percentage rent based on sales in
excess of a specified amount. In addition, some of the leases provide that,
commencing in the fourth to sixth lease year, the percentage rent will be an
amount equal to the greater of the percentage rent calculated under the lease
formula or a specified percentage (ranging from one to five percent) of the
purchase price or gross sales.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Caro Joint Venture, earned $2,897,402,
$3,333,665 and $3,207,860, respectively, in rental income from operating leases
and earned income from direct financing leases. The decrease in rental and
earned income during the year ended December 31, 1997, as compared to 1996, was
partially attributable to a decrease of approximately $159,400 during 1997, as
a result of the sales during 1997 of the restaurant properties in
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Whitehall, Michigan; Naples, Florida; Plattsmouth, Nebraska and Venice,
Florida. The decrease in rental and earned income during 1997, as compared to
1996, was partially attributable to, and the increase in rental and earned
income during 1996, as compared to 1995, was partially offset by, a decrease of
$103,100 and $6,800, respectively, of rental and earned income from the sale of
the restaurant property in Dallas, Texas in December 1996. The decrease in
rental income during 1997 was partially offset by an increase of approximately
$109,400 due to the reinvestment of the net sales proceeds from the 1996 sale
of the restaurant property in Dallas, Texas, in a restaurant property in
Marietta, Georgia, in February 1997. The decrease in rental and earned income
during 1997 was partially offset by an increase of approximately $1,600 in
rental and earned income due to the fact that the Income Fund reinvested the
net sales proceeds from the sales of the restaurant properties in Naples and
Venice, Florida in two IHOP restaurant properties in Elgin, Illinois and
Manassas, Virginia in December 1997.
The decrease in rental income during 1997, as compared to 1996, is also
attributable to the fact that during 1997 the Income Fund's consolidated joint
venture established an allowance for doubtful accounts for rental amounts
unpaid by the tenant of the restaurant property in Caro, Michigan totaling
approximately $84,500 due to financial difficulties the tenant is experiencing.
No such allowance was established during 1996. The Income Fund's consolidated
joint venture will continue to pursue collection of past due rental amounts
relating to this restaurant property and will recognize such amounts as income
if collected.
In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is partially attributable to the Income Fund increasing its
allowance for doubtful accounts during 1997 by approximately $40,500 for rental
amounts relating to the Hardee's restaurant property located in Greensburg,
Indiana, due to financial difficulties the tenant was experiencing. Rental and
earned income also decreased by approximately $43,700 during 1997 due to the
fact that the Income Fund terminated the lease with the former tenant of the
restaurant property in Greensburg, Indiana, in June 1997, as described above in
"Liquidity and Capital Resources." We have agreed that they will cease
collection efforts on past due rental amounts once the former tenant of this
restaurant property pays all amounts due under the promissory note for past due
real estate taxes described above in "Liquidity and Capital Resources." The
decrease in rental and earned income was slightly offset by an increase of
$14,200 in rental income from the new tenant of this restaurant property who
began operating the restaurant property after it was renovated into an Arby's
restaurant property.
In addition, rental and earned income decreased during 1997, as a result of
the Income Fund establishing an allowance for doubtful accounts during 1997
totaling approximately $107,100 for rental amounts relating to the restaurant
property located in Melbourne, Florida, due to the fact that the tenant vacated
the restaurant property in October 1997. The Income Fund will continue to
pursue collection of past due rental amounts relating to this restaurant
property and will recognize such amounts as income if collected. The Income
Fund sold this restaurant property in February 1998, as described above in
"Liquidity and Capital Resources."
In addition, rental and earned income decreased by approximately $35,300
during 1997, as a result of the fact that in December 1996, the tenant ceased
operations and vacated the restaurant property in Liverpool, New York. The
Income Fund sold this restaurant property in February 1998, as described above
in "Liquidity and Capital Resources."
The decrease in rental and earned income during 1997, as compared to 1996,
was offset by, and the increase in rental and earned income for 1996, was
partially attributable to, the fact that the Income Fund collected and recorded
as income approximately $18,600 and $5,300, respectively, in rental payment
deferrals for the two restaurant properties leased by the same tenant in
Chester, Pennsylvania, and Orlando, Florida. Previously, the Income Fund had
established an allowance for doubtful accounts for these amounts. These amounts
were collected in accordance with the agreement entered into in March 1996,
with the tenant to collect the remaining balance of the rental payment deferral
amounts as discussed above in "Liquidity and Capital Resources." The increase
in rental and earned income during 1996, as compared to 1995, was partially
attributable to the fact that during the year ended December 31, 1995, the
Income Fund established an allowance for doubtful accounts of approximately
$52,900, for rental payment deferral amounts relating to
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these restaurant properties deemed uncollectible. No such allowance was
established during the year ended December 31, 1996 or 1997.
Rental and earned income increased during 1996, as compared to 1995, by
approximately $43,700 due to the acquisition of a restaurant property located
in Broken Arrow, Oklahoma, in August 1995 with the net sales proceeds from the
sale of the restaurant property in Little Canada, Minnesota, in June 1995. The
increase in rental income was partially offset by a decrease of approximately
$6,800 during the year ended December 31, 1996, due to the sale of the
restaurant property in Little Canada, Minnesota, in June 1995.
In addition, the increase in rental income during 1996, as compared to 1995,
was partially attributable to an increase of approximately $35,300 during 1996,
due to the fact that in April 1995, the Income Fund entered into a new lease
for the restaurant property in Hermitage, Tennessee, for which rent commenced
in June 1995.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $147,434, $110,073 and $115,946, respectively, in contingent rental
income. The increase in contingent rental income during 1997 is primarily
attributable to increases in gross sales relating to certain restaurant
properties. The decrease in contingent rental income for 1996, as compared to
1995, is primarily attributable to the decreases in gross sales relating to
certain restaurant properties.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $280,331, $97,381 and $83,483, respectively, attributable to
net income earned by joint ventures in which the Income Fund is a co-venturer.
The increase in net income earned by joint ventures in 1997, as compared to
1996, is primarily attributable to the fact that in January 1997, Show Low
Joint Venture, in which the Income Fund owns a 36% interest, recognized a gain
of approximately $360,000 for financial reporting purposes, as a result of the
sale of its restaurant property in January 1997, as described above in
"Liquidity and Capital Resources." Show Low Joint Venture reinvested the
majority of the net sales proceeds in a replacement restaurant property in June
1997. In addition, in October 1997, the Income Fund and an affiliate, as
tenants-in-common, sold the restaurant property in Yuma, Arizona, and
recognized a gain of approximately $128,400 for financial reporting purposes,
as described above in "Liquidity and Capital Resources." The Income Fund owned
a 51.67% interest in the restaurant property in Yuma, Arizona, held as tenants-
in-common with an affiliate. The Income Fund reinvested its portion of the net
sales proceeds in a restaurant property in Vancouver, Washington, in December
1997, as described above in "Liquidity and Capital Resources." The increase in
net income earned by these joint ventures during 1996, as compared to 1995, is
primarily attributable to the fact that in January 1996, the Income Fund
acquired an interest in a Golden Corral restaurant property in Clinton, North
Carolina, with affiliates as tenants-in-common, as described above in
"Liquidity and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, three of the Income
Fund's lessees, Golden Corral Corporation, Restaurant Management Services, Inc.
and Mid-America Corporation, each contributed more than 10% of the Income
Fund's total rental income (including rental income from the Income Fund's
consolidated joint venture and the Income Fund's share of the rental income
from the three restaurant properties owned by unconsolidated joint ventures in
which the Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common). As of December 31, 1997, Golden Corral
Corporation was the lessee under leases relating to five restaurants,
Restaurant Management Services, Inc. was the lessee under leases relating to
seven restaurants and Mid-America Corporation was the lessee under leases
relating to four restaurants. It is anticipated that, based on the minimum
annual rental payments required by the leases, these three lessees each will
continue to contribute more than 10% of the Income Fund's total rental income
during 1998 and subsequent years. In addition, three restaurant chains, Golden
Corral, Hardee's and Burger King, and in 1997, an additional restaurant chain,
Denny's, each accounted for more than 10% of the Income Fund's total rental
income in 1997, 1996 and 1995 (including the Income Fund's consolidated joint
venture and the Income Fund's share of the rental income from the three
restaurant properties owned by unconsolidated joint ventures in which the
Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these four restaurant chains
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each will continue to account for more than 10% of the Income Fund's total
rental income to which the Income Fund is entitled under the terms of the
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income.
For the years ended 1997, 1996 and 1995, the Income Fund also earned
$119,961, $49,056 and $51,130, respectively, in interest and other income. The
increase in interest and other income during the year ended December 31, 1997,
was primarily attributable to interest earned on the net sales proceeds
received and held in escrow relating to the sales of the restaurant properties
in Dallas, Texas; Naples, Florida; Plattsmouth, Nebraska and Venice, Florida.
Operating expenses, including depreciation and amortization expense, were
$840,365, $683,163 and $672,818 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997, as compared
to 1996, is partially due to the fact that the Income Fund recorded
approximately $122,400 in bad debt expense and approximately $19,400 in real
estate tax expense for the restaurant property located in Melbourne, Florida,
due to the fact that the tenant vacated the restaurant property in October
1997. The Income Fund sold this restaurant property in February 1998, as
described above in "Liquidity and Capital Resources." In addition, the Income
Fund's consolidated joint venture, Caro Joint Venture, recorded bad debt
expense and real estate tax expense of approximately $26,200 relating to the
restaurant property located in Caro, Michigan, representing past due rental and
other amounts. The joint venture partners intend to continue to pursue the
collection of such amounts relating to the restaurant property in Caro,
Michigan. The increase in operating expenses during 1996, as compared to 1995,
was partially a result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and restaurant property coverage for the Income Fund beginning in May 1995.
The increase in operating expenses during 1997 was partially offset by the
decrease in depreciation expense which resulted from the sale of the restaurant
property in Dallas, Texas in December 1996, the sale of the restaurant property
in Whitehall, Michigan, in July 1997, and the sale of the restaurant property
in Venice, Florida, in September 1997. The decrease in depreciation expense was
partially offset by an increase in depreciation expense attributable to the
purchase of the restaurant property in Marietta, Georgia, in February 1997.
As a result of the sales of the restaurant properties in Naples, Florida;
Plattsmouth, Nebraska and Venice, Florida, as described above in "Liquidity and
Capital Resources," the Income Fund recognized a gain of $626,804 during 1997
for financial reporting purposes. The gain for 1997 was partially offset by a
loss of $79,777 for financial reporting purposes, resulting from the July 1997
sale of the restaurant property in Whitehall, Michigan, as described above in
"Liquidity and Capital Resources."
As a result of the sale of the restaurant property in Dallas, Texas, in
December 1996, the Income Fund recognized a loss for financial reporting
purposes of $1,706 for the year ended December 31, 1996, as discussed above in
"Liquidity and Capital Resources." In addition, as a result of the sale of the
restaurant property in Little Canada, Minnesota, during 1995 the Income Fund
recognized a gain of $103,283, and as a result of the sale during 1995 of a
portion of the land of the restaurant property in Orlando, Florida, the Income
Fund recognized a loss of $7,370 for the year ended December 31, 1995, as
described above in "Liquidity and Capital Resources."
During the years ended December 31, 1996 and 1997, the Income Fund recorded
provisions for losses on land and building in the amounts of $77,023 and
$104,947, respectively, for financial reporting purposes for the restaurant
property in Liverpool, New York. The allowance at December 31, 1996,
represented the difference between the restaurant property's carrying value at
December 31, 1996 and the estimated net realizable value for this restaurant
property based on an anticipated sales price to an interested third party. The
allowance at December 31, 1997, represents the difference between the
restaurant property's carrying value at December 31, 1997 and the net
realizable value of the restaurant property based on the net sales proceeds
received in February 1998 from the sale of the restaurant property.
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During the year ended December 31, 1997, the Income Fund established an
allowance for loss on land and on allowance for impairment in carrying value of
net investment in direct financing lease for its restaurant property in
Melbourne, Florida, in the amount of $158,239. The allowance represents the
difference between the restaurant property's carrying value at December 31,
1997 and the net sales proceeds received in February 1998 from the sale of the
restaurant property, as described above in "Liquidity and Capital Resources."
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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 Income Fund's restaurant
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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's restaurant
properties is the responsibility of the tenants of the properties in accordance
with the terms of the Income Fund's leases. We and our affiliates have
established a team dedicated to reviewing the internal information technology
systems used in the operation of the Income Fund, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial
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institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, we do not,
at this time, know of the potential costs to the Income Fund of any adverse
impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 18, 1989, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
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 leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 40 restaurant
properties, which included 10 restaurant properties owned by joint ventures in
which the Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,085,545 and $2,099,452 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, is primarily a result of changes in income and expenses as described in
"Results of Operations" below and changes in the Income Fund's working capital.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $828,551 invested in such short-term investments, as compared
to $761,317 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $737,856 at September 30, 1998, from $784,470 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $2,025,000 for each of the nine months ended September 30,
1998 and 1997 ($675,000 for each of the quarters ended September 30, 1998 and
1997). This represents distributions for each applicable nine months of $0.068
per unit ($0.023 per unit for each applicable quarter). No distributions were
made to us for the quarters and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, are required to be or have been treated by the
Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
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The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $2,840,459, $2,670,869 and
$2,484,538 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash from operations during 1997 and 1996, each as compared to
the prior year, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Income Fund's
working capital during each of the respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In August 1995, the Income Fund sold its restaurant property in Florence,
South Carolina, to the tenant for $1,160,000, and in connection therewith,
accepted a promissory note in the principal sum of $1,160,000, collateralized
by a mortgage on the restaurant property. The note bears interest at a rate of
10.25% per annum and is being collected in 59 equal monthly installments of
$10,395, with a balloon payment of $1,106,657 due in July 2000. Collections
commenced August 10, 1995. In accordance with Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate," the Income Fund
recorded the sale of the restaurant property using the installment sales
method. Therefore, the gain on the sale of the restaurant property was deferred
and is being recognized as income proportionately as payments under the
mortgage note are collected. The Income Fund recognized a gain of $926 and $836
for financial reporting purposes for the years ended December 31, 1997 and
1996, respectively, and had a deferred gain in the amount of $126,303 and
$127,229 at December 31, 1997 and 1996, respectively. The mortgage notes
receivable balances at December 31, 1997 and 1996, include principal of
$1,131,496 and $1,139,788, respectively, and accrued interest of $6,235 and
$6,281, respectively, and are shown net of the deferred gain of $126,303 and
$127,229, respectively. Proceeds received from the sale of this restaurant
property have been reinvested in additional restaurant properties or used for
other Income Fund purposes.
In November 1994, the Income Fund received notice from the subtenant of its
restaurant property in Jacksonville, Florida, that it intended to exercise its
option to purchase the restaurant property in accordance with the terms of its
sublease agreement. In December 1995, the Income Fund sold its restaurant
property in Jacksonville, Florida, to the subtenant for $240,000, and in
connection therewith, accepted a promissory note in the principal sum of
$240,000, collateralized by a mortgage on the restaurant property. The note
bears interest at a rate of 10% per annum and is being collected in 119 equal
monthly installments of $2,106, with a balloon payment of $218,252 due December
2005. Collections commenced in January 1996. As a result of the sale of the
restaurant property, the Income Fund recognized a loss of $6,556 for financial
reporting purposes for the year ended December 31, 1995. The mortgage notes
receivable balance at December 31, 1997 and 1996, include principal of $237,192
and $238,666, respectively, and accrued interest of $1,977 and $1,989,
respectively. Proceeds received from the sale of this restaurant property will
be distributed to the Limited Partners or will be used for other Income Fund
purposes.
In March 1996, the Income Fund entered into an agreement with the tenant of
the restaurant property in Daytona Beach, Florida, for payment of certain
rental payment deferrals the Income Fund had granted to the tenant through
March 31, 1996. Under the agreement, the Income Fund agreed to abate
approximately $13,200 of the rental payment deferral amounts. The tenant made
payments of approximately $5,700 in each of April 1996 and March 1997 in
accordance with the terms of the agreement, and has agreed to pay the Income
Fund the remaining balance due of approximately $28,000 in five remaining
annual installments through 2002.
In July 1996, the Income Fund sold its restaurant property in Colorado
Springs, Colorado, for $1,075,000, and received net sales proceeds of
$1,044,909, resulting in a gain of $194,839 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in July
1990 and had a cost of approximately $900,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the
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Income Fund sold the restaurant property for approximately $144,000 in excess
of its original purchase price. In October 1996, the Income Fund reinvested the
net sales proceeds, along with additional funds, in a Boston Market restaurant
property located in Marietta, Georgia. A portion of the transaction relating to
the sale of the restaurant property in Colorado Springs, Colorado, and the
reinvestment of the net sales proceeds were structured to qualify as a like-
kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code. The Income Fund distributed amounts sufficient to enable the
Limited Partners to pay federal and state income taxes resulting form the sale.
In addition, in October 1996, the Income Fund sold its restaurant property
in Hartland, Michigan, for $625,000 and received net sales proceeds of
$617,035, resulting in a loss of approximately $235,465, for financial
reporting purposes. In February 1997, the Income Fund reinvested the net sales
proceeds in CNL Mansfield Joint Venture. The Income Fund has a 79% interest in
the profits and losses of CNL Mansfield Joint Venture and the remaining
interest in this joint venture is held by an affiliate of the Income Fund which
has the same General Partners.
In May 1997, the Income Fund sold its restaurant property in Columbus,
Indiana, for $240,000 and received net sales proceeds of $223,589, resulting in
a loss of $19,739 for financial reporting purposes. In December 1997, the
Income Fund reinvested the net sales proceeds, along with additional funds, in
a restaurant property in Miami, Florida, as tenants-in-common with affiliates
of the General Partner, in exchange for a 35.64% interest in this restaurant
property.
In October 1997, the Income Fund sold its restaurant property in Dunnellon,
Florida, for $800,000 and received net sales proceeds (net of $5,055 which
represents amounts due to the former tenant for prepaid rent) of $752,745,
resulting in a gain of $183,701 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in August 1990
and had a cost of approximately $546,300, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $211,500 in excess of its original
purchase price. In December 1997, the Income Fund reinvested these net sales
proceeds in a restaurant property in Smithfield, North Carolina, as tenants-in-
common with an affiliate of the General Partner. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Dunnellon, Florida and the reinvestment of the net sales proceeds
in the restaurant property in Smithfield, North Carolina, qualified as a like-
kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code. However, the Income Fund distributed amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any, (at a level
reasonably assumed by us) resulting from the sale.
In addition, in October 1997, the Income Fund and an affiliate, as tenants-
in-common, sold the restaurant property in Yuma, Arizona, in which the Income
Fund owned a 48.33% interest, for a total sales price of $1,010,000 and
received net sales proceeds of $982,025, resulting in a gain, to the tenancy-
in-common, of approximately $128,400 for financial reporting purposes. The
restaurant property was originally acquired in July 1994 and had a total cost
of approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the restaurant property was sold for
approximately $120,300 in excess of its original purchase price. In December
1997, the Income Fund reinvested its portion of the net sales proceeds from the
sale of the Yuma, Arizona, restaurant property, along with funds from the sale
of the wholly-owned restaurant property in Columbus, Indiana, in a restaurant
property in Miami, Florida, as tenants-in-common with certain of our
affiliates. We believe that the transaction, or a portion thereof, relating to
the sale of the restaurant property in Yuma, Arizona and the reinvestment of
the net sales proceeds in the restaurant property in Miami, Florida, will
qualify as a like-kind exchange transaction in accordance with Section 1031 of
the Internal Revenue Code. However, the Income Fund will distribute amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any, (at a level reasonably assumed by us) resulting from the sale.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is
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prohibited from borrowing for any purpose; provided, however, that we or our
affiliates are entitled to reimbursement, at cost, for actual expenses incurred
by us or our affiliates on behalf of the Income Fund. Certain of our affiliates
from time to time incur certain operating expenses on behalf of the Income Fund
for which the Income Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or make distributions to the partners. At December 31, 1997, the
Income Fund had $761,317 invested in such short-term investments, as compared
to $1,305,429 at December 31, 1996. The decrease in the amount invested in
short-term investments is primarily a result of the reinvestment of the net
sales proceeds received in 1996 from the sale of the restaurant property in
Hartland, Michigan, in CNL Mansfield Joint Venture in February 1997, as
described above. The funds remaining at December 31, 1997, will be used for the
payment of distributions and other liabilities.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $74,968, $97,288 and $94,618, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$27,683 and $1,867, respectively, to affiliates for such amounts and accounting
and administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such amounts. In addition, during the year ended
December 31, 1995, the Income Fund incurred $7,200 in real estate disposition
fees due to an affiliate as a result of its services in connection with the
sale of the restaurant property in Jacksonville, Florida. The payment of such
fees is deferred until the Limited Partners have received the sum of their 10%
preferred return and their adjusted capital contributions. Amounts payable to
other parties, including distributions payable, of the Income Fund increased to
$749,587 at December 31, 1997, from $724,399 at December 31, 1996, primarily as
a result of an increase in rents paid in advance during the year ended December
31, 1997. Liabilities at December 31, 1997, to the extent they exceed cash and
cash equivalents at December 31, 1997, will be paid from future cash from
operations, from amounts collected under the mortgage notes described above or,
in the event we elect to make additional capital contributions, from future
General Partner contributions.
Based primarily on current and anticipated future cash from operations, the
Income Fund declared distributions to the Limited Partners of $2,700,000 for
each of the years ended December 31, 1997 and 1996, and $2,700,002 for the year
ended December 31, 1995. This represents distributions of $0.090 per Unit for
each of the years ended December 31, 1997, 1996 and 1995. No amounts
distributed to the Limited Partners for the years ended December 31, 1997, 1996
and 1995 are required to be or have been treated by the Income Fund as a return
of capital for purposes of calculating the Limited Partners' return on their
adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
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Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, San Antonio #849 Joint Venture, owned and leased 31
wholly-owned restaurant properties (including one restaurant property in
Columbus, Indiana and one restaurant property in Dunnellon, Florida, which were
sold in May and October 1997, respectively) and during the nine months ended
September 30, 1998, the Income Fund and its consolidated joint venture owned
and leased 29 wholly-owned restaurant properties, to operators of fast-food and
family-style restaurant chains. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund and San Antonio #849 Joint
Venture earned $1,795,268 and $1,842,615, respectively, in rental income from
operating leases and earned income from direct financing leases, $595,923 and
$615,826 of which was earned for the quarters ended September 30, 1998 and
1997, respectively. Rental and earned income decreased during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, primarily as a result of the sales of the
restaurant properties in Columbus, Indiana and Dunnellon, Florida in May and
October 1997, respectively. The Income Fund reinvested these net sales proceeds
in two restaurant properties, as tenants-in-common, with certain of our
affiliates as described below.
During the nine months ended September 30, 1997, the Income Fund owned and
leased nine restaurant properties indirectly through other joint venture
arrangements and one restaurant property indirectly with an affiliate as
tenants-in-common (including the restaurant property in Yuma, Arizona held as
tenants-in-common with an affiliate, which was sold in October 1997). In
addition, during the nine months ended September 30, 1998, the Income Fund
owned and leased nine restaurant properties indirectly through other joint
venture arrangements and two restaurant properties indirectly with affiliates
as tenants-in-common. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $229,480 and $151,930,
respectively, attributable to net income earned by these unconsolidated joint
ventures, $78,287 and $55,939 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
joint ventures during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
due to the fact that in December 1997, the Income Fund reinvested the net sales
proceeds received from the sale of two restaurant properties in October 1997,
in a restaurant property in Smithfield, North Carolina, and a restaurant
property in Miami, Florida, with certain of our affiliates as tenants-in-
common.
During at least one of the nine months ended September 30, 1998 and 1997,
four lessees of the Income Fund and its consolidated joint venture, San Antonio
#849 Joint Venture, Golden Corral Corporation, Restaurant Management Services,
Inc., Flagstar Enterprises, Inc. and Waving Leaves, Inc., each contributed more
than 10% of the Income Fund's total rental income (including rental income from
the Income Fund's consolidated joint venture and the Income Fund's share of
rental income from restaurant properties owned by unconsolidated joint ventures
and restaurant properties owned with affiliates as tenants-in-common). As of
September 30, 1998, Golden Corral Corporation was the lessee under leases
relating to five restaurants, Restaurant Management Services, Inc. was the
lessee under leases relating to eight restaurants, Flagstar Enterprises, Inc.
was the lessee under leases relating to two restaurants, and Waving Leaves,
Inc. was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
Golden Corral Corporation, Restaurant Management Services, Inc. and Waving
Leaves, Inc. each will continue to contribute more than 10% of the Income
Fund's total rental income during the remainder of 1998 and subsequent years.
Any failure of these lessees could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$352,286 and $356,379 for the nine months ended September 30, 1998 and 1997,
respectively, of which $117,124 and $112,150 were incurred for the quarters
ended September 30, 1998 and 1997, respectively.
As a result of the sale of the restaurant property in Florence, South
Carolina, in August 1995, and recording the gain using the installment method,
the Income Fund recognized a gain for financial reporting
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purposes of $758 and $685 for the nine months ended September 30, 1998 and
1997, respectively, $259 and $234 of which was recognized for the quarters
ended September 30, 1998 and 1997, respectively. As a result of the sale of the
restaurant property in Columbus, Indiana in 1997, the Income Fund recognized a
loss for financial reporting purposes of $19,739 during the nine months ended
September 30, 1997. No restaurant properties were sold during the quarter and
nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 33 wholly-owned restaurant
properties (including two restaurant properties in Florence, South Carolina,
and Jacksonville, Florida, which were sold in August and December 1995,
respectively), during 1996, the Income Fund owned and leased 33 wholly-owned
restaurant properties (including two restaurant properties in Colorado Springs,
Colorado, and Hartland, Michigan, which were sold in July and October 1996,
respectively), during 1997, the Income Fund owned and leased 31 wholly-owned
restaurant properties (including two restaurant properties in Columbus, Indiana
and Dunnellon, Florida, which were sold in May and October 1997, respectively).
In addition, during 1996 and 1995, the Income Fund was a co-venturer in four
separate joint ventures which owned and leased nine restaurant properties and
one restaurant property the Income Fund owned and leased with an affiliate as
tenants-in-common. During 1997, the Income Fund was a co-venturer in five
separate joint ventures which owned and leased 10 restaurant properties and
three restaurant properties the Income Fund owned with affiliates as tenants-
in-common (including one restaurant property in Yuma, Arizona which was sold in
October 1997). As of December 31, 1997, the Income Fund and its consolidated
joint venture, San Antonio #849 Joint Venture, owned (either directly, as
tenants-in-common with an affiliate or through joint venture arrangements) 40
wholly-owned restaurant properties which are subject to long-term, triple-net
leases. The leases of the restaurant properties provide for minimum base annual
rental amounts (payable in monthly installments) ranging from approximately
$22,100 to $166,700. Substantially all of the leases provide for percentage
rent based on sales in excess of a specified amount. In addition, some of the
leases provide that, commencing in the specified lease years (generally ranging
from the sixth to the eleventh lease year), the annual base rent required under
the terms of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, San Antonio #849 Joint Venture, earned
$2,436,222, $2,459,094 and $2,427,464, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease
in rental and earned income during 1997, as compared to 1996, was attributable
to a decrease in rental and earned income as a result of the sales of the
restaurant properties in Colorado Springs, Colorado; Hartland, Michigan;
Columbus, Ohio and Dunnellon, Florida, in July 1996, October 1996, May 1997 and
October 1997, respectively. This decrease was partially offset by an increase
in rental and earned income as a result of reinvesting the net sales proceeds
from the sale of the restaurant property in Colorado, Springs, Colorado, in a
restaurant property in Marietta, Georgia, in October 1996. Rental and earned
income are expected to decrease in future years as a result of reinvesting the
proceeds from the sales of the restaurant properties in Hartland, Michigan;
Columbus, Ohio and Dunnellon, Florida in joint ventures and in restaurant
properties owned with affiliates, as tenants-in-common, as described below.
However, as a result of reinvesting in joint ventures and in restaurant
properties owned with affiliates, as tenants-in-common, net income earned by
unconsolidated joint ventures is expected to increase in 1998.
Rental and earned income increased during 1996, as compared to 1995, as a
result of recording rental income during 1996 relating to the restaurant
properties in Colorado Springs, and Pueblo, Colorado as compared to recording
no rental income during 1995 due to financial difficulties the tenant was
experiencing. The restaurant property in Colorado Springs, Colorado, was
subsequently sold, as described above in "Liquidity and Capital Resources." The
increase in rental and earned income during 1996, as compared to 1995, was
partially offset by a decrease in rental income during 1996, as a result of the
sale of the Income Fund restaurant properties in Florence, South Carolina, and
Jacksonville, Florida, in August and December 1995, respectively. However, as a
result of the Income Fund accepting mortgage notes for the sale of these
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restaurant properties, interest income increased during 1996 and 1995, as
described below and above in "Liquidity and Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $51,345, $44,973 and $68,820, respectively, in contingent rental income.
The increase in contingent rental income during 1997, as compared to 1996, is
primarily a result of increased gross sales of certain restaurant properties
requiring the payment of contingent rental income. The decrease in contingent
rental income during 1996, as compared to 1995, is primarily attributable to
the change in the percentage rent formula in accordance with the terms of the
lease agreement for one of the Income Fund's leases during 1996.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $183,579, $240,079 and $84,390, respectively, in interest and other
income. The decrease in interest and other income for 1997, as compared to
1996, and the increase in interest and other income during 1996, as compared to
1995, is attributable to the fact that during 1996, the Income Fund recognized
approximately $46,500 in other income due to the fact that the corporate
franchisor of the restaurant properties in Pueblo and Colorado Springs,
Colorado, paid past due real estate taxes relating to the restaurant properties
and the Income Fund reversed such amounts during 1996 that it had previously
accrued as payable during 1995. In addition, the decrease in interest and other
income during 1997, as compared to 1996, was due to the fact that during 1996,
the Income Fund earned approximately $10,000 in interest income on the net
sales proceeds held in escrow relating to the restaurant property in Colorado
Springs, Colorado. These proceeds were reinvested in a restaurant property in
Marietta, Georgia, in October 1996. The increase in interest and other income
during 1996, as compared to 1995, was primarily attributable to an increase in
interest earned on the mortgage notes accepted in connection with the sales of
the restaurant properties in Florence, South Carolina, in August 1995, and
Jacksonville, Florida, in December 1995, as discussed above in "Liquidity and
Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $267,251, $157,254 and $154,937, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Income Fund is a
co-venturer and restaurant properties owned indirectly with affiliates as
tenants-in-common. The increase in net income earned by joint ventures during
the year ended 1997, is partially due to the fact that in February 1997, the
Income Fund reinvested the net sales proceeds it received from the sale, in
October 1996, of the restaurant property in Hartland, Michigan, in CNL
Mansfield Joint Venture, with an affiliate of the Income Fund which has the
same General Partners. In addition, the increase in net income earned by joint
ventures is partially attributable to the fact that in October 1997, the Income
Fund and an affiliate, as tenants-in-common, sold the restaurant property in
Yuma, Arizona, in which the Income Fund owned a 48.33% interest. The tenancy-
in-common recognized a gain of approximately $128,400 for financial reporting
purposes, as described above in "Liquidity and Capital Resources." In addition,
the increase in net income earned by joint ventures during the year ended 1997,
as compared to 1996, is partially due to the Income Fund investing in a
restaurant property in Smithfield, North Carolina, in December 1997, with
certain of our affiliates as tenants-in-common, as described above in
"Liquidity and Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
three lessees of the Income Fund and its consolidated joint venture, Golden
Corral Corporation, Restaurant Management Services, Inc. and Flagstar
Enterprises, Inc., each contributed more than 10% of the Income Fund's total
rental income (including rental income from the Income Fund's consolidated
joint venture and the Income Fund's share of rental income from nine restaurant
properties owned by unconsolidated joint ventures and three restaurant
properties owned with affiliates as tenants-in-common, including one restaurant
property owned as tenants-in-common which sold in October 1997). As of December
31, 1997, Golden Corral Corporation was the lessee under leases relating to
four restaurants, Restaurant Management Services, Inc. was the lessee under
leases relating to eight restaurants and Flagstar Enterprises, Inc. was the
lessee under leases relating to four restaurants. It is anticipated that, based
on the minimum rental payments required by the leases, these three lessees each
will continue to contribute more than 10% of the Income Fund's total rental
income during 1998 and subsequent years. In addition, during at least one at
least on of the years ended December 31, 1997, 1996 and 1995, three restaurant
chains, Golden Corral, Hardee's and Burger King, each accounted for more than
10% of the Income
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Fund's total rental income (including rental income from the Income Fund's
consolidated joint venture and the Income Fund's share of rental income from
nine restaurant properties owned by unconsolidated joint ventures and three
restaurant properties owned with affiliates as tenants-in-common, including one
restaurant property owned as tenants-in-common which was sold in October 1997).
In subsequent years, it is anticipated that these three restaurant chains each
will continue to account for more than 10% of the Income Fund's total rental
income to which the Income Fund is entitled under the terms of the leases. Any
failure of these lessees or restaurant chains could materially affect the
Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$478,614, $516,056 and $555,134 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, was primarily a result of a decrease in accounting and administrative
expenses associated with operating the Income Fund and its restaurant
properties. In addition, the decrease in operating expenses during 1997, as
compared to 1996, was due to the fact that in July 1996, the Income Fund sold
the restaurant property in Colorado Springs, Colorado, as discussed above in
"Liquidity and Capital Resources," and in connection therewith, paid
approximately $9,000 in 1996 real estate taxes which were due upon the sale of
the restaurant property. Because of the sale, no real estate taxes were
recorded in 1997. The decrease in operating expenses during 1996, as compared
to 1995, was primarily attributable to the fact that the Income Fund accrued
approximately $46,500 for current and past due real estate taxes relating to
the restaurant properties in Colorado Springs and Pueblo, Colorado, during
1995. As described above, the amounts accrued during 1995 were reversed and
recorded as other income during 1996. No real estate taxes were recorded during
1996 relating to the restaurant property in Pueblo, Colorado, due to the fact
that the new tenant is responsible for the real estate taxes under the terms of
the assigned lease.
The decrease in operating expenses during 1997, as compared to 1996, was
also partially attributable to a decrease in depreciation expense due to the
sales of the restaurant properties in Hartland, Michigan and Colorado Springs,
Colorado in 1996. The decrease in depreciation expense was partially offset by
the purchase of the restaurant property in Marietta, Georgia, in October 1996.
The decrease in operating expenses during 1996, as compared to 1995, was
partially attributable to a decrease in depreciation expense as a result of the
demolition of the restaurant property in Daytona Beach, Florida, the sale of
the restaurant property in Florence, South Carolina, and the sale of the
restaurant property in Jacksonville, Florida, during 1995.
The decrease in operating expenses during 1996, as compared to 1995, was
partially offset by an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
As a result of the sale of the restaurant property in Columbus, Indiana,
during 1997, as described above in "Liquidity and Capital Resources," the
Income Fund recognized a loss of $19,739 for financial reporting purposes, for
the year ended December 31, 1997. As a result of the sale of the restaurant
property in Dunnellon, Florida, as described above in "Liquidity and Capital
Resources," the Income Fund recognized a gain for financial reporting purposes
of $183,701 for the year ended December 31, 1997.
As a result of the sale of the restaurant property in Colorado Springs,
Colorado, during 1996, as described above in "Liquidity and Capital Resources,"
the Income Fund recognized a gain of $194,839 for financial reporting purposes
for the year ended December 31, 1996. As a result of the sale of the restaurant
property in Hartland, Michigan, as described above in "Liquidity and Capital
Resources," the Income Fund recognized a loss for financial reporting purposes
of $235,465 for the year ended December 31, 1996.
In connection with the sale of its restaurant property in Florence, South
Carolina, during 1995, as described above in "Liquidity and Capital Resources,"
the Income Fund recognized a gain for financial reporting purposes of $926,
$836 and $1,421 for the years ended December 31, 1997, 1996 and 1995,
respectively. In accordance with Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate," the Income Fund recorded the
sale using the installment sales method. As such, the gain on
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sale was deferred and is being recognized as income proportionately as payments
under the mortgage note are collected. Therefore, the balance of the deferred
gain of $126,303 at December 31, 1997 is being recognized as income in future
periods as payments are collected. For federal income tax purposes, a gain of
approximately $97,300 from the sale of this restaurant property was also
deferred during 1995 and is being recognized as payments under the mortgage
note are collected.
In addition, as a result of the sale of the restaurant property in
Jacksonville, Florida, during 1995, as described above in "Liquidity and
Capital Resources," the Income Fund recognized a loss for financial reporting
purposes of $6,556 for the year ended December 31, 1995. In addition, as a
result of the demolition of the restaurant property in Daytona Beach, Florida,
as described above in "Liquidity and Capital Resources," the Income Fund
recognized a loss on demolition of building for financial reporting purposes of
$174,466 for the year ended December 31, 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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. Inflation has had
a minimal effect on income from operations. 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 Income Fund's restaurant 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
restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's restaurant
properties is the responsibility of the tenants of the restaurant properties in
accordance with the terms of the Income Fund's leases. We and our affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Income Fund, and the
information technology and embedded systems and the Year 2000 compliance plans
of the Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
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The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND VIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 18, 1989, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
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 leases are triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of
September 30, 1998, the Income Fund owned 36 restaurant properties, which
included interests in nine restaurant properties owned by joint ventures in
which the Income Fund is a co-venturer.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,697,992 and $2,694,116 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, is primarily a result of changes in the Income Fund's
working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
In July 1998, the Income Fund received $116,397 as a settlement from the
Florida Department of Transportation for a right of way taking relating to a
parcel of land on its restaurant property in Brooksville, Florida. In
connection therewith, the Income Fund recognized a gain of $108,176 for
financial reporting purposes. The Income Fund anticipates that it will
distribute amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, if any (at a level reasonably assumed by us), resulting
from the right of way taking. The Income Fund intends to reinvest the proceeds
in an additional restaurant property or use the funds for other Income Fund
purposes.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,724,745 invested in such short-term investments, as compared
to $1,602,236 at December 31, 1997. The increase in cash and cash equivalents
at September 30, 1998, is primarily attributable to the receipt of settlement
proceeds relating to the right of way taking in Brooksville, Florida, as
described above. The funds remaining at September 30, 1998, after payment of
distributions for the nine months ended September 30, 1998, and other
liabilities, will be used to meet the Income Fund's working capital and other
needs and also may be used to acquire an additional restaurant property.
Total liabilities of the Income Fund, including distributions payable,
increased to $951,915 at September 30, 1998, from $933,524 at December 31,
1997, primarily as the result of an increase in rents paid in advance at
September 30, 1998, as compared to December 31, 1997. We believe that the
Income Fund has sufficient cash on hand to meet its current working capital
needs.
Based on cash from operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,712,502 and $2,362,502 for the nine
months ended September 30, 1998 and 1997, respectively ($787,501 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.078 and $0.068 per unit for
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the nine months ended September 30, 1998 and 1997, respectively ($0.023 per
unit for each applicable quarter). No distributions were made to us for the
quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the Limited Partners for the nine months ended September 30,
1998 and 1997, are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distribution to the Limited Partners
on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995 was cash from operations (which includes cash received from
tenants, distributions from joint ventures and interest received, less cash
paid for expenses). Cash from operations was $3,543,056, $3,462,668 and
$3,263,685 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash from operations for 1997, as compared to 1996, was
primarily a result of changes in income and expenses as discussed in "Results
of Operations" below and changes in the Income Fund's working capital, and the
increase in cash from operations for 1996, as compared to 1995, was primarily a
result of changes in the Income Fund's working capital during each of the
respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In July 1995, the Income Fund sold its restaurant property in Ocoee,
Florida, for $1,200,000 and received net sales proceeds of $1,184,865,
resulting in a gain of $71,638 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in November 1990
and had a cost of approximately $927,900, excluding acquisition fees and
miscellaneous acquisition costs; therefore, the Income Fund sold the restaurant
property for approximately $257,000 in excess of its original purchase price.
In September 1995, the Income Fund reinvested $950,663 of the net sales
proceeds in land and building of a Shoney's in North Fort Myers, Florida.
In December 1995, the Income Fund sold its two restaurant properties in
Jacksonville, Florida, to the subtenant for a total of $460,000, and in
connection therewith, accepted promissory notes in the principal sums of
$240,000 and $220,000, collateralized by mortgages on the restaurant
properties. The notes bear interest at a rate of 10% per annum and are being
collected in 119 equal monthly installments of $2,106 and $1,931 with balloon
payments of $218,252 and $200,324, respectively, due in December 2005. As a
result of the sale of the two restaurant properties, the Income Fund recognized
a loss of $11,712 for financial reporting purposes for the year ended December
31, 1995. The mortgage notes receivable balances at December 31, 1997 and 1996,
of $458,407 and $461,255, respectively, include accrued interest of $3,788 and
$3,812, respectively, relating to these two restaurant properties. Proceeds
received from the collection of these mortgage notes will be distributed to the
Limited Partners or will be used for other Income Fund purposes.
In May 1996, the Income Fund reinvested the remaining net sales proceeds of
approximately $234,100 from the 1995 sale of the restaurant property in Ocoee,
Florida, in Middleburg Joint Venture. The Income Fund has an approximate 12%
interest in the profits and losses of Middleburg Joint Venture and the
remaining interest in this joint venture is held by an affiliate of the Income
Fund which has the same General Partners.
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In October 1996, the Income Fund sold its restaurant property in Orlando,
Florida, to the tenant for $1,375,000. In connection therewith, the Income Fund
accepted a promissory note in the principal sum of $1,388,568, representing the
gross sales price of $1,375,000 plus tenant closing costs of $13,568 that the
Income Fund financed on behalf of the tenant. The promissory note bears
interest at a rate of 10.75% per annum and is collateralized by a mortgage on
the restaurant property. The promissory note is being collected in 12 monthly
installments of interest only, afterwards, in 24 monthly installments of
$15,413 consisting of principal and interest, and thereafter in 144 monthly
installments of $16,220 consisting of principal and interest. The mortgage note
receivable balances at December 31, 1997 and 1996 of $1,394,979 and $1,401,007,
respectively, include accrued interest of $12,386 and $12,439, respectively,
relating to this restaurant property. Proceeds received from the collection of
this mortgage note will be distributed to the Limited Partners or will be used
for other Income Fund purposes. This restaurant property was originally
acquired by the Income Fund in December 1990 and had a cost of approximately
$1,177,000, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Income Fund sold the restaurant property for approximately
$198,000 in excess of its original purchase price. Due to the fact that the
Income Fund had recognized accrued rental income since the inception of the
lease relating to the straight lining of future scheduled rent increases in
accordance with generally accepted accounting principles, the Income Fund wrote
off the cumulative balance of such accrued rental income at the time of the
sale of this restaurant property, resulting in a loss of $99,031 for financial
reporting purposes. Due to the fact that the straight lining of future
scheduled rent increases over the term of the lease is a non-cash accounting
adjustment, the write off of these amounts is a loss for financial statement
purposes only.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At December 31, 1997, the
Income Fund had $1,602,236 invested in such short-term investments as compared
to $1,476,274 at December 31, 1996.
During 1997, 1996 and 1995, affiliates incurred $80,998, $100,264 and
$95,550, respectively, for certain operating expense on behalf of the Income
Fund. As of December 31, 1997 and 1996 the Income Fund owed $4,599 and $1,830,
respectively, to affiliates for such amounts and accounting and administrative
services. As of February 28, 1998, the Income Fund had reimbursed the
affiliates all such amounts. In addition, during the years ended December 31,
1996 and 1995, the Income Fund incurred $41,250 and $13,800, respectively, in
real estate disposition fees due to an affiliate as a result of its services in
connection with the sale of the restaurant property in Orlando, Florida, and
the two restaurant properties in Jacksonville, Florida. No such fees were
incurred during the year ended December 31, 1997. The payment of such fees is
deferred until the Limited Partners have received the sum of their 10%
preferred return and their adjusted capital contributions. Other liabilities of
the Income Fund, including distributions payable, decreased to $873,875
December 31, 1997, from $1,147,333 at December 31, 1996. The decrease in other
liabilities is primarily attributable to the Income Fund's accruing a special
distribution payable to the Limited Partners of $262,500 at December 31, 1996,
from cumulative excess operating reserves. No special distribution payable was
accrued at December 31, 1997.
Based on cash from operations, and for the years ended December 31, 1996 and
1995, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,150,003, $3,412,500 and $3,325,002
for the years ended December 31, 1997, 1996 and 1995, respectively. This
represents distributions of $0.090 per Unit for the year ended December 31,
1997, $0.098 per Unit for the year ended December 31, 1996 and $0.095 per Unit
for the year ended December 31, 1995. We anticipate that the Income Fund will
declare a special distribution to the Limited Partners during the quarter
ending March 31, 1998,
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representing cumulative excess operating reserves. No amounts distributed to
the Limited Partners for the years ended December 31, 1997, 1996 and 1995, are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
and its consolidated joint venture, Woodway Joint Venture, owned and leased 28
wholly-owned restaurant properties to operators of fast-food and family-style
restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund and Woodway Joint Venture earned
$2,245,278 and $2,265,000, respectively, in rental income from operating leases
and earned income from direct financing leases, $737,090 and $755,070 of which
was earned during the quarters ended September 30, 1998 and 1997, respectively.
The decrease in rental and earned income for the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, is primarily due to the fact that the leases relating to the Burger
King restaurant properties in New City and Syracuse, New York and New
Philadelphia and Mansfield, Ohio were amended to provide for rent reductions
from August 1998 through the end of the lease terms.
For the nine months ended September 30, 1998 and 1997, the Income Fund owned
and leased eight restaurant properties indirectly through joint venture
arrangements. In connection therewith, during the nine months ended September
30, 1998 and 1997, the Income Fund earned $210,430 and $214,372, respectively,
attributable to net income earned by these unconsolidated joint ventures,
$71,177 and $74,581 of which was earned during the quarters ended September 30,
1998 and 1997, respectively.
Operating expenses, including depreciation and amortization expense, were
$310,688 and $280,748 for the nine months ended September 30, 1998 and 1997,
respectively, of which $112,376 and $90,683 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to an increase in administrative expenses for services related to
accounting; financial, tax and regulatory compliance and reporting; lease and
loan compliance; Limited Partner distributions and reporting; and investor
relations. In addition, the increase in operating expenses during the quarter
and nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is partially due to an increase in
depreciation expense relating to the fact that during the quarter and nine
months ended September 30, 1998, the Income Fund reclassified the leases for
its restaurant properties in New City and Syracuse, New York and New
Philadelphia and Mansfield, Ohio from direct financing leases to operating
leases due to lease amendments.
As a result of the right of way settlement for the Income Fund's restaurant
property in Brooksville, Florida, as described above in "Liquidity and Capital
Resources," the Income Fund recognized a gain on sale of land of $108,176
during the quarter and nine months ended September 30, 1998, for financial
reporting purposes. No restaurant properties were sold during the quarter and
nine months ended September 30, 1997.
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The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 31 wholly-owned restaurant
properties (including one restaurant property in Ocoee, Florida, which was sold
in July 1995, and two restaurant properties in Jacksonville, Florida, which
were sold in December 1995), during 1996, the Income Fund owned and leased
28 wholly-owned restaurant properties (including one restaurant property in
Orlando, Florida, which was sold in October 1996) and during 1997, the Income
Fund owned and leased 28 wholly-owned restaurant properties. In addition,
during 1995, the Income Fund was a co-venturer in two separate joint ventures
that each owned and leased one restaurant property, and one joint venture that
owned and leased six restaurant properties, and during 1996 and 1997, the
Income Fund was a co-venturer in four joint ventures that owned and leased a
total of nine restaurant properties. As of December 31, 1997, the Income Fund
owned, either directly or through joint venture arrangements, 36 restaurant
properties which are subject to long-term, triple-net leases. The leases of the
restaurant properties provide for minimum base annual rental amounts (payable
in monthly installments) ranging from approximately $41,300 to $213,800. All of
the leases provide for percentage rent based on sales in excess of a specified
amount. In addition, a majority of the leases provide that, commencing in
specified lease years (ranging from the third to sixth lease year), the annual
base rent required under the terms of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Woodway Joint Venture, earned $3,015,642,
$3,182,058 and $3,300,816, respectively, in rental income from operating leases
and earned income from direct financing leases. The decrease in rental and
earned income during 1997, as compared to 1996, is primarily attributable to a
decrease of approximately $141,300, as a result of the sale of the restaurant
property in Orlando, Florida, in October 1996, as described above in "Liquidity
and Capital Resources."
Rental and earned income decreased approximately $53,600 during the year
ended December 31, 1996, as compared to the year ended December 31, 1995, as a
result of the sale of two restaurant properties located in Jacksonville,
Florida, in December 1995. In addition, rental and earned income decreased
approximately $45,400 during 1996, as compared to 1995, as a result of the sale
of the restaurant property in Orlando, Florida, in October 1996 as described
above. However, as a result of Income Fund accepting mortgage notes for the
sale of the two restaurant properties located in Jacksonville, Florida, and the
restaurant property located in Orlando, Florida, interest income increased
during the years ended December 31, 1997 and 1996, each as compared to the
previous year, as discussed below.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $85,735, $31,712 and $59,085, respectively, in contingent rental income.
The increase in contingent rental income during 1997 as compared to 1996, is
primarily attributable to (i) the Income Fund adjusting estimated contingent
rental amounts accrued at December 31, 1996, to actual amounts during the year
ended December 31, 1997, and (ii) increased gross sales of certain restaurant
properties requiring the payment of contingent rental income. The decrease in
contingent rental income during 1996, as compared to 1995, is partially
attributable to decreases in gross sales relating to certain restaurant
properties.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $238,338 , $127,246 and $76,445, respectively, in interest and
other income. The increase in interest and other income during 1997 and 1996,
each as compared to the previous year, is primarily attributable to the
interest earned on the mortgage notes accepted in connection with the sale of
the one restaurant property located in Orlando, Florida, in October 1996 and
the two restaurant properties located in Jacksonville, Florida, in December
1995.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $293,480, $266,500 and $244,933, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Income Fund is a
co-venturer. The increase in net income earned by joint ventures during 1997
and 1996, each as compared to the previous year, is primarily attributable to
the fact that the Income Fund invested in Middleburg Joint Venture in May 1996,
as described above in "Liquidity and Capital Resources."
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During at least one of the years ended December 31, 1997, 1996 and 1995,
four lessees of the Income Fund and its consolidated joint venture, (i) Golden
Corral Corporation, (ii) Carrols Corporation (iii) Restaurant Management
Services, Inc. and (iv) Flagstar Enterprises, Inc. and Quincy's Inc. (which are
affiliated entities under common control of Flagstar Corporation) (herein after
referred to as Flagstar Corporation), each contributed more than 10% of the
Income Fund's total rental income (including rental income from the Income
Fund's consolidated joint venture and the Income Fund's share of rental income
from eight restaurant properties owned by joint ventures). As of December 31,
1997, Golden Corral Corporation was the lessee under leases relating to four
restaurants, Carrols Corporation was the lessee under leases relating to five
restaurants, Restaurant Management Services, Inc. was the lessee under leases
relating to five restaurants and Flagstar Corporation was the lessee under
leases relating to three restaurants. It is anticipated that, based on the
minimum annual rental payments required by the leases, Golden Corral
Corporation, Carrols Corporation and Restaurant Management Services, each will
continue to contribute more than 10% of the Income Fund's total rental income
during 1998 and subsequent years. In addition, during at least one of the three
years ended December 31, 1997, 1996 and 1995, three restaurant chains, Golden
Corral Family Steakhouse Restaurants, Burger King and Shoney's, each accounted
for more than 10% of the Income Fund's total rental income (including rental
income from the Income Fund's consolidated joint venture and the Income Fund's
share of rental income from eight restaurant properties owned by unconsolidated
joint ventures). In subsequent years, it is anticipated that these three
restaurant chains each will continue to account for more than 10% of the Income
Fund's total rental income to which the Income Fund is entitled under the terms
of the leases. Any failure of these lessees or restaurant chains could
materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$377,922, $397,587 and $390,308 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, is primarily attributable to a decrease in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties. The increase in operating expenses during 1996 as
compared to 1995, is primarily attributable to an increase in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties and an increase in insurance expense as a result of our'
obtaining contingent liability and property coverage for the Income Fund
beginning in 1995. The increase in operating expenses during 1996, as compared
to 1995, was partially offset by a decrease in depreciation expense as a result
of the sale of the two properties located in Jacksonville, Florida, in December
1995, as described above in "Liquidity and Capital Resources."
As a result of the 1996 sale of the restaurant property in Orlando, Florida,
as described above in "Liquidity and Capital Resources," the Income Fund
recognized a loss of $99,031 for the year ended December 31, 1996. In addition,
as a result of the 1995 sales of the restaurant property in Ocoee, Florida, and
the two restaurant properties in Jacksonville, Florida, as described above in
"Liquidity and Capital Resources," the Income Fund recognized a gain of $71,638
and a loss of $11,712, respectively, during the year ended December 31, 1995.
No restaurant properties were sold during 1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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 volume 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 Income Fund's restaurant
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 restaurant properties.
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The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's restaurant
properties is the responsibility of the tenants of the restaurant properties in
accordance with the terms of the Income Fund's leases. We and affiliates have
established a team dedicated to reviewing the internal information technology
systems used in the operation of the Income Fund, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND IX, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on April
16, 1990, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants 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 September 30, 1998, the Income Fund owned 41 restaurant
properties, which included interests in 13 restaurant properties owned by joint
ventures in which the Income Fund is a co-venturer and one restaurant property
owned with an affiliate as tenants in common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,461,641 and $2,363,892 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, is primarily a result of changes in income and expenses as described
below in "Results of Operations" and changes in the Income Fund's working
capital.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,279,526 invested in such short-term investments, as compared
to $1,250,388 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $941,844 at September 30, 1998, from $949,197 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on cash from operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,432,503 and $2,362,503 for the nine
months ended September 30, 1998 and 1997, respectively ($787,501 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.70 and $0.68 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.23 per unit for each of the quarters ended June 30, 1998
and 1997). No distributions were made to us for the quarters and nine months
ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions. The Income Fund intends to continue to make distributions of
cash available for distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
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We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $3,157,964, $3,356,240 and
$3,098,276 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996 is
primarily a result of changes in income and expenses as discussed in "Results
of Operations" below and changes in the Income Fund's working capital. The
increase in cash from operations during 1996, as compared to 1995, is primarily
due to changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
In June 1997, the Income Fund sold its restaurant property in Alpharetta,
Georgia, and received net sales proceeds of $1,053,571, resulting in a gain for
financial reporting purposes of $199,643. This restaurant property was
originally acquired by the Income Fund in September 1991 and had a cost of
approximately $711,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $342,400 in excess of its original purchase price. In July
1997, the Income Fund reinvested approximately $1,049,800 of these net sales
proceeds in an IHOP restaurant property in Englewood, Colorado, as tenants-in-
common, with one of our affiliates. In connection therewith, the Income Fund
and the affiliate entered into an agreement whereby each co-venturer will share
in the profits and losses of the restaurant property in proportion to each co-
venturer's percentage interest. As of December 31, 1997, the Income Fund owned
a 67.23% interest in the restaurant property. We believe that the transaction,
or a portion thereof, relating to the sale of the restaurant property in
Alpharetta, Georgia, and the reinvestment of the proceeds in an IHOP restaurant
property in Englewood, Colorado, qualified as a like-kind exchange transaction
for federal income tax purposes.
In December 1996, the tenant of the restaurant property in Woodmere, Ohio,
exercised its option under the terms of its lease agreement, to substitute the
existing restaurant property for a replacement restaurant property. In
conjunction therewith, the Income Fund simultaneously exchanged the Burger King
restaurant property in Woodmere, Ohio, with a Burger King restaurant property
in Carrboro, North Carolina. The lease for the restaurant property in Woodmere,
Ohio, was amended to allow the restaurant property in Carrboro, North Carolina,
to continue under the terms of the original lease. All closing costs were paid
by the tenant. The Income Fund accounted for this as a non-monetary exchange of
similar assets and recorded the acquisition of the restaurant property in
Carrboro, North Carolina, at the net book value of the restaurant property in
Woodmere, Ohio. No gain or loss was recognized due to this being accounted for
as a non-monetary exchange of similar assets.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
pending the Income Fund's use of such funds to pay Income Fund expenses or to
make distributions to the partners. At December 31, 1997, the Income Fund had
$1,250,388 invested in such short-term investments as compared to $1,288,618 at
December 31, 1996.
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During 1997, 1996 and 1995, our affiliates incurred on behalf of the Income
Fund $77,999, $97,032 and $88,563, respectively, for certain operating
expenses. As of December 31, 1997 and 1996, the Income Fund owed $4,619 and
$1,405, respectively, to affiliates for such amounts and accounting and
administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such amounts. Other liabilities, including
distributions payable, decreased to $944,578 at December 31, 1997, from
$982,846 at December 31, 1996, primarily as the result of the Income Fund's
accruing a special distribution payable to the Limited Partners of $35,000, at
December 31, 1996, which was paid in January 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,150,004 for the year ended December 31, 1997 and
$3,185,004 for each of the years ended December 31, 1996 and 1995. This
represents a distribution of $0.90 per Unit for the year ended December 31,
1997 and $0.91 per Unit for each of the years ended December 31, 1996 and 1995.
We anticipate that the Income Fund will declare a special distribution to the
Limited Partners during the quarter ending March 31, 1998, representing
cumulative excess operating reserves. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purpose, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 28 wholly-owned restaurant properties (including one restaurant property
in Alpharetta, Georgia, which was sold in June 1997) and during the nine months
ended September 30, 1998, the Income Fund owned and leased 27 wholly-owned
restaurant properties, to operators of fast-food and family-style restaurant
chains. In connection therewith, during the nine months ended September 30,
1998 and 1997, the Income Fund earned $1,588,343 and $1,918,423, respectively,
in rental income from operating leases (net of adjustments to accrued rental
income) and earned income from direct financing leases from these restaurant
properties, $660,861 and $615,425 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The decrease in rental and earned
income during the nine months ended September 30, 1998, as compared to the nine
months ended September 30, 1997, is partially attributable to, and the increase
in rental and earned income during the quarter ended September 30, 1998, as
compared to the quarter ended September 30, 1997, is partially offset by, the
fact that in May 1998, the tenant of the restaurant properties in Williamsville
and Rochester, New York, filed for bankruptcy. As a result, during the quarter
and nine months ended September 30, 1998, the Income Fund wrote off
approximately $4,600 and $272,200, respectively, of accrued rental income (non-
cash accounting adjustments relating to the straight-lining of future scheduled
rent increases over the lease term in accordance with generally accepted
accounting principles). This decrease was partially offset by the fact that
during the quarter and nine months ended September 30, 1998, the Income Fund
collected and recognized as income, approximately $65,700 in rental and earned
income from the tenant of these restaurant properties, for which the Income
Fund had previously established an allowance for doubtful accounts. The tenant
has rejected the lease relating to the restaurant property in Williamsville,
New York and, as a result, the Income Fund will not
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receive rental income from this restaurant property. The tenant is currently in
the process of deciding whether to affirm or reject the lease for the
restaurant property in Rochester, New York. If the lease for the Rochester, New
York restaurant property is rejected, the Income Fund anticipates that rental
income from this restaurant property will terminate. However, we do not
anticipate that any decrease in rental income due to lost revenues relating to
these restaurant properties will have a material effect on the Income Fund's
financial position or results of operations. We are currently seeking either
new tenants or purchasers for these restaurant properties.
The decrease in rental and earned income during the nine months ended
September 30, 1998, is also partially attributable to, and the increase during
the quarter ended September 30, 1998, is partially offset by, the fact that the
Income Fund established an allowance for doubtful accounts of approximately
$14,600 and $43,900 for the quarter and nine months ended September 30, 1998,
respectively, relating to the restaurant property in Grand Prairie, Texas, in
accordance with its collection policy. No such allowance was established during
the quarter and nine months ended September 30, 1997. The Income Fund intends
to pursue collection of past due amounts from this tenant and will recognize
such amounts as income if collected.
The decrease in rental and earned income during the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997, is
partially attributable to, and the increase during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is partially
offset by, a decrease of approximately $20,400 and $21,800 for the quarter and
nine months ended September 30, 1998, respectively, in rental and earned income
due to the fact that the Income Fund amended the leases for the restaurant
properties in Shelby, North Carolina; Maple Heights, Ohio; Watertown, New York
and Carrboro, North Carolina to provide for rent reductions.
In addition, rental and earned income decreased approximately $47,700 during
the nine months ended September 30, 1998, as a result of the sale of the
restaurant property in Alpharetta, Georgia, in June 1997. The Income Fund
reinvested the net sales proceeds in an additional restaurant property as
tenants-in-common with certain of our affiliates in July 1997, resulting in an
increase in equity in earnings of joint ventures, as described below.
The decrease in rental and earned income during the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997,
was partially offset by, and the increase during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is partially
attributable to, the fact that in September 1997, the Income Fund re-leased the
restaurant property in Copley Township, Ohio to a new tenant to operate the
restaurant property as a Shell's Seafood restaurant and rent commenced in
December 1997. The Income Fund had ceased recording rental income relating to
the former tenant in September 1997.
During the nine months ended September 30, 1998 and 1997, the Income Fund
also earned $42,604 and $50,263, respectively, in contingent rental income,
$943 and $20,436 of which was earned during the quarters ended September 30,
1998 and 1997, respectively. The decrease during the quarter and nine months
ended September 30, 1998, as compared to the quarter and nine months ended
September 30, 1997, is partially attributable to the fact that no contingent
rents were recorded during the quarter ended September 30, 1998 as a result of
the Income Fund adopting EITF 98-9, a consensus reached by the Financial
Accounting Standards Board entitled "Accounting for Contingent Rent in the
Interim Financial Periods." The EITF states that a lessor should defer
recognition of contingent rent in interim periods until the specified target
that triggers the contingent rental income is achieved. Adoption of this
consensus did not have a material effect on the Income Fund's financial
position or results of operations. The decrease in contingent rental income
during the nine months ended September 30, 1998, as compared to the nine months
ended September 30, 1997, is partially offset by an increase in gross sales of
certain restaurants, the leases of which require the payment of contingent
rent.
For the nine months ended September 30, 1998 and 1997, the Income Fund also
owned and leased 13 restaurant properties indirectly through joint venture
arrangements and during the nine months ended
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September 30, 1998, the Income Fund owned and leased one restaurant property
with an affiliate as tenants-in- common. In connection therewith, during the
nine months ended September 30, 1998 and 1997, the Income Fund earned $432,608
and $373,525, respectively, attributable to net income earned by these joint
ventures, $155,940 and $148,487 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
joint ventures for the quarter and nine months ended September 30, 1998 is
primarily due to the fact that in July 1997, the Income Fund reinvested the net
sales proceeds it received from the sale of the restaurant property in
Alpharetta, Georgia, in an IHOP restaurant property located in Englewood,
Colorado, as tenants-in-common, with one of our affiliates.
Operating expenses, including depreciation and amortization expense, were
$354,315 and $372,413 for the nine months ended September 30, 1998 and 1997,
respectively, of which $122,534 and $113,038 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during the nine months ended September 30, 1998, as compared to the
nine months ended September 30, 1997, is partially attributable to the fact
that during the nine months ended September 30, 1997, the Income Fund recorded
bad debt expense of $21,000 relating to the restaurant property in Copley
Township, Ohio, as a result of the former tenant ceasing operating the
restaurant property in April 1997. In addition, the decrease in operating
expenses during the nine months ended September 30, 1998, is partially due to
the fact that the Income Fund recorded past due real estate taxes relating to
the restaurant property in Copley Township, Ohio, of approximately $23,200
during the nine months ended September 30, 1997. Due to the fact that the
restaurant property was re-leased to a new tenant in September 1997, no such
expenses were recorded during the nine months ended September 30, 1998.
The increase in operating expenses during the quarter ended September 30,
1998, was primarily attributable to an increase in depreciation expense due to
the fact that the Income Fund reclassified certain leases from direct financing
leases to operating leases in connection with lease amendments described above.
In accordance with the Statement of Financial Accounting Standards #13,
Accounting for Leases," the Income Fund recorded each of the reclassified
leases at the lower of original cost, present fair value, or present carrying
amount.
As a result of the sale of the restaurant property in Alpharetta, Georgia
during 1997, the Income Fund recognized a gain for financial reporting purposes
of $199,643 during the nine months ended September 30, 1997. No restaurant
properties were sold during the nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
owned and leased 27 wholly-owned restaurant properties (including one
restaurant property in Alpharetta, Georgia, which was sold in June 1997). In
addition, during 1997, 1996 and 1995, the Income Fund was a co-venturer in two
separate joint ventures that each owned and leased six properties and one joint
venture that owned and leased one restaurant property. During 1997, the Income
Fund also owned and leased one restaurant property with an affiliate as
tenants-in-common. As of December 31, 1997, the Income Fund owned, either
directly or through joint venture arrangements, 40 restaurant properties, which
are subject to long-term, triple-net leases. The leases of the restaurant
properties provide for minimum base annual rental amounts (payable in monthly
installments) ranging from approximately $50,400 to $171,400. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount. In addition, a majority of the leases provide that, commencing in
specified lease years (ranging from the third to the sixth lease year), the
annual base rent required under the terms of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $2,572,954, $2,771,319 and $2,807,108, respectively, in rental income
from operating leases and earned income from direct financing leases from the
Income Fund's wholly-owned restaurant properties. The decrease in rental and
earned income in 1997, as compared to 1996, is partially due to a decrease in
rental and earned income of approximately $65,000 during 1997, due to the fact
that during April 1997, the operator of the restaurant
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property in Copley Township, Ohio, ceased operations of the restaurant property
and the Income Fund ceased recording rental income and wrote-off the allowance
for doubtful accounts. As described above, the Income Fund re-leased this
restaurant property to Shells Seafood Restaurants in September 1997 and rent
commenced December 1997. The decrease in rental and earned income during 1996,
as compared to 1995, is primarily the result of the fact that during 1996, the
Income Fund established an allowance for doubtful accounts relating to the same
restaurant property in Copley Township, Ohio.
Rental and earned income also decreased during 1997, as compared to 1996,
due to the fact that the Income Fund established an allowance for doubtful
accounts of approximately $70,000 during 1997, relating to the Perkins
restaurant properties in Williamsville and Rochester, New York, which are
leased by the same tenant, due to financial difficulties the tenant is
experiencing. No such allowance was established during 1996. The Income Fund
intends to pursue collection of past due amounts from this tenant and will
recognize such amounts as income if collected.
As described above, rental and earned income decreased approximately $51,800
during 1997, as a result of the sale of the restaurant property in Alpharetta,
Georgia, in June 1997. In July 1997, the Income Fund reinvested the net sales
proceeds in a restaurant property in Englewood, Colorado, as tenants-in-common,
with one of our affiliates, as discussed above in "Liquidity and Capital
Resources."
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $74,867, $120,999 and $110,036, respectively, in contingent
rental income. The decrease in contingent rental income for 1997, as compared
to 1996, is primarily attributable to a change in the contingent rent formula
(consisting of an increase to the sales breakpoint on which contingent rents
are computed) in accordance with the terms of the leases, for certain
restaurant properties requiring the payment of contingent rental income. The
increase in contingent rental income during 1996, as compared to 1995, is
primarily a result of increased gross sales of certain restaurant properties
requiring the payment of contingent rental income.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $537,853, $460,400 and $453,794, respectively, in income
attributable to net income earned by joint ventures in which the Income Fund is
a co-venturer. The increase in net income earned by joint ventures during 1997,
as compared to 1996 and 1995, is primarily due to the fact that in July 1997,
the Income Fund reinvested the net sales proceeds it received from the sale of
the restaurant property in Alpharetta, Georgia, in an IHOP restaurant property
located in Englewood, Colorado, as tenants-in-common, with one of our
affiliates.
During at least one of the years ended December 31, 1997, 1996 and 1995,
five of the Income Fund's lessees (or group of affiliated lessees), Carrols
Corporation, TPI Restaurants, Inc., Flagstar Enterprises, Inc., Golden Corral
Corporation and Burger King Corporation, each contributed more than 10% of the
Income Fund's total rental income (including the Income Fund's share of rental
income from 13 restaurant properties owned by joint ventures and one restaurant
property owned as tenants-in-common). As of December 31, 1997, Carrols
Corporation was the lessee under leases relating to four restaurants, TPI
Restaurants, Inc. was the lessee under leases relating to five restaurants,
Flagstar Enterprises, Inc. was the lessee under leases relating to six
restaurants, Burger King Corp. was the lessee under leases relating to the 13
restaurants owned by joint ventures and Golden Corral Corporation was the
lessee under leases relating to two restaurants. It is anticipated that, based
on the minimum rental payments required by the leases, these five lessees or
groups of affiliated lessees each will continue to contribute more than 10% of
the Income Fund's total rental income in 1998 and subsequent years. In
addition, during at least one of the years ended December 31, 1997, 1996 and
1995, four restaurant chains, Burger King, Hardee's, Golden Corral and
Shoney's, each accounted for more than 10% of the Income Fund's total rental
income (including the Income Fund's share of the rental income from 13
restaurant properties owned by joint ventures and one restaurant property owned
as tenants-in-common). In subsequent years, it is anticipated that these four
restaurant chains each will continue to account for more than 10% of the total
rental income to which the Income Fund is entitled under the terms of its
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income.
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Operating expenses, including depreciation and amortization expense, were
$492,354, $443,767 and $440,176 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses for 1997, as compared to
1996, is partially attributable to the fact that the Income Fund recorded bad
debt expense of $21,000 relating to the restaurant property in Copley Township,
Ohio. Due to the fact that the former tenant ceased operating the restaurant
property in April 1997, we believe collection of this amount is doubtful. In
addition, the increase in operating expenses during 1997, was partially due to
the fact that during 1997, the Income Fund recorded past due real estate taxes
relating to the restaurant property in Copley Township, Ohio of $23,191. The
Income Fund recorded $9,905 of such expense during 1996. In addition, the
increase in operating expenses for 1997, as compared to 1996, was partially
attributable to the fact that the Income Fund recorded approximately $7,600 in
real estate tax expense in 1997 relating to the Perkins restaurant properties
in Williamsville and Rochester, New York, which are leased by the same tenant,
due to the financial difficulties the tenant is experiencing. The Income Fund
intends to pursue collection of such amounts and will recognize such amounts as
income if collected. No real estate tax expense was recorded for these
restaurant properties in 1996.
The increase in operating expenses during 1996, as compared to 1995, is
primarily a result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
As a result of the 1997 sale of the restaurant property in Alpharetta,
Georgia, as described above in "Liquidity and Capital Resources," the Income
Fund recognized a gain for financial reporting purposes of $199,643 for the
year ended December 31, 1997. No restaurant properties were sold during 1996 or
1995.
General
The Income Fund's leases as of September 30, 1998, in general, are triple-
net leases and contain provisions that we 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
Income Fund's restaurant 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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or
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infrastructure could result in an interruption in, or failure of, certain of
the Income Fund's business activities or operations. Accordingly, we and our
affiliates have requested and are evaluating documentation from the suppliers
of the affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Income Fund. The costs
expected to be incurred by us and our affiliates to become Year 2000 compliant
will be incurred by us and our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND X, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on April
16, 1990, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as land
upon which restaurants were to be constructed, which are leased primarily to
operators of selected national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 48 restaurant
properties, which included nine restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and two properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,774,783 and $2,748,032 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, is primarily a result of changes in the Income Fund's
working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
In January 1998, the Income Fund sold its restaurant property in Sacramento,
California to the tenant, for $1,250,000 and received net sales proceeds of
$1,230,672, resulting in a gain of $163,349 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in December
1991 and had a cost of approximately $969,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $261,300 in excess of its original
purchase price. As of September 30, 1998, net sales proceeds of $1,230,672 plus
accrued interest of $29,594 were being held in an interest-bearing escrow
account pending the release of funds by the escrow agent to acquire an
additional restaurant property. We believe that the transaction, or a portion
thereof, relating to the sale of the restaurant property in Sacramento,
California, and the reinvestment of the net sales proceeds, will qualify as a
like-kind exchange transaction for federal income tax purposes. However, the
Income Fund will distribute amounts sufficient to enable the Limited Partners
to pay federal and state income taxes, if any (at a level reasonably assumed by
us), resulting from the sale.
In addition, in March 1998, a vacant parcel of land relating to the
restaurant property in Austin, Texas, was sold to a third party who had
previously subleased the land from the Income Fund's lessee. In connection
therewith, the Income Fund received net sales proceeds of $68,434 ($68,000 of
which had been received as a deposit in 1995), resulting in a gain of $7,810
for financial reporting purposes.
In October 1998, the Income Fund sold its restaurant property in Billings,
Montana to the tenant for $362,000 and received net sales proceeds of $360,688,
resulting in a gain of $47,800 for financial reporting purposes. The Income
Fund plans to reinvest the net sales proceeds from the sale of this restaurant
property in an additional restaurant property.
In November 1998, the Income Fund reinvested approximately $1,020,800 of the
net sales proceeds it received from the sale of the restaurant property in
Sacramento, California in a Jack in the Box restaurant property located in San
Marcos, Texas. In connection therewith, the Income Fund entered into a long
term, triple-net lease with terms substantially the same as its other leases.
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Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,662,186 invested in such short-term investments as compared
to $1,583,883 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $1,068,724 at September 30, 1998, from $1,071,183 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on cash from operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to Limited Partners of $2,780,003 and $2,700,002 for the nine
months ended September 30, 1998 and 1997, respectively ($900,001 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.70 and $0.68 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.23 per unit for each applicable quarter ended September
30, 1998 and 1997). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions. The Income Fund intends to continue to make distributions of
cash available for distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $3,596,417, $3,695,802 and
$3,527,362 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, and the
increase in 1996, as compared to 1995, is primarily a result of changes in the
Income Fund's working capital during each of the respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In July 1995, the Income Fund sold a small parcel of land as a result of an
easement relating to its restaurant property in Hendersonville, North Carolina,
for $7,200, resulting in a gain of $1,112 for financial reporting purposes. In
addition, in August 1995, the Income Fund sold its restaurant property in
Denver, Colorado, for $1,057,000 and received net sales proceeds of $1,050,186,
resulting in a gain of $66,102 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in December 1991
and had a cost of approximately $977,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $73,200 in excess of its original
purchase price. In September 1995, the Income Fund reinvested $928,122 in a
Shoney's in Fort Myers Beach, Florida.
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In October 1995, the tenant of the Income Fund's restaurant property located
in Austin, Texas, entered into a sublease agreement for a vacant parcel of land
under which the subtenant has the option to purchase such land. The subtenant
exercised the purchase option and in accordance with the terms of the sublease
agreement, the tenant assigned the purchase contract, together with the
purchase contract payment of $69,000 from the subtenant, to the Income Fund. As
of February 28, 1998, the sale for the vacant parcel of land had not been
consummated and as a result, the net proceeds of $68,000 (representing the
original $69,000 received by the Income Fund, less $1,000 in costs incurred in
anticipation of the sale) were recorded as a deposit at December 31, 1997.
In January 1996, the Income Fund reinvested the remaining net sales proceeds
from the 1995 sale of the restaurant property in Denver, Colorado, and the
proceeds from the granting of an easement relating to the restaurant property
in Hendersonville, North Carolina, in a Golden Corral restaurant property
located in Clinton, North Carolina, with certain of our affiliates as tenants-
in-common. In connection therewith, the Income Fund and its affiliates entered
into an agreement whereby each co-venturer will share in the profits and losses
of the restaurant property in proportion to its applicable percentage interest.
As of December 31, 1997, the Income Fund owned a 13.37% interest in this
restaurant property.
In September 1997, the Income Fund sold its restaurant property in Fremont,
California, to the franchisor, for $1,420,000 and received net sales proceeds
(net of $2,745 which represents amounts due to the former tenant for prorated
rent) of $1,363,805, resulting in a gain of $132,238 for financial reporting
purposes. This restaurant property was originally acquired by the Income Fund
in March 1992 and had a cost of approximately $1,116,900, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $249,700 in excess of its original
purchase price. In October 1997, the Income Fund reinvested approximately
$1,277,300 of the net sales proceeds in a Boston Market restaurant property in
Homewood, Alabama. The Income Fund acquired the Boston Market restaurant
property from one of our affiliates. The affiliate had purchased and
temporarily held title to the restaurant property in order to facilitate the
acquisition of the restaurant property by the Income Fund. The purchase price
paid by the Income Fund represented the costs incurred by the affiliate to
acquire the restaurant property, including closing costs. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Fremont, California, and the reinvestment of the proceeds in a
Boston Market restaurant property in Homewood, Alabama, will qualify as a like-
kind exchange transaction for federal income tax purposes. However, the Income
Fund will distribute amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any (at a level reasonably assumed by us)
resulting from the sale. The Income Fund intends to reinvest the remaining net
sales proceeds in an additional restaurant property or use such amounts for
other Income Fund purposes.
In December 1997, the Income Fund used approximately $130,400 that had been
previously reserved for working capital purposes, to invest in a Chevy's Fresh
Mex restaurant property located in Miami, Florida, with certain of our
affiliates as tenants-in-common. In connection therewith, the Income Fund and
its affiliates entered into an agreement whereby each co-venturer will share in
the profits and losses of the restaurant property in proportion to its
applicable percentage interest. As of December 31, 1997, the Income Fund owned
a 6.69% interest in this restaurant property.
During 1997, the Income Fund entered into a contract to sell the restaurant
property in Sacramento, California, to the tenant. In January 1998, the Income
Fund sold this restaurant property for $1,250,000 and received net sales
proceeds of $1,234,175, resulting in a gain of approximately $163,300 for
financial reporting purposes.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Under its partnership agreement, the Income Fund is prohibited from borrowing
for any purpose; provided, however, that we or our affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by us or our affiliates on
behalf of the Income Fund.
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Certain of our affiliates from time to time incur certain operating expenses on
behalf of the Income Fund for which the Income Fund reimburses the affiliates
without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
pending the Income Fund's use of such funds to pay Income Fund expenses or to
make distributions to partners. At December 31, 1997, the Income Fund had
$1,583,883 invested in such short-term investments as compared to $1,769,483 at
December 31, 1996. The decrease in cash is primarily attributable to the Income
Fund using approximately $130,400 that had been previously reserved for working
capital purposes, to invest in a restaurant property located in Miami, Florida,
with affiliates, as tenants-in-common, in December 1997.
During 1997, 1996 and 1995, certain of our affiliates incurred $86,327,
$112,363 and $100,249, respectively, for certain operating expenses. As of
December 31, 1997 and 1996, the Income Fund owed $4,946 and $1,609,
respectively, to affiliates for such amounts and accounting and administrative
services. As of February 28, 1998, the Income Fund had reimbursed the
affiliates all such amounts. Other liabilities, including distributions
payable, decreased to $1,066,237 at December 31, 1997, from $1,148,901 at
December 31, 1996, partially as the result of the Income Fund's accruing a
special distribution payable to the Limited Partners of $40,000 at December 31,
1996, which was paid in January 1997. Other liabilities also decreased due to a
decrease in escrowed real estate taxes payable and rents paid in advance at
December 31, 1997.
Based on cash from operations, and during the years ended December 31, 1996
and 1995, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,600,003 for the year ended December
31, 1997 and $3,640,003 for each of the years ended December 31, 1996 and 1995.
This represents distributions of $0.90 per Unit for the year ended December 31,
1997 and $0.91 per Unit for each of the years ended December 31, 1996 and 1995.
No amounts distributed to the Limited Partners for the years ended December 31,
1997, 1996 and 1995, are required to be or have been treated by the Income Fund
as a return of capital for purposes of calculating the Limited Partners' return
on their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purpose, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, Allegan Real Estate Joint Venture, owned and leased
39 wholly-owned restaurant properties (including one restaurant property in
Fremont, California, which was sold in September 1997) and during the nine
months ended September 30, 1998, the Income Fund owned and leased 39 restaurant
properties (including one restaurant property in Sacramento, California, which
was sold in January 1998) to operators of fast-food and family-style restaurant
chains. In connection therewith, during the nine months ended September 30,
1998 and 1997, the Income Fund and Allegan Real Estate Joint Venture earned
$1,927,308 and $2,543,098, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these restaurant properties, $840,010 and $847,929 of
which was earned during the
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quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income during the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997, is partially due to a
decrease of approximately $84,400 in rental and earned income due to the fact
that the lease relating to the Perkins restaurant property in Ft. Pierce,
Florida, was amended to provide for rent reductions from May 1997 through
December 31, 1998. Due to the lease amendment and questionable collectibility
of future scheduled rent increases from this tenant, the Income Fund increased
its reserve for 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) by approximately
$139,600 during the nine months ended September 30, 1998, as compared to
approximately $22,700 during the nine months ended September 30, 1997. In
addition, rental and earned income decreased by approximately $172,900 during
the nine months ended September 30, 1998, as a result of the sale of the
restaurant properties in Fremont and Sacramento, California in September 1997
and January 1998. The decrease in rental and earned income for the nine months
ended September 30, 1998 was partially offset by an increase in rental and
earned income of approximately $97,300 during the nine months ended September
30, 1998, due to the reinvestment of a portion of the net sales proceeds from
the 1997 sale of the restaurant property in Fremont, California, in a
restaurant property in Homewood, Alabama in October 1997.
In addition, the decrease during the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, was partially
attributable to the fact that in May 1998 the tenant of the restaurant
properties in Lancaster and Amherst, New York, filed for bankruptcy. As a
result, during the nine months ended September 30, 1998, the Income Fund wrote
off approximately $292,600 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 Income Fund also increased the allowance for doubtful accounts
for past due rental amounts for these restaurant properties in the amount of
$14,100 for the nine months ended September 30, 1998, due to the fact that
collection of such amounts is questionable. The tenant has rejected the lease
relating to the restaurant property in Lancaster, New York, and as a result,
the Income Fund will not receive rental income from this restaurant property.
The tenant is currently in the process of deciding whether to affirm or reject
the lease for the restaurant property in Amherst, New York. If the lease for
the Amherst, New York restaurant property is rejected, the Income Fund
anticipates that rental income from this restaurant property will terminate.
However, we do not anticipate that any decrease in rental income due to lost
revenues relating to these restaurant properties will have a material effect on
the Income Fund's financial position or results of operations. We are currently
seeking either new tenants or purchasers for these restaurant properties.
In addition, the decrease in rental and earned income during the nine months
ended September 30, 1998 is partially attributable to the fact that in October
1998 the tenant of one Boston Market restaurant property filed for bankruptcy
and ceased operations relating to this restaurant property. As a result, during
the nine months ended September 30, 1998, the Income Fund wrote off
approximately $13,200 of accrued rental income (non-cash accounting adjustments
relating to the straight-lining of future scheduled rent increases over the
lease term in accordance with generally accepted accounting principles). If the
lease is eventually rejected, the Income Fund anticipates that rental income
relating to this restaurant property will terminate until a new tenant is
located or until the restaurant property is sold and the proceeds from such a
sale are reinvested in an additional restaurant property. However, we do not
anticipate that any decrease in rental income due to lost revenues relating to
this restaurant property will have a material effect on the Income Fund's
financial position or results of operations.
The decrease in rental and earned income for the nine months ended September
30, 1998, as compared to the nine months ended September 30, 1997, is also
partially due to a decrease of approximately $13,200 for the nine months ended
September 30, 1998, due to the fact that the leases relating to the Burger King
restaurant properties in Irondequoit, New York, Ashland, Ohio and Henderson,
North Carolina were amended to provide for rent reductions from August 1998
through the end of the lease term.
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For the nine months ended September 30, 1998 and 1997, the Income Fund also
owned and leased eight restaurant properties indirectly through other joint
venture arrangements and one restaurant property as tenants-in-common with
certain of our affiliates, and for the nine months ended September 30, 1998,
the Income Fund owned and leased one additional restaurant property as tenants-
in-common with certain of our affiliates. In connection therewith, during the
nine months ended September 30, 1998 and 1997, the Income Fund earned $213,432
and $204,167, respectively, attributable to the net income earned by
unconsolidated joint ventures, $76,163 and $71,523 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The increase in
net income earned by unconsolidated joint ventures during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is primarily attributable to the Income Fund
investing in a restaurant property in Miami, Florida, in December 1997, with
certain of our affiliates as tenants-in-common.
Operating expenses, including depreciation and amortization expense, were
$375,200 and $296,492 for the nine months ended September 30, 1998 and 1997,
respectively, of which $135,903 and $94,956 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
the result of an increase in depreciation expense due to the purchase of the
restaurant property in Homewood, Alabama, in October 1997 and the fact that
during the quarter and nine months ended September 30, 1998, the Income Fund
reclassified the leases relating to the restaurant properties in Irondequoit,
New York, Ashland, Ohio and Henderson, North Carolina from direct financing
leases to operating leases due to lease amendments. In addition, the increase
in operating expenses is partially due to the fact that the Income Fund
recorded bad debt expense and real estate tax expense relating to the
restaurant properties in Lancaster and Amherst, New York due to the fact that
the tenant of these restaurant properties filed for bankruptcy, as described
above. Due to the fact that the tenant rejected the lease in Lancaster, New
York and if the tenant rejects the lease in Amherst, New York, the Income Fund
will continue to incur certain expenses, such as real estate taxes, insurance,
and maintenance, until a new tenant or buyer for the restaurant properties are
located.
In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Income Fund recorded
approximately $14,000 in real estate tax expense due to the fact that in
October 1998 the tenant of the Boston Market restaurant property in Homewood,
Alabama filed for bankruptcy, as described above. If the tenant decides to
reject the lease, the Income Fund will continue to incur certain expenses, such
as real estate taxes, insurance and maintenance, until a new tenant or buyer
for the restaurant property is located.
As a result of the sale of the restaurant property in Sacramento,
California, and the sale of the parcel of land in Austin, Texas, as described
above in "Liquidity and Capital Resources," the Income Fund recognized a gain
of $171,159 for financial reporting purposes during the nine months ended
September 30, 1998. As a result of the sale of the restaurant property in
Fremont, California, the Income Fund recognized a gain of $132,238 for
financial reporting purposes for the quarter and nine months ended September
30, 1997.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 39 wholly-owned restaurant
properties (including one restaurant property in Denver, Colorado, which was
sold in August 1995), during 1996, the Income Fund owned and leased 38 wholly-
owned restaurant properties, and during 1997, the Income Fund owned and leased
39 wholly-owned restaurant properties (including one restaurant property in
Fremont, California, which was sold in September 1997). In addition, during
1997, 1996 and 1995, the Income Fund was a co-venturer in three separate joint
ventures that each owned and leased one restaurant property and one joint
venture which owned and leased six restaurant properties. During 1996, the
Income Fund also owned and leased one restaurant property with affiliates as
tenants-in-common and during 1997, the Income Fund owned and leased two
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restaurant properties with affiliates as tenants-in-common. As of December 31,
1997, the Income Fund owned, either directly or through joint venture
arrangements 49 restaurant properties which are subject to long-term, triple-
net leases. The leases of the restaurant properties provide for minimum base
annual rental amounts (payable in monthly installments) ranging from
approximately $26,200 to $198,500. All of the leases provide for percentage
rent based on sales in excess of a specified amount. In addition, a majority of
the leases provide that, commencing in specified lease years (ranging from the
second to the sixth lease year), the annual base rent required under the terms
of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Allegan Real Estate Joint Venture, earned
$3,402,320, $3,481,139 and $3,474,227, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease
in rental and earned income during 1997, as compared to 1996, is partially
attributable to the Income Fund increasing its allowance for doubtful accounts
by approximately $64,600 during 1997, for rental amounts relating to the
Perkins restaurant properties located in Lancaster and Amherst, New York, which
are leased by the same tenant, due to the financial difficulties the tenant is
experiencing. No such allowance was established during 1996. The Income Fund
intends to pursue collection of past due amounts from this tenant and will
recognize such amounts as income if collected. Rental and earned income also
decreased by approximately $36,600 during 1997, as compared to 1996, due to the
fact that the Income Fund sold its restaurant property in Fremont, California,
in September 1997. This decrease was partially offset by an increase of
approximately $28,100 in rental income as a result of reinvesting the majority
of these net sales proceeds in a restaurant property in Homewood, Alabama, in
October 1997.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $51,678, $45,126 and $53,189, respectively, in contingent rental
income. The increase in contingent rental income during 1997, as compared to
1996, is primarily attributable to a change in the percentage rent formula in
accordance with the terms of the lease agreement for one of the Income Fund's
leases during 1997. The decrease in contingent rent during 1996, as compared to
1995, was primarily a result of decreases in gross sales relating to certain
restaurant properties during 1996.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $278,919, $278,371 and $267,799, respectively, attributable to net
income earned by unconsolidated joint ventures in which the Income Fund is a
co-venturer. The increase in net income earned by unconsolidated joint ventures
during 1996, as compared to 1995, is primarily attributable to the Income Fund
investing in a restaurant property in Clinton, North Carolina, in January 1996,
with certain of our affiliates as tenants-in-common, as described above in
"Liquidity and Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
three lessees (or group of affiliated lessees), of the Income Fund and its
consolidated joint venture, Golden Corral Corporation, Foodmaker, Inc. and
Flagstar Corporation, each contributed more than 10% of the Income Fund's total
rental income (including rental income from the Income Fund's consolidated
joint venture and the Income Fund's share of rental income from eight
restaurant properties owned by unconsolidated joint ventures and two restaurant
properties owned with affiliates as tenants-in-common). As of December 31,
1997, Golden Corral Corporation was the lessee under leases relating to four
restaurants, Foodmaker, Inc. was the lessee under leases relating to six
restaurants and Flagstar Corporation was the lessee under leases relating to
nine restaurants. It is anticipated that based on the minimum rental payments
required by the leases, these three lessees (or groups of affiliated lessees)
each will continue to contribute more than 10% of the Income Fund's total
rental income during 1998 and subsequent years. In addition, during at least
one of the years ended December 31, 1997, 1996 and 1995, five restaurant
chains, Golden Corral, Hardee's, Burger King, Shoney's and Jack in the Box,
each accounted for more than 10% of the Income Fund's total rental income
(including rental income from the Income Fund's consolidated joint venture and
the Income Fund's share of rental income from eight restaurant properties owned
by unconsolidated joint ventures and two restaurant properties owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these five restaurant chains each
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will continue to account for more than 10% of the Income Fund's total rental
income to which the Income Fund is entitled under the terms of the leases. Any
failure of these lessees or restaurant chains could materially affect the
Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$414,105, $410,057 and $390,926 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997, as compared
to 1996, is partially a result of the Income Fund recording approximately
$9,700, for real estate taxes relating to the Perkins restaurant properties
located in Lancaster and Amherst, New York, which are leased by the same
tenant, due to the current financial difficulties of the tenant. Payment of
these taxes remains the responsibility of the tenant of this restaurant
property; however, we believe that the tenant's ability to pay these expenses
is doubtful. The Income Fund intends to pursue collection from the tenant of
any such amounts paid by the Income Fund and will recognize such amounts as
income if collected. The increase in operating expenses during 1997, as
compared to 1996, is partially offset by a decrease in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties.
The increase in operating expenses during 1997, as compared to 1996, is also
partially attributable to, and the increase during 1996, as compared to 1995,
is partially offset by a decrease in state taxes during 1996 as a result of
receiving a state tax refund from the state of New Hampshire during 1996, for
taxes paid in prior years.
Operating expenses increased during 1996, as compared to 1995, due to an
increase in accounting and administrative expenses associated with operating
the Income Fund and its restaurant properties and an increase in insurance
expense as a result of our obtaining contingent liability and restaurant
property coverage for the Income Fund beginning in May 1995. Operating expenses
also increased during 1996, as compared to 1995, due to an increase in
professional fees during the year ended December 31, 1996, as a result of
obtaining appraisal updates for 1996 and 1995, to prepare an annual statement
of unit valuation to qualified plans in accordance with the Income Fund's
partnership agreement.
As a result of the sale of the restaurant property in Fremont, California,
as discussed above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $132,238 for financial reporting purposes for the year
ended December 31, 1997. In addition, as a result of the granting of an
easement relating to the restaurant property in Hendersonville, North Carolina,
and the sale of the restaurant property in Denver, Colorado, as described above
in "Liquidity and Capital Resources," the Income Fund recognized a gain for
financial reporting purposes of $67,214 during the year ended December 31,
1995. No restaurant properties were sold during the year ended December 31,
1996.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of December 31, 1997, are triple-net leases and
contain provisions that we 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 Income Fund's restaurant
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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and
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elevators) using a two-digit format, as opposed to four digits, to indicate the
year. Such information technology and embedded systems may be unable to
properly recognize and process date-sensitive information beginning January 1,
2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XI, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 20, 1991, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as
properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 39 restaurant
properties, which included four restaurant properties owned by joint ventures
in which the Income Fund is a co-venturer and one restaurant property owned
with an affiliate as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,934,890 and $2,743,042 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, is primarily a result of changes in income and
expenses as described in "Results of Operations" below and changes in the
Income Fund's working capital.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,492,088 invested in such short-term investments, as compared
to $1,272,386 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
In October 1998, the Income Fund sold its restaurant property in Nashua, New
Hampshire, to a third party for $1,748,000 and received net sales proceeds of
$1,630,296, resulting in a gain of $461,862 for financial reporting purposes.
The Income Fund intends to reinvest the net sales proceeds in a replacement
restaurant property.
Total liabilities of the Income Fund, including distributions payable,
increased to $979,258 at September 30, 1998, from $975,905 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on cash from operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,665,018 and $2,625,018 for the nine
months ended September 30, 1998 and 1997, respectively ($875,006 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.67 and $0.66 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.22 per unit for each applicable quarter). No
distributions were made to us for the quarters and nine months ended September
30, 1998 and 1997. No amounts distributed to the Limited Partners for the nine
months ended September 30, 1998 and 1997, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions. The
Income Fund intends to continue to make distributions of cash available for
distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who meet specified
financial standards minimizes the Income Fund's operating expenses. We believe
that the leases will continue to generate cash flow in excess of operating
expenses.
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We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $3,642,796, $3,601,714 and
$3,652,185 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash from operations during 1997, as compared to 1996, is
primarily a result of changes in income and expenses as described in "Results
of Operations" below, and the decrease during 1996, as compared to 1995, is
primarily a result of changes in the Income Fund's working capital during each
of the respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In November 1996, the Income Fund sold its restaurant property in
Philadelphia, Pennsylvania, for $1,050,000 and received net sales proceeds of
$1,044,750, resulting in a gain of $213,685 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in
September 1992, and had a cost of approximately $877,900, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $166,900 in excess of its original
purchase price. As of December 31, 1996, the net sales proceeds of $1,044,750,
plus accrued interest of $3,072, were being held in an interest-bearing escrow
account pending the release of funds by the escrow agent to acquire an
additional restaurant property. The sale of this restaurant property was
structured to qualify as a like-kind exchange transaction in accordance with
Section 1031 of the Internal Revenue Code. As a result, no gain was recognized
for federal income tax purposes. Therefore, the Income Fund was not required to
distribute any of the net sales proceeds from the sale of this restaurant
property to Limited Partners for the purpose of paying federal and state income
taxes.
In January 1997, the Income Fund reinvested the net sales proceeds from the
1996 sale of the restaurant property in Philadelphia, Pennsylvania, in a Black-
eyed Pea restaurant property located in Corpus Christi, Texas, with one of our
affiliates as tenants-in-common. In connection therewith, the Income Fund and
the affiliate entered into an agreement whereby each co-venturer will share in
the profits and losses of the restaurant property in proportion to its
applicable percentage interest. As of December 31, 1997, the Income Fund owned
a 72.5% interest in this restaurant property.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. Certain of our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
pending the Income Fund's use of such funds to pay Income Fund expenses or to
make distributions to partners. At December 31, 1997, the Income Fund had
$1,272,386 invested in such short-term investments as compared to $1,225,860 at
December 31, 1996.
During 1997, 1996 and 1995, certain of our affiliates incurred $83,747,
$105,643 and $92,276, respectively, for certain operating expenses. As of
December 31, 1997 and 1996, the Income Fund owed $6,648
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and $2,121, respectively, to affiliates for such amounts, accounting and
administrative services and management fees. As of February 28, 1998, the
Income Fund had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, decreased to $969,257 at December 31, 1997,
from $999,977 at December 31, 1996, partially as the result of the Income
Fund's accruing a special distribution payable to the Limited Partners of
$40,000 at December 31, 1996, which was paid in January 1997.
During 1996, the Income Fund entered into an agreement with an unrelated
third party to sell the Burger King restaurant property in Nashua, New
Hampshire. As discussed above, in October 1998, the Income Fund sold its
restaurant property in Nashua, New Hampshire to a third party for $1,748,000.
Based on cash from operations, and during the years ended December 31, 1996
and 1995, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,500,024, $3,540,024 and $3,540,023
for the years ended December 31, 1997, 1996 and 1995, respectively. This
represents a distribution of $0.88 per Unit for the year ended December 31,
1997 and $0.89 per Unit for each of the years ended December 31, 1996 and 1995.
We anticipate that the Income Fund will declare a special distribution to the
Limited Partners during the quarter ending March 31, 1998, representing
cumulative excess operating reserves. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and restaurant
property coverage for the Income Fund. This insurance is intended to reduce the
Income Fund's exposure in the unlikely event a tenant's insurance policy lapses
or is insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, owned and leased 36 wholly-owned restaurant properties, and during the
nine months ended September 30, 1998, the Income Fund and its consolidated
joint ventures owned and leased 37 wholly-owned restaurant properties
(including one restaurant property in Columbus, Ohio exchanged for one
restaurant property in Danbury, Connecticut), to operators of fast-food and
family-style restaurant chains. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund, Denver Joint Venture and
CNL/Airport Joint Venture earned $2,632,415 and $2,655,818, respectively, in
rental income from operating leases and earned income from direct financing
leases, $868,028 and $883,882 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
In addition, for the nine months ended September 30, 1998 and 1997, the
Income Fund owned and leased two restaurant properties indirectly through other
joint venture arrangements and owned and leased one restaurant property with an
affiliate as tenants-in-common. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund earned $156,335 and
$163,945, respectively, attributable to net income earned by unconsolidated
joint ventures, $58,730 and $58,782 of which was earned during the quarters
ended September 30, 1998 and 1997, respectively. Net income earned by joint
ventures decreased
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during the nine months ended September 30, 1998, as compared to the nine months
ended September 30, 1997, due to Ashland Joint Venture adjusting estimated
contingent rental amounts accrued at December 31, 1997, to actual amounts
billed during the nine months ended September 30, 1998.
During the nine months ended September 30, 1998 and 1997, the Income Fund
earned $114,469 and $53,455, respectively, in interest and other income,
$16,421 and $25,999 of which was earned during the quarters ended September 30,
1998 and 1997, respectively. The increase in interest and other income during
the nine months ended September 30, 1998 was primarily attributable to the
Income Fund collecting and recognizing $60,000 in other income in May 1998, as
a result of executing an amendment to a purchase and sale agreement with a
third party to extend the closing date for the Burger King restaurant property
located in Nashua, New Hampshire. In accordance with the terms of the
amendment, the Income Fund was deemed to have earned the $60,000 upon execution
of the amendment to extend the closing date of this restaurant property. This
restaurant property was sold in October 1998, as described above in "Liquidity
and Capital Resources."
Operating expenses, including depreciation and amortization expense, were
$540,998 and $533,051 for the nine months ended September 30, 1998 and 1997,
respectively, $179,596 and $166,842 of which were incurred during the quarters
ended September 30, 1998 and 1997, respectively.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1996 and 1995, the Income Fund owned and
leased 35 wholly-owned restaurant properties (including one restaurant property
in Philadelphia, Pennsylvania, which was sold in November 1996). During the
year ended December 31, 1997, the Income Fund owned and leased 34 wholly-owned
restaurant properties. In addition, during 1997, 1996 and 1995, the Income Fund
was a co-venturer in four separate joint ventures that each owned and leased
one restaurant property, and during 1997, the Income Fund owned and leased one
restaurant property with an affiliate as tenants-in-common. As of December 31,
1997, the Income Fund owned, either directly or through joint venture
arrangements, 39 restaurant properties which are subject to long-term, triple-
net leases. The leases of the restaurant properties provide for minimum base
annual rental amounts (payable in monthly installments) ranging from
approximately $45,600 to $183,600. All of the leases provide for percentage
rent based on sales in excess of a specified amount. In addition, some of the
leases provide that, commencing in specified lease years (generally the sixth
lease year), the annual base rent required under the terms of the lease will
increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, earned $3,543,984, $3,615,977 and $3,609,385, respectively, in rental
income from operating leases and earned income from direct financing leases.
The decrease in rental and earned income during 1997 as compared to 1996, is
primarily attributable to the sale of the restaurant property in Philadelphia,
Pennsylvania in November 1996, as described above in "Liquidity and Capital
Resources." In January 1997, the Income Fund reinvested the net sales proceeds
in a restaurant property in Corpus Christi, Texas, with one of our affiliates,
as described above in "Liquidity and Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $225,888, $251,312 and $200,198, respectively, in contingent rental
income. The decrease during 1997, as compared to 1996, is primarily due to the
sale of the restaurant property in Philadelphia, Pennsylvania. The increase in
contingent rental income during 1996, as compared to 1995, is primarily due to
an increase in gross sales of certain restaurant properties whose leases
require the payment of contingent rental income.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $236,103, $118,211 and $118,384, respectively, attributable
to net income earned by unconsolidated joint ventures in which the Income Fund
is a co-venturer. The increase in net income earned by unconsolidated joint
venture during 1997, as compared to 1996, is primarily attributable to the
Income Fund investing in a restaurant property in Corpus Christi, Texas, in
January 1997, with one of our affiliates as tenants-in-common, as described
above in "Liquidity and Capital Resources."
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<PAGE>
During at least one of the years ended December 31, 1997, 1996 and 1995,
five lessees (or group of affiliated lessees) of the Income Fund and its
consolidated joint ventures, Golden Corral Corporation, Foodmaker, Inc., Burger
King Corporation, DenAmerica and Flagstar Corporation, each contributed more
than 10% of the Income Fund's total rental income (including rental income from
the Income Fund's consolidated joint ventures, the Income Fund's share of
rental income from two restaurant properties owned by unconsolidated joint
ventures and one restaurant property owned with an affiliate as tenants-in-
common). As of December 31, 1997, Golden Corral Corporation was the lessee
under leases relating to three restaurants, Foodmaker, Inc. was the lessee
under leases relating to eight restaurants, Burger King Corporation was the
lessee under leases relating to eight restaurants, Flagstar Corporation was the
lessee under leases relating to nine restaurants, and DenAmerica Corporation
was the lessee under leases relating to five restaurants. It is anticipated
that, based on the minimum rental payments required by the leases, these five
lessees or groups of affiliated lessees, each will continue to contribute more
than 10% of the Income Fund's total rental income during 1998 and subsequent
years. In addition, during at least one of the years ended December 31, 1997,
1996 and 1995 four restaurant chains, Golden Corral, Jack in the Box, Burger
King and Denny's, each accounted for more than 10% of the Income Fund's total
rental income (including rental income from the Income Fund's consolidated
joint ventures and the Income Fund's share of rental income from two restaurant
properties owned by unconsolidated joint ventures and one restaurant property
owned with an affiliate as tenants-in-common). In subsequent years, it is
anticipated that these restaurant chains each will continue to account for more
than 10% of the total rental income to which the Income Fund is entitled under
the terms of its leases. Any failure of these lessees or restaurant chains
could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$703,459, $725,767 and $718,352 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997 as compared
to 1996 is primarily attributable to a decrease in depreciation expense as a
result of the sale of the restaurant property in Philadelphia, Pennsylvania.
The increase in operating expenses during 1996, as compared to 1995, is
primarily the result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties, and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
The increase in operating expenses during 1996, as compared to 1995, was
partially offset by the Income Fund receiving a state tax refund during 1996,
for state taxes paid in prior years and by a decrease in depreciation expense
as a result of the sale of the restaurant property in Philadelphia,
Pennsylvania, in November 1996, as described above in "Liquidity and Capital
Resources."
As a result of the sale of the restaurant property in Philadelphia,
Pennsylvania, as described above in "Liquidity and Capital Resources," the
Income Fund recognized a gain of $213,685 for financial reporting purposes for
the year ended December 31, 1996. No restaurant properties were sold during the
years ended December 31, 1997 or 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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 Income Fund's restaurant
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 restaurant properties.
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The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
August 20, 1991, to acquire for cash, either directly or through joint venture
arrangements, both newly constructed and existing restaurants, as well as
properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 49 restaurant
properties, which included interests in five restaurant properties owned by
joint ventures in which the Income Fund is a co-venturer.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$3,066,225 and $2,955,295 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, is primarily a result of changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In August 1998, the Income Fund entered into a joint venture arrangement,
Columbus Joint Venture, with certain of our affiliates, to construct and hold
one restaurant property. As of September 30, 1998, the Income Fund had
contributed $115,256 to purchase land and pay for construction costs relating
to the joint venture. When construction is completed, the Income Fund will have
an approximate 28% interest in the profits and losses of the joint venture.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,785,128 invested in such short-term investments, as compared
to $1,706,415 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
Total liabilities of the Income Fund increased to $1,055,882 at September
30, 1998, from $1,013,678 at December 31, 1997, primarily as the result of the
Income Fund accruing real estate taxes in connection with certain Long John
Silver's restaurant properties, as described below in "Results of Operations."
We believe that the Income Fund has sufficient cash on hand to meet its current
working capital needs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $2,868,756 for each of the nine months ended September 30,
1998 and 1997 ($956,252 for each of the quarters ended September 30, 1998 and
1997). This represents distributions for each applicable nine months of $0.64
per unit ($0.21 per unit for each applicable quarter). No distributions were
made to us for the quarters and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, are required to be or have been treated by the
Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Income Fund
intends to continue to make distributions of cash available for distribution to
the Limited Partners on a quarterly basis.
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The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $3,806,988, $3,951,689 and
$3,819,362 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, and the
increase during 1996, as compared to 1995, are primarily a result of changes in
income and expenses as described in "Results of Operations" below and changes
in the Income Fund's working capital during each of the respective years.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
In April 1996, the Income Fund sold its restaurant property in Houston,
Texas, to an unrelated third party for $1,640,000. As a result of this
transaction, the Income Fund recognized a loss of $15,355 for financial
reporting purposes primarily due to acquisition fees and miscellaneous
acquisition expenses that the Income Fund had allocated to this restaurant
property. In May 1996, the Income Fund reinvested the sales proceeds from this
sale, along with additional funds, in Middleburg Joint Venture. The Income Fund
has an 87.54% interest in the profits and losses of Middleburg Joint Venture
and the remaining interest in this joint venture is held by an affiliate of the
Income Fund which has the same General Partners.
In March 1997, the Income Fund entered into a new lease for the restaurant
property in Tempe, Arizona. In connection therewith, the Income Fund incurred
$55,000 in renovation costs during the year ended December 31, 1997. The
renovations were completed in May 1997.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. Certain of our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term highly liquid investments
pending the Income Fund's use of such funds to pay Income Fund expenses or to
make distributions to partners. At December 31, 1997, the Income Fund had
$1,706,415 invested in such short-term investments as compared to $1,800,601 at
December 31, 1996.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $97,078, $118,929 and $105,019, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$6,887 and $2,981, respectively, to affiliates for such amounts and accounting
and administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such
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amounts. Other liabilities including distributions payable decreased to
$1,006,791 at December 31, 1997, from $1,050,051 at December 31, 1996,
primarily as the result of a decrease in rents paid in advance at December 31,
1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,825,008 for each of the years ended December 31, 1997
and 1996, and $3,870,007 for the year ended December 31, 1995. This represents
a distribution of $0.85 per Unit for each of the years ended December 31, 1997
and 1996, and $0.86 per Unit for the year ended December 31, 1995. No amounts
distributed or to be distributed to the Limited Partners for the years ended
December 31, 1997, 1996 and 1995, are required to be or have been treated by
the Income Fund as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
owned and leased 44 wholly-owned restaurant properties to operators of fast-
food and family-style restaurant chains. In connection therewith, during the
nine months ended September 30, 1998 and 1997, the Income Fund earned
$2,822,747 and $3,061,061, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these restaurant properties, $963,925 and $1,031,166 of
which was earned during the quarters ended September 30, 1998 and 1997,
respectively. The decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is primarily attributable to the fact that in
June 1998, the Income Fund discontinued receiving rental income from the
tenant, Long John Silver's, Inc., which filed for bankruptcy and rejected the
leases relating to these restaurant properties. In addition, during the nine
months ended September 30, 1998, the Income Fund wrote off approximately
$224,900 of accrued rental income (non-cash accounting adjustments relating to
the straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles). We are currently
seeking either new tenants or buyers for these restaurant properties. The
Income Fund will not recognize any rental and earned income from these
restaurant properties until new tenants for these restaurant properties are
located, or until the restaurant properties are sold and the proceeds from such
sales are reinvested in additional restaurant properties.
The decrease in rental and earned income during the quarter and nine months
ended September 30, 1998 was partially offset by an increase in rental and
earned income of approximately $87,700 as a result of the Income Fund entering
into a new lease with a new tenant for the restaurant property in Tempe,
Arizona, for which rental payments commenced in July 1997.
For the nine months ended September 30, 1998 and 1997, the Income Fund also
earned $19,755 and $36,999, respectively, in contingent rental income, $6,038
and $11,036 of which was earned during the quarters
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ended September 30, 1998 and 1997, respectively. The decrease in contingent
rental income during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to a decrease in gross sales of certain restaurant properties
whose leases require the payment of contingent rental income.
For the nine months ended September 30, 1997, the Income Fund owned and
leased four restaurant properties, and for the nine months ended September 30,
1998, the Income Fund owned and leased five restaurant properties indirectly
through joint venture arrangements. In connection therewith, during the nine
months ended September 30, 1998 and 1997, the Income Fund earned $85,604 and
$212,586, respectively, attributable to net income earned by these joint
ventures, $63,712 and $71,230 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The decrease in net income is
primarily due to the fact that Kingsville Real Estate Joint Venture (in which
the Income Fund owns a 31.13% interest in the profits and losses of the joint
venture) established an allowance for doubtful accounts of approximately
$21,900 and $87,800 during the quarter and nine months ended September 30,
1998, respectively, in accordance with its collection policy. No such allowance
was established during the quarter and nine months ended September 30, 1997. In
addition, during the nine months ended September 30, 1998, the joint venture
established an allowance for loss on land and net investment in the direct
financing lease for its restaurant property in Kingsville, Texas of
approximately $316,000. The allowance represents the difference between the
restaurant property's carrying value at September 30, 1998 and the estimated
net realizable value of the restaurant property. Kingsville Real Estate Joint
Venture is currently seeking either a new tenant or purchaser for this
restaurant property.
Operating expenses, including depreciation and amortization expense, were
$658,349 and $428,628 for the nine months ended September 30, 1998 and 1997,
respectively, of which $294,262 and $136,269 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998 is
primarily attributable to the fact that the Income Fund recorded bad debt
expense for past due principal and interest amounts relating to the loan with
the tenant of the restaurant property in Kingsville Real Estate Joint Venture
due to financial difficulties the tenant is experiencing. We are in the process
of negotiating an arrangement to collect past due amounts and will recognize
any such amounts as income if collected.
In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 1998, is partially attributable to the fact that the
Income Fund accrued insurance and real estate tax expenses as a result of Long
John Silver's, Inc. filing for bankruptcy and rejecting the leases relating to
three restaurant properties in June 1998. The increase in operating expenses
during the quarter and nine months ended September 30, 1998, is partially
attributable to an increase in depreciation expense due to the fact that during
the quarter and nine months ended September 30, 1998, the Income Fund
reclassified these assets from net investment in direct financing leases to
land and buildings on operating leases. The Income Fund will continue to incur
certain expenses, such as real estate taxes, insurance, and maintenance
relating to these restaurant properties until new tenants or buyers are
located. The Income Fund is currently seeking either new tenants or buyers for
these restaurant properties.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1996 and 1995, the Income Fund owned and
leased 45 wholly-owned restaurant properties (including one restaurant property
in Houston, Texas, which was sold in April 1996). During 1997, the Income Fund
owned and leased 44 wholly-owned restaurant properties. In addition, during
1995, the Income Fund was a co-venturer in three separate joint ventures that
each owned and leased one restaurant property, and during 1996 and 1997, the
Income Fund was a co-venturer in four separate joint ventures that each owned
and leased one restaurant property. As of December 31, 1997, the Income Fund
owned, either directly or through joint venture arrangements, 48 restaurant
properties which are subject to long-term, triple-net leases. The leases of the
restaurant properties provide for minimum base annual rental payments (payable
in monthly installments) ranging from approximately $46,900 to $213,800. The
majority of the leases provide for percentage rent based on sales in excess of
a specified amount. In addition, some of the leases
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provide that, commencing in specified lease years (generally the sixth lease
year), the annual base rent required under the terms of the lease will
increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $4,102,842, $4,165,640 and $4,330,100, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1997 and 1996, each as compared to the previous year,
is primarily attributable to a decrease of approximately $51,800 and $136,500
during the years ended December 31, 1997 and 1996, respectively, as a result of
the sale of the restaurant property in Houston, Texas, in April 1996, as
discussed above in "Liquidity and Capital Resources."
In addition, rental and earned income also decreased approximately $23,500
and $39,800 during 1997 and 1996, each as compared to the previous year, as a
result of the fact that the tenant of the restaurant property in Tempe,
Arizona, declared bankruptcy and ceased operations of the restaurant business
located on the restaurant property in June 1996. As a result of the termination
of this lease, during the year ended December 31, 1996, the Income Fund
reclassified this lease from a direct financing lease to an operating lease. In
March 1997, the Income Fund entered into a new lease for the restaurant
property in Tempe, Arizona with a new tenant to operate the restaurant property
for which rental payments commenced in July 1997. The decrease in rental and
earned income during 1997, as compared to 1996, was partially offset by an
increase in rental income of $38,600 earned from the new tenant during 1997.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $54,330, $67,652 and $70,819, respectively, in contingent rental
income. The decrease in contingent rental income during 1997 and 1996, each as
compared to the previous year, is primarily attributable to decreased gross
sales of certain restaurant properties requiring the payments of contingent
rental income.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $277,325, $200,499 and $81,582, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The increase in net income earned by joint ventures during 1997 and
1996, each as compared to the previous year, is primarily due to the fact that
the Income Fund invested in Middleburg Joint Venture in May 1996, as described
above in "Liquidity and Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
three of the Income Fund's lessees (or group of affiliated lessees), Long John
Silver's, Inc., Foodmaker, Inc. and Flagstar Corporation, each contributed more
than 10% of the Income Fund's total rental income (including the Income Fund's
share of rental income from four restaurant properties owned by joint
ventures). As of December 31, 1997, Long John Silver's, Inc. was the lessee
under leases relating to eight restaurants, Foodmaker, Inc. was the lessee
under leases relating to 10 restaurants and Flagstar Corporation was the lessee
under leases relating to 15 restaurants. It is anticipated that based on the
minimum rental payments required by the leases, these three lessees or group of
affiliated lessees each will continue to contribute more than 10% of the Income
Fund's total rental income during 1998 and subsequent years. In addition,
during at least one of the years ended December 31, 1997, 1996 and 1995, four
restaurant chains, Long John Silver's, Hardee's, Jack in the Box and Denny's,
each accounted for more than 10% of the Income Fund's total rental income
(including the Income Fund's share of rental income from four restaurant
properties owned by joint ventures). In subsequent years, it is anticipated
that these four restaurant chains each will continue to account for more than
10% of the Income Fund's total rental income to which the Income Fund is
entitled under the terms of the leases. Any failure of these lessees or
restaurant chains could materially affect the Income Fund's income.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $87,719, $119,267 and $88,070, respectively, in interest and other
income. The decrease in interest and other income during 1997, as compared to
1996, and the increase in interest and other income during 1996, as compared to
1995, is primarily attributable to the Income Fund granting certain easement
rights during 1996, to the owner of the restaurant property adjacent to the
Income Fund's restaurant property in Black Mountain, North Carolina, in
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exchange for $25,000. In addition, the decrease in interest and other income
during 1997, as compared to 1996, is offset by an increase attributable to the
Income Fund recognizing approximately $7,900 in other income due to the fact
that the former tenant of the restaurant property in Tempe, Arizona, paid past
due real estate taxes relating to the restaurant property and the Income Fund
reversed such amounts during 1997 that it had previously accrued as payable
during 1996.
Operating expenses, including depreciation and amortization expense, were
$570,002, $594,660 and $556,199 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, and the increase in 1996, as compared to 1995, is partially
attributable to the fact that during 1996, the Income Fund recorded current and
past due real estate taxes relating to the restaurant property in Tempe,
Arizona, due to financial difficulties the tenant was experiencing. As
discussed above, the amounts accrued during 1996 were reversed and recorded as
other income during 1997. No real estate taxes were recorded during 1997
relating to the restaurant property in Tempe, Arizona, due to the fact that the
new tenant is responsible for the real estate taxes under the terms of the new
lease.
In addition, the decrease in operating expenses during 1997, as compared to
1996, is partially attributable to a decrease in accounting and administrative
expenses associated with operating the Income Fund and its restaurant
properties. The decrease in operating expenses during 1997, as compared to
1996, and the increase in 1996, as compared to 1995, is partially attributable
to the Income Fund incurring certain expenses, such as insurance and legal fees
during 1996, due to the former tenant of the restaurant property in Tempe,
Arizona declaring bankruptcy during 1996. The increase in operating expenses
during 1996, as compared to 1995, is primarily attributable to an increase in
accounting and administrative expenses associated with operating the Income
Fund and its restaurant properties and an increase in insurance expense as a
result of our obtaining contingent liability and property coverage for the
Income Fund beginning in May 1995.
The decrease in operating expenses during 1997, was partially offset by an
increase in depreciation expense as a result of the reclassification of the
lease relating to the restaurant property in Tempe, Arizona, from a direct
financing lease to an operating lease, as described above in "Liquidity and
Capital Resources." The increase in operating expenses during 1996, as compared
to 1995, was partially offset by a decrease in depreciation expense during the
year ended December 31, 1996, as a result of the sale of the restaurant
property located in Houston, Texas, in April 1996, as described above in
"Liquidity and Capital Resources."
As a result of the sale of the restaurant property in Houston, Texas, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a loss of $15,355 for financial reporting purposes for the year
ended December 31, 1996. The loss was primarily due to acquisition fees and
miscellaneous acquisition expenses that the Income Fund had allocated to this
restaurant property. No restaurant properties were sold during 1995 and 1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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 Income Fund's restaurant
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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and
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elevators) using a two-digit format, as opposed to four digits, to indicate the
year. Such information technology and embedded systems may be unable to
properly recognize and process date-sensitive information beginning January 1,
2000.
The Income Fund does not have any information technology systems. Affiliates
of us provide all services requiring the use of information technology systems
pursuant to a management agreement with the Income Fund. The maintenance of
embedded systems, if any, at the Income Fund's properties is the responsibility
of the tenants of the properties in accordance with the terms of the Income
Fund's leases. We and our affiliates have established a team dedicated to
reviewing the internal information technology systems used in the operation of
the Income Fund, and the information technology and embedded systems and the
Year 2000 compliance plans of the Income Fund's tenants, significant suppliers,
financial institutions and transfer agent.
The information technology infrastructure of the affiliates of us consists
of a network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 25, 1992, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 47 restaurant
properties which included two restaurant properties owned by joint ventures in
which the Income Fund is a co-venturer and three restaurant properties owned
with affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,459,747 and $2,511,698 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, is primarily a result of changes in income and expenses as described
below in "Results of Operations" and changes in the Income Fund's working
capital.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At September 30, 1998, the
Income Fund had $817,721 invested in such short-term investments, as compared
to $907,980 at December 31, 1997. The funds remaining at September 30, 1998,
will be used towards the payment of distributions and other liabilities.
Total liabilities of the Income Fund, including distributions payable,
increased to $913,767 at September 30, 1998, from $870,034 at December 31,
1997, primarily as a result of the Income Fund accruing real estate taxes in
connection with certain Long John Silver's restaurant properties, as described
below in "Results of Operations." Total liabilities at September 30, 1998, to
the extent that they exceed cash and cash equivalents at September 30, 1998,
will be paid from future cash from operations.
Based on current and future anticipated cash from operations, the Income
Fund declared distributions to the Limited Partners of $2,550,006 for each of
the nine months ended September 30, 1998 and 1997 ($850,002 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions of
$0.64 per Unit for each applicable nine months ($0.21 per Unit for each
applicable quarter). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997 are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contribution. The Income Fund intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who meet specified
financial standards minimizes the Income Fund's operating expenses. We believe
that the leases will continue to generate cash flow in excess of operating
expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
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The Years Ended December 31, 1997, 1996 and 1995
The Income Fund'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
$3,204,420, $3,367,581 and $3,379,378 for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease in cash from operations during 1997
and 1996, each as compared to the previous year, is primarily a result of
changes in income and expenses as described in "Results of Operations" below
and changes in the Income Fund's working capital during each of the respective
years.
In January 1995, the Income Fund received notice from the tenant of its
restaurant property in Houston, Texas, of its intent to exercise its option in
accordance with its lease agreement, to substitute another restaurant property
for the Houston, Texas restaurant property. In April 1995, the Income Fund sold
its restaurant property in Houston, Texas, to the tenant for its original
purchase price, excluding acquisition fees and miscellaneous acquisition
expenses. As a result of this transaction, the Income Fund recognized a loss
for financial reporting purposes of approximately $29,560 primarily due to
acquisition fees and miscellaneous acquisition expenses the Income Fund had
allocated to the Houston, Texas, restaurant property and due to the accrued
rental income relating to future scheduled rent increases that the Income Fund
had recorded and reversed at the time of sale. The Income Fund used the net
sales proceeds, along with approximately $39,800 of cash reserves, to acquire a
Checkers restaurant property in Lakeland, Florida, from the tenant.
In November 1996, the Income Fund sold its restaurant property in Richmond,
Virginia, to the tenant and received sales proceeds of $550,000, resulting in a
gain of $82,855 for financial reporting purposes. This restaurant property was
originally acquired by the Income Fund in March 1994, and had a cost of
approximately $415,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $134,600 in excess of its original purchase price. As of
December 31, 1996, the sales proceeds of $550,000, plus accrued interest of
$770, were being held in an interest-bearing escrow account pending the release
of funds by the escrow agent to acquire an additional restaurant property. In
January 1997, the Income Fund reinvested the net sales proceeds in a restaurant
property located in Akron, Ohio, with one of our affiliates as tenants-in-
common. In connection therewith, the Income Fund and the affiliate entered into
an agreement whereby each co-venturer will share in the profits and losses of
the restaurant property in proportion to its applicable percentage interest. As
of December 31, 1997, the Income Fund owned a 63.03% interest in this
restaurant property. The sale of the restaurant property in Richmond, Virginia,
and the reinvestment of the net sales proceeds in a restaurant property in
Akron, Ohio, were structured to qualify as a like-kind exchange transaction in
accordance with Section 1031 of the Internal Revenue Code. As a result, no gain
was recognized for federal income tax purposes. Therefore, the Income Fund was
not required to distribute any of the net sales proceeds from the sale of this
restaurant property to Limited Partners for the purpose of paying federal and
state income taxes.
In October 1997, the Income Fund sold its restaurant property in Orlando,
Florida, to a third party, for $953,371 and received net sales proceeds of
$932,849, resulting in a loss of $48,538 for financial reporting purposes. In
December 1997, the Income Fund reinvested the net sales proceeds in a
restaurant property located in Miami, Florida, with certain of our affiliates
as tenants-in-common. In connection therewith, the Income Fund and its
affiliates entered into an agreement whereby each co-venturer will share in the
profits and losses of the restaurant property in proportion to its applicable
percentage interest. As of December 31, 1997, the Income Fund owned a 47.83%
interest in this restaurant property.
During the year ended December 31, 1997, the Income Fund loaned $196,980 to
the former tenant of the Denny's restaurant property in Orlando, Florida. The
Income Fund collected $127,843 of the amounts advanced and wrote off the
balance of $69,137.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
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None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. Certain of our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Currently, cash reserves and rental income from the Income Fund restaurant
properties are invested in money market accounts or other short-term highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1997, the
Income Fund had $907,980 invested in such short-term investments as compared to
$1,103,568 at December 31, 1996. The decrease in cash and cash equivalents
during the year ended December 31, 1997, is partially the result of the Income
Fund advancing and not recovering $69,137 from the former tenant of the Denny's
restaurant property in Orlando, Florida, as described above. In addition, the
decrease was also partially attributable to a decrease in rents paid in advance
at December 31, 1997.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $87,870, $97,819 and $94,875, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$6,791 and $2,594, respectively, to related parties for such amounts,
accounting and administrative services and management fees. As of February 28,
1998, the Income Fund had reimbursed the affiliates all such amounts. Other
liabilities, including distributions payable, decreased to $863,243 at December
31, 1997, from $924,539 at December 31, 1996, partially as the result of a
decrease in rents paid in advance and a decrease in accrued and escrowed real
estate taxes payable at December 31, 1997.
Based primarily on current and future anticipated cash from operations, the
Income Fund declared distributions to the Limited Partners of $3,400,008 for
each of the years ended December 31, 1997 and 1996 and $3,375,011 for the year
ended December 31, 1995. This represents distributions of $0.85 per Unit for
each of the years ended December 31, 1997 and 1996 and $0.84 per Unit for the
year ended December 31, 1995. No amounts distributed or to be distributed to
the Limited Partners for the years ended December 31, 1997, 1996 and 1995, are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
The Fund's investment strategy of acquiring restaurant properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimized the Fund'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, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs. We have the right to cause the Income Fund to
maintain additional reserves if, in our discretion, we determine such reserves
are required to meet the Income Fund's working capital needs.
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Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 43 wholly-owned restaurant properties (including one restaurant property
in Orlando, Florida, which was sold in October 1997) and during the nine months
ended September 30, 1998, the Income Fund owned and leased 42 wholly-owned
restaurant properties to operators of fast-food and family-style restaurant
chains. In connection therewith, during the nine months ended September 30,
1998 and 1997, the Income Fund earned $2,097,553 and $2,512,212, respectively,
in rental income from operating leases (net of adjustments to accrued rental
income) and earned income from direct financing leases for these restaurant
properties, $761,025 and $824,586 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. Rental and earned income decreased
by approximately $100,100 and $101,400, respectively, during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, primarily due to the fact that in June 1998,
Long John Silver's, Inc., the tenant of three restaurant properties, filed for
bankruptcy and rejected the leases relating to these restaurant properties. As
a result, during the nine months ended September 30, 1998, the Income Fund
wrote off approximately $307,400 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). In October 1998, the Income Fund re-leased one of these restaurant
properties to a new tenant for which rent will commence in December 1998. We
are currently seeking either new tenants or purchasers for the two remaining
restaurant properties. The Income Fund will not recognize any rental and earned
income from the two remaining restaurant properties until new tenants for these
restaurant properties are located or until the restaurant properties are sold
and the proceeds from such sales are reinvested in additional restaurant
properties.
During the nine months ended September 30, 1997, the Income Fund also owned
and leased two restaurant properties indirectly through joint venture
arrangements and two restaurant properties with certain of our affiliates as
tenants-in-common. During the nine months ended September 30, 1998, the Income
Fund owned and leased three restaurant properties as tenants-in-common with
certain of our affiliates and two restaurant properties indirectly through
joint venture arrangements. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund earned $182,346 and
$109,720, respectively, attributable to the net income earned by these joint
ventures, $60,864 and $39,217 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
these joint ventures during the quarter and nine months ended September 30,
1998, as compared to the quarter and nine months ended September 30, 1997, is
primarily attributable to the fact that in December 1997, the Income Fund
reinvested the net sales proceeds it received from the sale, in October 1997,
of the restaurant property in Orlando, Florida, in a restaurant property
located in Miami, Florida, with certain of our affiliates as tenants-in-common.
Operating expenses, including depreciation and amortization expense, were
$559,506 and $596,044 for the nine months ended September 30, 1998 and 1997,
respectively, of which $241,028 and $270,186 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to the fact that during the quarter and nine months ended
September 30, 1997, the Income Fund recorded bad debt expense of approximately
$54,800 for rental and other amounts, relating to the Denny's restaurant
property in Orlando, Florida, due to financial difficulties the tenant was
experiencing. The restaurant property was sold in October 1997, and in
anticipation of the October sale, the Income Fund wrote off as bad debt expense
approximately $69,100 of amounts previously advanced during the nine months
ended September 30, 1997.
The decrease in operating expenses during the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, is partially offset by the fact that the Income Fund accrued
insurance and real estate taxes as a result of Long John Silver's, Inc. filing
for
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bankruptcy and rejecting the leases relating to three restaurant properties, in
June 1998. The Income Fund will continue to incur certain expenses, such as
real estate taxes, insurance, and maintenance relating to these restaurant
properties until new tenants or purchasers are located. The Income Fund is
currently seeking either new tenants or purchasers for these restaurant
properties. In addition, the decrease in operating expenses during the quarter
and nine months ended September 30, 1998, is partially offset by an increase in
depreciation expense due to the fact that during the quarter and nine months
ended September 30, 1998, the Income Fund reclassified the assets from direct
financing leases to operating leases, in accordance with Statement of Financial
Accounting Standards #13, "Accounting for Leases," which requires the Income
Fund to record the reclassified leases at the lower of original cost, present
fair value or present carrying value.
During the quarter and nine months ended September 30, 1997, the Income Fund
established an allowance for loss on land and net investment in the direct
financing lease in the amount of $7,336 and $48,538, respectively, for
financial reporting purposes for the restaurant property in Orlando, Florida.
The total allowance for the restaurant property represented the difference
between (i) the sum of the restaurant property's land carrying value and the
carrying value of the net investment in the direct financing lease at September
30, 1997 and (ii) the net realizable value of $932,849 received as net sales
proceeds received in conjunction with the sale of the restaurant property in
October 1997.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 45 wholly-owned restaurant
properties (including one restaurant property in Houston, Texas, which was sold
in April 1995), during 1996, the Income Fund owned and leased 44 wholly-owned
restaurant properties (including one restaurant property in Richmond, Virginia,
which was sold in November 1996) and during 1997, the Income Fund owned and
leased 43 wholly-owned restaurant properties (including one restaurant property
in Orlando, Florida, which was sold in October 1997). During 1997, 1996 and
1995, the Income Fund was a co-venturer in two separate joint ventures that
each owned and leased one restaurant property. In addition, during 1995 and
1996, the Income Fund owned and leased one restaurant property, and during
1997, owned and leased three restaurant properties, with certain of our
affiliates as tenants-in-common. As of December 31, 1997, the Income Fund
owned, either directly, as tenants-in-common with affiliates or through joint
venture arrangements, 47 restaurant properties which are subject to long-term,
triple-net leases. The leases of the restaurant properties provide for minimum
base annual rental amounts (payable in monthly installments) ranging from
approximately $27,400 to $191,900. A 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,
the annual base rent required under the terms of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $3,347,609, $3,376,286 and $3,509,773, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1997, as compared to 1996, was partially attributable
to a decrease of approximately $116,200 as a result of the fact that in
February 1997, the Income Fund discontinued charging rent to the former tenant
of the Denny's restaurant property in Orlando, Florida, as a result of the
former tenant vacating the restaurant property. The decrease in rental and
earned income during 1997, as compared to 1996, was partially offset by, and
the decrease during 1996, as compared to 1995, was partially attributable to
the fact that the Income Fund established an allowance for doubtful accounts of
approximately $15,300, $85,400 and $38,000 during 1997, 1996 and 1995,
respectively, for past due rental amounts relating to the Denny's restaurant
property in Orlando, Florida, due to financial difficulties the tenant was
experiencing. The decrease during 1997, as compared to 1996, was also offset
by, and the decrease during 1996, as compared to 1995, was also attributable to
the fact that during 1996, the Income Fund established an allowance for
doubtful accounts of approximately $72,700 for accrued rental income amounts
previously recorded (due to the fact that future scheduled rent increases are
recognized on a straight-line basis over the term of the lease in accordance
with generally accepted accounting principles). The Income Fund sold this
restaurant property in October 1997, and
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reinvested the net sales proceeds in a restaurant property in Miami, Florida,
as tenants-in-common, with certain of our affiliates, as described above in
"Liquidity and Capital Resources."
In addition, the decrease in rental and earned income for the years ended
1997 and 1996, each as compared to the previous year, is partially attributable
to a decrease of approximately $46,200 and $5,600, respectively, due to the
fact that the Income Fund sold its restaurant property in Richmond, Virginia,
in November 1996. The Income Fund reinvested the net sales proceeds in a
restaurant property located in Akron, Ohio, as tenants-in-common, with one of
our affiliates, as described above in "Liquidity and Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $287,751, $299,495 and $293,749, respectively, in contingent rental
income. The decrease in contingent rental income during 1997, as compared to
1996, is primarily the result of the Income Fund adjusting estimated contingent
rental amounts accrued at December 31, 1996, to actual amounts during the year
ended December 31, 1997. The increase in contingent rental income during 1996
as compared to 1995, is primarily the result of increases in gross sales
relating to certain restaurant properties during 1996.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $150,417, $60,654 and $98,520, respectively, attributable to
net income earned by joint ventures in which the Income Fund is a co-venturer.
The increase in net income earned by joint ventures during 1997, as compared to
1996 is primarily attributable to the fact that in January 1997, the Income
Fund reinvested the net sales proceeds from the sale of the restaurant property
in Richmond, Virginia, in a restaurant property in Akron, Ohio, with one of our
affiliates, as tenants-in-common as described above in "Liquidity and Capital
Resources." The increase was also attributable to the fact that in December
1997, the Income Fund reinvested the net sales proceeds from the sale of the
restaurant property in Orlando, Florida, in a restaurant property in Miami,
Florida, with certain of our affiliates, as tenants-in-common as described
above in "Liquidity and Capital Resources." The decrease in net income earned
by joint ventures during 1996, as compared to 1995, is primarily a result of
the former tenant defaulting under the terms of the lease agreement of the
Kenny Rogers' Roasters restaurant property owned with an affiliate as tenants-
in-common during 1996. The Income Fund entered into a new lease for this
restaurant property with a new tenant to operate the restaurant property as an
Arby's restaurant. Rent commenced in December 1996, upon completion of the
renovations.
During at least one of the years ended December 31, 1997, 1996 and 1995,
five of the Income Fund's lessees (or group of affiliated lessees), Flagstar
Corporation, Long John Silver's, Inc., Golden Corral Corporation, Foodmaker,
Inc. and Checkers Drive-In Restaurants, Inc. each contributed more than 10% of
the Income Fund's total rental income (including the Income Fund's share of
rental income from two restaurant properties owned by joint ventures and three
restaurant properties owned with affiliates as tenants-in-common). As of
December 31, 1997, Flagstar Corporation was the lessee under leases relating to
12 restaurants, Long John Silver's, Inc. was the lessee under leases relating
to eight restaurants, Golden Corral Corporation was the lessee under leases
relating to three restaurants, Foodmaker, Inc. was the lessee under leases
relating to five restaurants and Checkers was the lessee under leases relating
to eight restaurants. It is anticipated that based on the minimum rental
payments required by the leases, Flagstar Corporation, Long John Silver's,
Inc., Golden Corral Corporation and Foodmaker, Inc. each will continue to
contribute more than 10% of the Income Fund's total rental income during 1998
and subsequent years. In addition, during at least one of the years ended
December 31, 1997, 1996 and 1995, five restaurant chains, Long John Silver's,
Hardee's, Golden Corral, Jack in the Box and Burger King, each accounted for
more than 10% of the Income Fund's total rental income (including the Income
Fund's share of rental income from two restaurant properties owned by joint
ventures and three restaurant properties owned with affiliates as tenants-in-
common). In subsequent years, it is anticipated that these five restaurant
chains, each will continue to account for more than 10% of the total rental
income to which the Income Fund is entitled under the terms of its leases. Any
failure of these lessees or restaurant chains could materially affect the
Income Fund's income.
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Operating expenses, including depreciation and amortization expense, were
$748,305, $646,794 and $608,140 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997, as compared
to 1996, is primarily the result of the fact that the Income Fund recorded bad
debt expense of approximately $54,000 for rental amounts due from the former
tenant of the Denny's restaurant property in Orlando, Florida, as a result of
the Income Fund ceasing collection efforts on rental amounts not collected from
the tenant as of the time of the sale of the restaurant property in October
1997, as described above in "Liquidity and Capital Resources." Operating
expenses also increased as a result of the fact that the Income Fund recorded
bad debt expense of approximately $69,100 relating to the advances made to the
former tenant of the Denny's restaurant property in Orlando, Florida, that were
not recovered from the former tenant, as described above in "Liquidity and
Capital Resources." The increase in operating expenses during 1997 is partially
offset by, and the increase during 1996 is partially attributable to, the fact
that during 1996, the Income Fund recorded real estate tax expense relating to
this restaurant property of approximately $10,700. No such real estate tax
expense was recorded by the Income Fund during 1995 or 1997, due to the fact
that real estate taxes amounts were paid by the tenant and the purchaser of the
restaurant property, respectively, for each of these years.
The increase in operating expenses during 1996, as compared to 1995, is also
partially the result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
As a result of the sale of the restaurant property in Orlando, Florida, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a loss for financial reporting purposes of $48,538 for the year
ended December 31, 1997. In addition, as a result of the sale of the restaurant
property in Richmond, Virginia, as described above in "Liquidity and Capital
Resources," the Income Fund recognized a gain of $82,855 for financial
reporting purposes for the year ended December 31, 1996. In addition, as a
result of the sale of the restaurant property in Houston, Texas, as described
above in "Liquidity and Capital Resources," the Income Fund recognized a loss
for financial reporting purposes of $29,560 for the year ended December 31,
1995. The loss was primarily due to acquisition fees and miscellaneous
acquisition expenses the Income Fund had allocated to this restaurant property
and due to accrued rental income relating to future scheduled rent increases
that the Income Fund had recorded and reversed at the time of sale.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Period." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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 based 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 Income Fund's restaurant
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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
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The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of the certain of our affiliates
consists of a network of personal computers and servers that were obtained from
major suppliers. The affiliates utilize various administrative and financial
software applications on that infrastructure to perform the business functions
of the Income Fund. Our inability and that of our affiliates to identify and
timely correct material Year 2000 deficiencies in the software and/or
infrastructure could result in an interruption in, or failure of, certain of
the Income Fund's business activities or operations. Accordingly, we and our
affiliates have requested and are evaluating documentation from the suppliers
of the affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Income Fund. The costs
expected to be incurred by us and our affiliates to become Year 2000 compliant
will be incurred by us and our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CNL INCOME FUND XIV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 25, 1992, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases, with the lessee
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Income Fund owned 56 restaurant
properties, which included interests in 10 restaurant properties owned by joint
ventures in which the Income Fund is a co-venturer.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $2,610,623 and $2,782,288, respectively. The
decrease in cash from operations for the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, is primarily a result
of changes in income and expenses as described below in "Results of Operations"
and changes in the Income Fund's working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
During the nine months ended September 30, 1998, the Income Fund sold its
restaurant property in Madison, Alabama and two restaurant properties in
Richmond, Virginia, to third parties, for a total of $1,667,462 and received
net sales proceeds of $1,606,702, resulting in a total gain of $70,798 for
financial reporting purposes. These restaurant properties were originally
acquired by the Income Fund in 1993 and 1994, and had costs totaling
approximately $1,393,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold these restaurant
properties for a total of approximately $213,300 in excess of their original
purchase prices. During the nine months ended September 30, 1998, the Income
Fund reinvested a portion of the net sales proceeds from the sale of the
restaurant property in Madison, Alabama in a joint venture arrangement, as
described below. The Income Fund will distribute amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any (at a level
reasonably assumed by us), resulting from the sale.
In addition, in April 1998, the Income Fund reached an agreement to accept
$360,000 for the restaurant property in Riviera Beach, Florida, which was taken
through a right of way taking in December 1997. The Income Fund had received
preliminary sales proceeds of $318,592 as of December 31, 1997. Upon agreement
of the final sales price of $360,000, and receipt of the remaining sales
proceeds of $41,408, the Income Fund recognized a gain of $41,408 for financial
reporting purposes. This restaurant property was originally acquired by the
Income Fund in 1994 and had a cost of approximately $276,400, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the Income
Fund sold this restaurant property for a total of approximately $83,600 in
excess of its original purchase price. In October 1998, the Income Fund
reinvested the net sales proceeds from the right of way taking of the
restaurant property in Riviera Beach, Florida in a restaurant property in
Fayetteville, North Carolina, as described below.
In September 1997, the Income Fund entered into a joint venture arrangement,
CNL Kingston Joint Venture, with one of our affiliates, to construct and hold
one restaurant property. Construction of the restaurant was completed in
January 1998. As of September 30, 1998, the Income Fund had contributed
$206,848 to the
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joint venture and owned a 39.94% interest in the profits and losses of the
joint venture. In addition, in April
1998, the Income Fund reinvested a portion of the net sales proceeds from the
sale of the restaurant property in Madison, Alabama in a joint venture
arrangement, Melbourne Joint Venture, with one of our affiliates, to construct
and hold one restaurant property, at a total cost of $1,052,552. As of
September 30, 1998, the Income Fund had contributed $314,011 to purchase land
and pay for construction costs relating to the joint venture. The Income Fund
has agreed to contribute approximately $212,300 in additional construction
costs to the joint venture. The Income Fund will have an approximate 50%
interest in the profits and losses of the joint venture.
As of September 30, 1998, the net sales proceeds from the sale of one of the
restaurant properties in Richmond, Virginia were being held in an interest
bearing escrow account pending the release of funds by the escrow agent to
acquire an additional restaurant property. In October 1998, the Income Fund
reinvested these net sales proceeds, along with additional funds, in a
restaurant property in Fayetteville, North Carolina, as described below.
In October 1998, the Income Fund reinvested approximately $1,533,100 of the
net sales proceeds it received from the sales of the restaurant properties in
Richmond, Virginia and the right of way taking of the restaurant property in
Riviera Beach, Florida, and a portion of the net sales proceeds it received
from the sale of the restaurant property in Madison, Alabama, in a Bennigan's
restaurant property located in Fayetteville, North Carolina. In connection
therewith, the Income Fund entered into a long term, triple-net lease with
terms substantially the same as its other leases. The Income Fund acquired the
Bennigan's restaurant property from one of our affiliates. The affiliate had
purchased and temporarily held title to the restaurant property in order to
facilitate the acquisition of the restaurant property by the Income Fund. The
purchase price paid by the Income Fund represented the costs incurred by the
affiliate to acquire the restaurant property, including closing costs.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties is invested in money market accounts or other short-term, highly
liquid investments pending the use of such funds to pay Income Fund expenses or
to make distributions to partners. At September 30, 1998, the Income Fund had
$2,293,184 invested in such short-term investments, as compared to $1,285,777
at December 31, 1997. The increase in cash is primarily attributable to the
receipt of net sales proceeds relating to the sales of one of the restaurant
properties in Richmond, Virginia and the restaurant property in Madison,
Alabama, net of the amount reinvested in Melbourne Joint Venture, as described
above. In addition, the increase in cash is partially attributable to the
release of funds held in escrow at December 31, 1997 relating to the right of
way taking of the restaurant property in Riviera Beach, Florida, as described
above. The funds remaining at September 30, 1998, after payment of
distributions and other liabilities, will be used to meet the Income Fund's
working capital and other needs and to acquire additional restaurant
properties.
Total liabilities of the Income Fund, including distributions payable,
increased to $1,013,605 at September 30, 1998, from $995,467 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on current and anticipated future cash from operations, the Income
Fund declared distributions to the Limited Partners of $2,784,390 for each of
the nine months ended September 30, 1998 and 1997 ($928,130 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions for
each applicable nine months of $0.62 per unit ($0.21 per unit for each
applicable quarter). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contribution. The Income Fund intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who meet specified
financial standards minimizes the Income Fund's operating expenses. We believe
that the leases will continue to generate cash flow in excess of operating
expenses.
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We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest received, less
cash paid for expenses). Cash from operations was $3,606,190, $3,706,296 and
$3,709,844 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997 and 1996, each as compared to
the previous year, is primarily a result of changes in income and expenses as
discussed in "Results of Operations" below and changes in the Income Fund's
working capital during each of the respective years.
Other sources and used of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
The Income Fund received notice in January 1995, from the tenant of two of
its restaurant properties located in Knoxville, Tennessee, and Dallas, Texas,
of the tenant's intention to exercise its option, in accordance with its lease
agreement, to substitute other properties for these two restaurant properties.
In March 1995, the Income Fund sold its two restaurant properties in Knoxville,
Tennessee and Dallas, Texas, to the tenant for their original purchase prices,
excluding acquisition fees and miscellaneous acquisition expenses, and received
net sales proceeds totaling $696,012. The Income Fund used the net sales
proceeds, along with other uninvested offering proceeds, to acquire two
Checkers restaurant properties in Coral Springs and St. Petersburg, Florida,
from the tenant. As a result of these transactions, the Income Fund recognized
a loss of $66,518 for financial reporting purposes primarily due to acquisition
fees and miscellaneous acquisition expenses that the Income Fund had allocated
to the Knoxville, Tennessee, and Dallas, Texas restaurant properties, and due
to the accrued rental income relating to future scheduled rent increases that
the Income Fund had previously recorded and wrote off at the time of sale.
In September 1996, Wood-Ridge Real Estate Joint Venture, a joint venture in
which the Income Fund owns a 50% interest, sold its two restaurant 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 restaurant 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 restaurant properties. In January
1997, the joint venture reinvested $502,598 of the remaining net sales proceeds
in an additional restaurant property. During 1997, the Income Fund and the
other joint venture partner each received approximately $52,000, representing a
return of capital, for the remaining uninvested net sales proceeds.
During 1997, the Fund entered into an agreement with the tenant of the
Checkers #486 Property in Richmond, Virginia, to sell the restaurant property.
The general partners believe that the anticipated sales price exceeds the
Fund's cost attributable to the restaurant property. As of February 28, 1998,
the sale had not occurred.
During 1997, the Income Fund entered into an agreement with a third party to
sell the restaurant property in Marietta, Georgia. We believe that the
anticipated sales price exceeds the Income Fund's cost attributable to the
restaurant property. As of February 28, 1998, the sale had not occurred.
In December 1997, the Port of Palm Bay deposited $660,000 in the registry of
the court on behalf of the Fund and the tenant in exchange for taking
possession of the restaurant property located in Riviera Beach, Florida,
through a total right of way taking. The Fund owned the land and the tenant
owned the building
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relating to this restaurant property. The general partners and the tenant are
in the process of negotiating the allocation of the $660,000. The general
partners anticipate that the Fund will be entitled to receive at least
$330,000, but the general partners intend to pursue a larger allocation of this
amount. As of December 31, 1997, the Fund had removed the carrying value of the
land in the amount of $318,592 from its accounts due to the fact that the Port
of Palm Bay had taken possession of this restaurant property, and in exchange,
the Fund recorded restricted cash in the amount of $318,592. The general
partners anticipate that the Fund will recognize a gain as a result of the
taking of this restaurant property and will recognize such gain when the final
proceeds are determined. As of February 28, 1998, the final amount of proceeds
to be received had not been determined.
In January 1998, the Fund sold its restaurant property in Madison, Alabama,
to a third party for $740,000 and received net sales proceeds of $700,950. Due
to the fact that the Fund had recognized accrued rental income since the
inception of the lease relating to the straight lining of future scheduled rent
increases in accordance with generally accepted accounting principles, the Fund
wrote off $13,314 of such accrued rental income at December 31, 1997. Due to
the fact that the Fund recorded the write off at December 31, 1997, no gain or
loss will be recorded in 1998 for financial reporting purposes relating to the
sale. The Fund intends to reinvest the net sales proceeds in an additional
restaurant property. The general partners believe that the transaction, or a
portion thereof, relating to the sale of this restaurant property and the
reinvestment of the proceeds will be structured to qualify as a like-kind
exchange transaction for federal income tax purposes.
In January 1998, the Fund sold its restaurant property in Richmond, Virginia
(#548), to a third party for $512,462 and received net sales proceeds in that
amount, resulting in a gain of $70,798 for financial reporting purposes. The
Fund intends to reinvest the net sales proceeds in an additional restaurant
property. The general partners believe that the transaction, or a portion
thereof, relating to the sale of this restaurant property and the reinvestment
of the proceeds will be structured to qualify as a like-kind exchange
transaction for federal income tax purposes.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. Certain of our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties are invested in money market accounts or other short-term, highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or make distributions to partners. At December 31, 1997, the
Income Fund had $1,285,777 invested in such short-term investments as compared
to $1,462,012 at December 31, 1996. The decrease in cash is primarily
attributable to the Income Fund investing in CNL Kingston Joint Venture in
September 1997, as described above. The funds remaining at December 31, 1997,
after the payment of distributions and other liabilities, will be used to meet
the Income Fund's working capital and other needs.
During 1997, 1996 and 1995, the affiliates incurred on behalf of the Income
Fund $87,695, $94,152 and $104,433, respectively, for certain operating
expenses. In addition, during 1995, certain of our affiliates incurred on
behalf of the Income Fund $577 for certain acquisition expenses. At December
31, 1997 and 1996, the Income Fund owed $7,853 and $1,651, respectively, to
affiliates for such amounts and accounting and administrative services and
management fees. As of February 28, 1998, the Income Fund had reimbursed the
affiliates all such amounts. Other liabilities, including distributions
payable, decreased to $987,614 at December 31, 1997, from $1,008,461 at
December 31, 1996, primarily as a result of a decrease in rents paid in advance
at December 31, 1997.
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Based primarily on current and future cash from operations, the Income Fund
declared distributions to the Limited Partners of $3,712,520, $3,712,522 and
$3,628,130 for the years ended December 31, 1997, 1996 and 1995, respectively.
This represents distributions of $0.83 per Unit for each of the years ended
December 31, 1997 and 1996 and $0.81 per Unit for the year ended December 31,
1995. No amounts distributed or to be distributed to the Limited Partners for
the years ended 1997, 1996 and 1995 are required to be or have been treated by
the Income Fund as a return of capital for purposes of calculating the Limited
Partners' return of their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs. We have the right to cause the Income Fund to
maintain additional reserves if, in our discretion, we determine such reserves
are required to meet the Income Fund's working capital needs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 50 wholly-owned restaurant properties (including one restaurant property
in Riviera Beach, Florida, sold through a right of way taking in December 1997)
and during the nine months ended September 30, 1998, the Income Fund owned and
leased 49 wholly-owned restaurant properties (including two restaurant
properties in Richmond, Virginia, and one restaurant property in Madison,
Alabama, which were sold during 1998) to operators of fast-food and family-
style restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $2,474,536 and $2,934,924,
respectively, in rental income from operating leases (net of adjustments to
accrued rental income) and earned income from direct financing leases from
these restaurant properties, $852,352 and $977,641 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income during the quarter and nine months
ended September 30, 1998, as compared to the quarter and nine months ended
September 30, 1997, is primarily attributable to the fact that in June 1998,
the Income Fund stopped receiving rental income from the tenant, Long John
Silver's Inc., which filed for bankruptcy and rejected the leases relating to
four restaurant properties. In addition, during the nine months ended September
30, 1998, the Income Fund wrote off approximately $265,000 of accrued rental
income (non-cash accounting adjustments relating to the straight-lining of
future scheduled rent increases over the lease term in accordance with
generally accepted accounting principles) relating to these four restaurant
properties. We are currently seeking either replacement tenants or purchasers
for these restaurant properties. The Income Fund will not recognize any rental
and earned income from these restaurant properties until replacement tenants
for these restaurant properties are located, or until the restaurant properties
are sold and the proceeds from such sales are reinvested in additional
restaurant properties.
In addition, the decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, is partially attributable to a decrease
in rental and earned income as a result of the 1998 sales of the restaurant
properties in Madison, Alabama and Richmond, Virginia and the 1997 right of way
taking of the restaurant property in Riviera Beach, Florida. The decrease in
rental and earned income during the quarter and nine months ended September 30,
1998, is also partially due to the fact that the Income Fund wrote off
approximately $12,100 in accrued rental income (non-cash accounting adjustments
relating to the straight-lining of future scheduled rent increases over the
lease term in accordance with generally accepted accounting
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principles) relating to one of the restaurant properties in Richmond, Virginia
to adjust the carrying value of the asset to the net sales proceeds received
from the sale of this restaurant property. In October 1998, the Income Fund
reinvested the majority of the net sales proceeds from these restaurant
properties in a restaurant property in Fayetteville, North Carolina, as
described above in "Liquidity and Capital Resources." Consequently, the Income
Fund expects the decrease in rental and earned income relating to the sales of
these restaurant properties to be partially offset by an increase in rental and
earned income relating to the acquisition of the restaurant property in
Fayetteville, North Carolina, during the remainder of 1998 and in subsequent
years.
In addition, during the nine months ended September 30, 1997, the Income
Fund owned and leased nine restaurant properties and during the nine months
ended September 30, 1998, the Income Fund owned and leased ten restaurant
properties indirectly through joint venture arrangements. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $241,570 and $231,204, respectively, attributable to net income
earned by these joint ventures, $76,939 and $78,381 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The increase in
net income earned by joint ventures during nine months ended September 30,
1998, as compared to the nine months ended September 30, 1997, is primarily
attributable to the Income Fund investing in Kingston Joint Venture in
September 1997.
In addition, during the nine months ended September 30, 1998 and 1997, the
Income Fund earned $73,047 and $43,367, respectively in interest and other
income, $26,585 and $12,765 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in interest and other
income for the quarter and nine months ended September 30, 1998 is primarily
due to an increase in interest income earned on net sales proceeds relating to
the sales of several restaurant properties during 1998 described above, pending
the reinvestment of the net sales proceeds in additional restaurant properties.
Operating expenses, including depreciation and amortization expense, were
$548,769 and $457,419 for the nine months ended September 30, 1998 and 1997,
respectively, of which $238,307 and $138,402 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to the fact that the Income Fund accrued insurance and real estate
tax expenses as a result of Long John Silver's Inc. filing for bankruptcy and
rejecting the leases relating to four restaurant properties in June 1998. In
connection with the bankruptcy, the Income Fund reclassified these assets from
net investment in direct financing leases to land and buildings on operating
leases. In accordance with Statement of Financial Accounting Standards #13,
"Accounting for Leases," the Income Fund recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying amount, which resulted in a loss on termination of direct
financing lease of $21,873 for financial reporting purposes during the quarter
and nine months ended September 30, 1998. No such loss was recorded during the
quarter and nine months ended September 30, 1997. In addition, the increase in
operating expenses during the quarter and nine months ended September 30, 1998,
is partially attributable to an increase in depreciation expense due to the
fact that during the quarter and nine months ended September 30, 1998, the
Income Fund reclassified these assets from net investment in direct financing
leases to land and buildings on operating leases. The Income Fund will continue
to incur certain expenses, such as real estate taxes, insurance, and
maintenance relating to these restaurant properties until new tenants or
purchasers are located. The Income Fund is currently seeking either new tenants
or purchasers for these restaurant properties.
As a result of the sales of several restaurant properties and the receipt of
proceeds from the right of way taking of the restaurant property in Riviera
Beach, Florida, as described above in "Liquidity and Capital Resources," the
Income Fund recognized gains totaling $112,206 for financial reporting purposes
during the nine months ended September 30, 1998. No restaurant properties were
sold during the nine months ended September 30, 1997.
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The Years Ended December 31, 1997, 1996 and 1995
The Income Fund owned and leased 52 wholly-owned restaurant properties
during 1995 (including one restaurant property in Knoxville, Tennessee, and one
restaurant property in Dallas, Texas, which were sold in March 1995) and 50
wholly-owned restaurant properties during 1996 and 1997 (including one
restaurant property in Riviera Beach, Florida which was condemned through a
total right of way taking in December 1997). In addition, during 1995, the
Income Fund was a co-venturer in three separate joint ventures that owned and
leased a total of four restaurant properties, during 1996, the Income Fund was
a co-venturer in three joint ventures that owned and leased nine restaurant
properties (including two restaurant properties in Wood-Ridge Real Estate Joint
Venture, which were sold in September 1996), and during 1997, the Income Fund
was a co-venture in four separate joint ventures that owned and leased a total
of nine restaurant properties. As of December 31, 1997, the Income Fund owned,
either directly or through joint venture arrangements, 58 restaurant properties
which are, in general, subject to long-term, triple-net leases. The leases of
the restaurant properties provide for minimum base annual rental amounts
(payable in monthly installments) ranging from approximately $18,900 to
$203,600. All of the leases provide for percentage rent based on sales in
excess of a specified amount. In addition, the majority of the leases provide
that, commencing in specified lease years (generally the sixth or ninth lease
year), the annual base rent required under the terms of the lease will
increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $3,911,527, $3,987,525 and $4,015,564, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1996, as compared to 1995, was primarily attributable
to the fact that during 1994, the Income Fund's former tenant of the restaurant
property in Akron, Ohio, ceased operating the restaurant located on the
restaurant property. The Income Fund subsequently leased this restaurant
property to various temporary operators who assumed the restaurant operations
and paid the Income Fund rent on a month-to-month basis. The decrease in rental
and earned income during 1997, as compared to 1996, was primarily attributable
to the fact that during May 1997, the temporary operator of the restaurant
property in Akron, Ohio, ceased restaurant operations and vacated the
restaurant property. The Income Fund ceased recording rental income and wrote
off the related allowance for doubtful accounts. The Income Fund entered into a
long-term, triple-net lease for this restaurant property with the operator of
an Arlington Big Boy in September 1997, and rental income commenced in
December, 1997.
In addition, the decrease in rental and earned income during 1997 as
compared to 1996, was partially due to the fact that the Income Fund wrote off
accrued rent relating to the restaurant property in Madison, Alabama to adjust
the carrying value of the asset to the net proceeds received from the sale of
this restaurant property in January 1998.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $309,879, $459,137 and $338,717, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The decrease in net income earned by joint ventures during 1997 as
compared to 1996, and the increase during 1996 as compared to 1995, is
primarily attributable to the fact that in September 1996, Wood-Ridge Real
Estate Joint Venture, in which the Income Fund owns a 50% interest, recognized
a gain of approximately $261,100 for financial reporting purposes as a result
of the sale of its restaurant properties in September 1996, as described above
in "Liquidity and Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
five lessees (or group of affiliated lessees) of the Income Fund, Flagstar
Corporation, Foodmaker, Inc., Long John Silver's, Inc., Checkers Drive-In
Restaurants, Inc. and Golden Corral Corporation, each contributed more than 10%
of the Income Fund's total rental income (including the Income Fund's share of
rental income from nine restaurant properties owned by joint ventures). As of
December 31, 1997, Flagstar Corporation was the lessee under leases relating to
11 restaurants, Foodmaker, Inc. was the lessee under leases relating to six
restaurants, Long John Silver's, Inc. was the lessee under leases relating to
nine restaurants, Checkers Drive-In Restaurants, Inc. was the lessee under
leases relating to 17 restaurants and Golden Corral Corporation was the lessee
under
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leases relating to four restaurants. It is anticipated that based on the
minimum rental payments required by the leases, these five lessees (or group of
affiliated lessees) each will continue to contribute more than 10% of the
Income Fund's total rental income in 1998 and subsequent years. In addition,
during at least one of the years ended December 31, 1997, 1996 or 1995, six
restaurant chains, Hardee's, Denny's, Jack in the Box, Long John Silver's,
Checkers and Golden Corral, each accounted for more than 10% of the Income
Fund's total rental income (including the Income Fund's share of rental income
from nine restaurant properties owned by joint ventures). In subsequent years,
it is anticipated that these six restaurant chains each will account for more
than 10% of the total rental income to which the Income Fund is entitled under
the terms of the leases. Any failure of these lessees or restaurant chains
could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$602,753, $586,710 and $588,952 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997 as compared
to 1996 was primarily attributable to the fact that the Income Fund recorded
bad debt expense of $10,500 during 1997 relating to the restaurant property in
Akron, Ohio. Due to the fact that the temporary operator ceased operating the
restaurant property in May, 1997, as described above in "Liquidity and Capital
Resources," we ceased further collection efforts of these past due amounts.
As a result of the former tenant of the restaurant property in Akron, Ohio,
defaulting under the terms of its lease during 1994 and the Income Fund leasing
the restaurant property to temporary operators who subsequently ceased
operating the restaurant property, the Income Fund incurred real estate taxes
during the years ended December 31, 1997, 1996 and 1995. The Income Fund
entered into a long-term, triple-net lease for this restaurant property with
the operator of an Arlington Big Boy in September 1997, and rental income
commenced in December 1997. The new tenant is responsible for real estate
taxes; therefore, we do not anticipate the Income Fund will incur these
expenses in the future.
As a result of the 1995 sales of the restaurant properties in Knoxville,
Tennessee, and Dallas, Texas, as described above in "Liquidity and Capital
Resources," the Income Fund recognized a loss for financial reporting purposes
of $66,518 for the year ended December 31, 1995. The loss was primarily due to
acquisition fees and miscellaneous acquisition expenses the Income Fund had
allocated to these restaurant properties and due to accrued rental income
relating to straight lining future scheduled rent increases that the Income
Fund had recorded and wrote off at the time of the sale. No restaurant
properties were sold during 1996 and 1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are, in general, triple-
net leases and contain provisions that we 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
Income Fund's restaurant 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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
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The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and
operations of the Income Fund and the systems of the third parties with which
the Income Fund conducts its business, we have not yet developed a
comprehensive contingency plan and are unable to identify "the most reasonably
likely worst case scenario" at this time. As we identify significant risks
related to the Income Fund's Year 2000 compliance or if the Income Fund's Year
2000 compliance program's progress deviates substantially from the anticipated
timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CNL INCOME FUND XV, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 2, 1993, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurants, as well
as properties upon which restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains. The leases are triple-net leases with the lessee responsible
for all repairs and maintenance, property taxes, insurance and utilities. As of
September 30, 1998, the Income Fund owned 50 restaurant properties, including
interests in six restaurant properties owned by a joint venture in which the
Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,415,807 and $2,550,613 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, is primarily a result of changes in income and expenses as described
below in "Results of Operations" and changes in the Income Fund's working
capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In June 1998, the Income Fund acquired a restaurant property in Fort Myers,
Florida with one of our affiliates as tenants-in-common. In connection
therewith, the Income Fund and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to its applicable percentage interest. As of September
30, 1998, the Income Fund owned a 14.93% interest in the restaurant property.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties are invested in money market accounts or other short-term, highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to the partners. At September 30, 1998,
the Income Fund had $1,222,529 invested in such short-term investments, as
compared to $1,614,708 at December 31, 1997. The decrease in cash and cash
equivalents for the nine months ended September 30, 1998, is primarily
attributable to the acquisition of a restaurant property as tenants-in-common
with one of our affiliates, as described above. The funds remaining at
September 30, 1998, after payment of distributions and other liabilities, will
be used to meet the Income Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
increased to $837,947 at September 30, 1998, from $822,320 at December 31,
1997, primarily as a result of the Income Fund accruing real estate taxes in
connection with certain Long John Silver's restaurant properties, as described
below in "Results of Operations." We believe that the Income Fund has
sufficient cash on hand to meet its current working capital needs.
Based on cash from operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,600,000 and $2,400,000 for the nine
months ended September 30, 1998 and 1997, respectively ($800,000 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.65 and $0.60 per Unit for the
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nine months ended September 30, 1998 and 1997, respectively ($0.20 per Unit for
each applicable quarter). No distributions were made to us for the quarters and
nine months ended September 30, 1998 and 1997. No amounts distributed to the
Limited Partners for the nine months ended September 30, 1998 and 1997, are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Income Fund intends to continue to make
distributions of cash available for distribution to the Limited Partners on a
quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who meet specified
financial standards minimizes the Income Fund's operating expenses. We believe
that the leases will continue to generate cash flow in excess of operating
expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
Net proceeds to the Income Fund from its offering of Units, after deduction
of organizational and offering expenses, totaled $35,200,000. As of December
31, 1994, approximately $32,088,000 had been used to invest, either directly or
through joint venture arrangements, in 43 restaurant properties (three of which
were under construction at December 31, 1994) and to pay acquisition fees to
one of our affiliates totaling $2,200,000 and to pay certain acquisition
expenses. During 1995, the Income Fund completed construction of the three
restaurant properties acquired in 1994 and acquired two additional restaurant
properties. In addition, in January 1995, the Income Fund received notice from
the tenant of two of its restaurant properties in Knoxville, Tennessee, and one
restaurant property in Leavenworth, Kansas, of the tenant's intention to
exercise its options, in accordance with its lease agreements, to substitute
other restaurant properties for these three restaurant properties. In March
1995, the Income Fund sold its two restaurant properties in Knoxville,
Tennessee, and one restaurant property in Leavenworth, Kansas, to the tenant
for their original purchase prices, excluding acquisition fees and
miscellaneous acquisition expenses and received net sales proceeds totaling
$811,706. The Income Fund used the majority of the net sales proceeds to
acquire two Checkers restaurant properties in Orlando and Bradenton, Florida,
from the tenant. As a result of these transactions, the Income Fund recognized
a loss of $71,023 for financial reporting purposes primarily due to acquisition
fees and miscellaneous acquisition expenses the Income Fund had allocated to
the two restaurant properties in Knoxville, Tennessee, and the restaurant
property in Leavenworth, Kansas, and due to the accrued rental income relating
to future scheduled rent increases for these restaurant properties that the
Income Fund had recorded and reversed at the time of the sale. As a result of
the above transactions, as of December 31, 1995, approximately $34,781,000 had
been used to invest, either directly or through joint venture arrangements in
44 restaurant properties and to pay acquisition fees and certain acquisition
expenses.
In January 1996, the Income Fund invested $122,439 in a Golden Corral
restaurant property located in Clinton, North Carolina, with certain of our
affiliates as tenants-in-common. In connection therewith, the Income Fund and
its affiliates entered into an agreement whereby each co-venturer will share in
the profits and losses of the restaurant property in proportion to its
applicable percentage interest. As of December 31, 1996, the Income Fund owned
a 15.02% interest in this restaurant property. Upon completion of the Income
Fund's acquisitions in January 1996, the remaining net offering proceeds of
approximately $220,000 were reserved for Income Fund purposes.
In September 1996, Wood-Ridge Real Estate Joint Venture, a joint venture in
which the Income Fund owns a 50% interest, sold its two restaurant 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 restaurant 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
restaurant properties for approximately $698,700 in excess of their original
purchase price. In October 1996, Wood-Ridge Real Estate
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Joint Venture reinvested $4,404,046 of the net sales proceeds in five
restaurant properties. In January 1997, the joint venture reinvested $502,598
of the remaining net sales proceeds in an additional restaurant property. As of
December 31, 1997, the Income Fund had received approximately $52,000,
representing its pro-rata share of the uninvested net sales proceeds.
Currently, the Income Fund'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 $3,306,595, $3,434,682 and $3,239,370 for the years ended
December 31, 1997, 1996 and 1995, respectively. The decrease in cash from
operations during 1997, as compared to 1996, and the increase during 1996, as
compared to 1995, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Income Fund's
working capital.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
Subject to certain restrictions on borrowing, however, the Income Fund may
borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. Certain of our affiliates from
time to time incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses the affiliates without interest.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties are invested in money market accounts or other short-term, highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or make distributions to partners. At December 31, 1997, the
Income Fund had $1,614,708 invested in such short-term investments as compared
to $1,536,163 at December 31, 1996.
During 1997, 1996 and 1995, our affiliates incurred on behalf of the Income
Fund $78,821, $86,714 and $94,991, respectively, for certain operating
expenses. In addition, during 1995, certain of our affiliates incurred on
behalf of the Income Fund $2,274 for certain acquisition expenses. As of
December 31, 1997 and 1996, the Income Fund owed $4,311 and $1,355,
respectively, to related parties for such amounts, accounting and
administrative services and management fees. As of February 28, 1998, the
Income Fund had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, decreased to $818,009 at December 31, 1997,
from $946,825 at December 31, 1996, partially as a result of the Income Fund
accruing a special distribution payable to the Limited Partners of $80,000 at
December 31, 1996, which was paid in January 1997 from cumulative excess
operating reserves. Total liabilities also decreased as a result of a decrease
in rents paid in advance at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,200,000, $3,280,000 and $2,900,001 for the years ended
December 31, 1997, 1996 and 1995, respectively. This represents distributions
of $0.80, $0.82 and $0.73 per Unit for the years ended December 31, 1997, 1996
and 1995, respectively. No amounts distributed or to be distributed to the
Limited Partners for the years ended December 31, 1997, 1996 or 1995 are
required to be or have been treated by the Income Fund as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be
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established at this time. To the extent, however, that the Income Fund has
insufficient funds for such purposes, we will contribute to the Income Fund an
aggregate amount of up to one percent of the offering proceeds for maintenance
and repairs. We have the right to cause the Income Fund to maintain additional
reserves if, in our discretion, we determine such reserves are required to meet
the Income Fund's working capital needs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During each of the nine months ended September 30, 1998 and 1997, the Income
Fund owned and leased 42 wholly-owned restaurant properties to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the nine months ended September 30, 1998 and 1997, the Income Fund earned
$2,325,191 and $2,689,968, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these restaurant properties, $832,774 and $896,387 of
which was earned during the quarters ended September 30, 1998 and 1997,
respectively. The decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is primarily attributable to the fact that, in
June 1998, the Income Fund stopped receiving rental income from the tenant,
Long John Silver's, Inc., which filed for bankruptcy and rejected the leases
relating to four restaurant properties. As a result, during the nine months
ended September 30, 1998, the Income Fund 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). We are currently seeking either
new tenants or purchasers for these restaurant properties. The Income Fund will
not recognize rental and earned income from these restaurant properties until
new tenants for these restaurant properties are located or until the restaurant
properties are sold and the proceeds from such sales are reinvested in
additional restaurant properties.
For the nine months ended September 30, 1997 and 1998, the Income Fund also
owned and leased six restaurant properties indirectly through one joint venture
arrangement and one restaurant property as tenants-in-common with certain of
our affiliates. For the nine months ended September 30, 1998, the Income Fund
also owned an additional restaurant property, held as tenants-in-common with
one of our affiliates. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $179,502 and $177,735,
respectively, attributable to net income earned by these joint ventures,
$59,208 and $60,424 of which was earned during the quarters ended September 30,
1998 and 1997, respectively.
Operating expenses, including depreciation and amortization expense, were
$415,175 and $355,039 for the nine months ended September 30, 1998 and 1997,
respectively, $162,799 and $107,513 of which were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to the fact that the Income Fund 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 restaurant properties, in June 1998. In
addition, the increase in operating expenses during the quarter and nine months
ended September 30, 1998, is partially attributable to an increase in
depreciation expense due to the fact that during the quarter and nine months
ended September 30, 1998, the Income Fund reclassified these assets from net
investment in direct financing leases to land and buildings on operating
leases. The Income Fund will continue to incur certain expenses, such as real
estate taxes, insurance, and maintenance relating to these restaurant
properties with rejected leases until replacement tenants or purchasers are
located. The Income Fund is currently seeking either replacement tenants or
purchasers for these restaurant properties with rejected leases.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund owned and leased 45 wholly-owned restaurant properties
during 1995 (including two restaurant properties in Knoxville, Tennessee, and
one restaurant property in Leavenworth, Kansas, which were sold in March 1995),
and during 1996 and 1997, owned and leased 42 wholly-owned restaurant
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properties. In addition, during 1995, the Income Fund was a co-venturer in one
joint venture that owned two restaurant properties, and during 1996, the Income
Fund was a co-venturer in one joint venture that owned and leased seven
restaurant properties (including two restaurant properties in Wood-Ridge Real
Estate Joint Venture, which were sold in September 1996) and the Income Fund
owned and leased one restaurant property with affiliates, as tenants-in-common.
During 1997, the Income Fund was a co-venturer in one joint venture that owned
and leased six restaurant properties and owned and leased one restaurant
property with affiliates as tenants-in-common. As of December 31, 1997, the
Income Fund owned, either directly or through joint venture arrangements 49
restaurant properties, which are subject to long-term, triple-net leases. The
leases of the restaurant properties provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $22,500
to $190,600. All of the leases provide for percentage rent based on sales in
excess of a specified amount. In addition, the majority of the leases provide
that, commencing in specified lease years (generally from the sixth or the
ninth lease year), the annual base rent required under the terms of the lease
will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $3,586,791, $3,596,466 and $3,446,745 respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The increase in rental
and earned income during 1996, as compared to 1995, is primarily attributable
to the acquisition of additional restaurant properties in 1995, and the fact
that, with the exception of the three restaurant properties sold in March 1995,
the restaurant properties owned at December 31, 1995, were operational for a
full year in 1996, as compared to a partial year in 1995.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $25,791, $23,318 and $97,539, respectively, in contingent rental
income. Contingent rental income for the year ended December 31, 1996, as
compared to 1995, decreased primarily as a result of decreased 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, 1997, 1996 and 1995, the
Income Fund earned $239,249, $392,862 and $280,606, respectively, attributable
to net income earned by joint ventures in which the Income Fund is a co-
venturer. The decrease in net income earned by joint ventures during 1997, as
compared to 1996, is primarily attributable to, and the increase during 1996,
as compared to 1995, is primarily attributable to, the fact that in September
1996, Wood-Ridge Real Estate Joint Venture, in which the Income Fund owns a 50%
interest, recognized a gain of approximately $261,100 for financial reporting
purposes as a result of the sale of its restaurant properties in September
1996, as described above in "Liquidity and Capital Resources." Due to the fact
that the joint venture reinvested the majority of the net sales proceeds in
five restaurant properties in October 1996 and one restaurant property in
January 1997, the Income Fund does not anticipate that the sale of the two
restaurant properties will have a material adverse effect on operations.
During at least one of the years ended December 31, 1997, 1996 and 1995,
five lessees (or group of affiliated lessees) of the Income Fund, Flagstar
Corporation, Checkers Drive-In Restaurants, Inc., Long John Silver's, Inc.,
Foodmaker, Inc. and Golden Corral Corporation, each contributed more than 10%
of the Income Fund's total rental income (including the Income Fund's share of
rental income from six restaurant properties owned by a joint venture and one
restaurant property owned with affiliates as tenants-in-common). As of December
31, 1997, Flagstar Corporation 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 eight restaurants, 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, these five lessees (or group of
affiliated lessees) each will continue to contribute more than 10% of the
Income Fund's total rental income in 1998 and subsequent years. In addition,
during at least one of the years ended December 31, 1997, 1996 and 1995, 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 10% of the
Income Fund's total rental income (including the Income Fund's share of rental
income from six restaurant properties owned by a joint venture and one
restaurant
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property owned with affiliates as tenants-in-common). In subsequent years, it
is anticipated that these five restaurant chains each will continue to account
for more than 10% of the total rental income to which the Income Fund is
entitled under the terms of the leases. Any failure of these lessees or
restaurant chains could materially affect the Income Fund's income.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $56,183, $55,964, and $90,095, respectively, in interest and other
income. The decrease in interest and other income during 1996, as compared to
1995, is primarily attributable to a decrease in the amount of funds invested
in short-term, liquid investments due to the acquisition of restaurant
properties during 1995.
Operating expenses, including depreciation and amortization expense, were
$473,109, $483,551 and $471,494 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, is primarily attributable to a decrease in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties. The increase in operating expenses during 1996, as
compared to 1995, is primarily a result of the Income Fund incurring additional
taxes relating to the filing of various state tax returns during 1996.
As a result of the sale of the two restaurant properties in Knoxville,
Tennessee, and the restaurant property in Leavenworth, Kansas, as described
above in "Liquidity and Capital Resources," the Income Fund recognized a loss
for financial reporting purposes of $71,023 during the year ended December 31,
1995. The loss was primarily due to acquisition fees and miscellaneous
acquisition expenses the Income Fund had allocated to these restaurant
properties and due to accrued rental income relating to future scheduled rent
increases that the Income Fund had recorded and wrote off at the time of sale.
No restaurant properties were sold during the years ended December 31, 1996 and
1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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 Income Fund's restaurant
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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
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The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by we and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XVI, LTD.
Introduction
The Income Fund is a Florida limited partnership that 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 restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food and
family-style restaurant chains. The leases are triple-net leases, with the
lessee responsible for all repairs and maintenance, property taxes, insurance
and utilities. As of September 30, 1998, the Income Fund owned 44 restaurant
properties, which included one restaurant property owned by a joint venture in
which the Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and
other income received, less cash paid for expenses). Cash from operations was
$2,759,611 and $2,923,755 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, is primarily a result of changes in income and expenses as described
below in "Results of Operations" and changes in the Income Fund's working
capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In January 1998, the Income Fund reinvested approximately $607,900 of the
net sales proceeds it received from the sale, in March 1997, of the restaurant
property in Oviedo, Florida, in a restaurant property located in Memphis,
Tennessee, with certain of our affiliates as tenants-in-common. In connection
therewith, the Income Fund and the affiliates entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to its applicable percentage interest. As of September
30, 1998, the Income Fund owned a 40.42% interest in this restaurant property.
In addition, during the nine months ended September 30, 1998, the Income
Fund received approximately $162,000 from the developer of the restaurant
property in Farmington, New Mexico. This represents a reimbursement from the
developer upon final reconciliation of total construction costs to the total
construction costs funded by the Income Fund in accordance with the development
agreement. In August 1998, the Income Fund reinvested these proceeds in
Columbus Joint Venture as described below.
In addition, in August 1998, the Income Fund entered into a joint venture
arrangement, Columbus Joint Venture, with certain of our affiliates, to
construct and hold one restaurant restaurant property. As of September 30,
1998, the Income Fund had contributed $134,507 to purchase land and pay for
construction costs relating to the joint venture. When construction is
completed, the Income Fund will have an approximate 32% interest in the profits
and losses of the joint venture.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties are invested in money market accounts or other short-term, highly
liquid investments pending the use of such funds to pay Income Fund expenses or
to make distributions to partners. At September 30, 1998, the Income Fund had
$1,641,160 invested in such short-term investments, as compared to $1,673,869
at December 31, 1997. The funds remaining at September 30, 1998, after the
payment of distributions and other liabilities, will be used to meet the Income
Fund's working capital and other needs.
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Total liabilities of the Income Fund, including distributions payable,
decreased to $980,339 at September 30, 1998, from $1,033,394 at December 31,
1997. The decrease was primarily a result of the payment during 1998 of
construction costs accrued for certain restaurant properties at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on cash from operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,790,000 and $2,700,000 for the nine
months ended September 30, 1998 and 1997, respectively ($900,000 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.62 and $0.60 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.20 per unit for each of the quarters ended September 30,
1998 and 1997). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, are required to
be or have been treated by the Income Fund as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions. The Income Fund intends to continue to make distributions of
cash available for distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
On September 2, 1994, the Income Fund commenced an offering to the public of
up to 4,500,000 Units of limited partnership interest. The Income Fund's
offering of Units terminated on June 12, 1995, at which time the maximum
proceeds of $45,000,000 (4,500,000 Units) had been received from investors. The
Income Fund, therefore, will derive no additional capital resources from the
offering.
Net proceeds to the Income Fund from its offering of Units, after deduction
of organizational and offering expenses, totaled $39,600,000. As of December
31, 1994, approximately $16,300,000 had been used to invest in 22 restaurant
properties (seven of which were undeveloped land on which restaurants were
being constructed as of December 31, 1994) and to pay acquisition fees and
certain acquisition expenses. During the year ended December 31, 1995, the
Income Fund completed construction of the seven restaurant properties acquired
in 1994, and acquired 19 additional restaurant properties at a cost of
approximately $20,900,000 including acquisition fees and miscellaneous
acquisition expenses. As a result of the above transactions, as of December 31,
1995, the Income Fund had acquired 41 restaurant properties and had paid
acquisition fees totaling $2,475,000 to one of our affiliates. During the year
ended December 31, 1996, the Income Fund used its remaining net offering
proceeds to acquire two additional restaurant properties (one of which was
undeveloped land on which a restaurant was constructed), and to establish a
working capital reserve of approximately $60,000 for Income Fund purposes.
As a result of the Income Fund's tenant selling its restaurant business
located on the Income Fund's restaurant property in Appleton, Wisconsin, in
April 1996, the Income Fund sold its restaurant property for $775,000,
resulting in a gain for financial reporting purposes of $124,305. This
restaurant property was originally acquired by the Income Fund in February 1995
and had a cost of approximately $595,100, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $179,900 in excess of its original
purchase price. In October 1996, the Income Fund reinvested the net sales
proceeds in a Boston Market restaurant property in Fayetteville, North
Carolina, as tenants-in-common with one of our affiliates. In connection
therewith, the Income Fund and its affiliate entered
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into an agreement whereby each co-venturer will share in the profits and losses
of the restaurant property in proportion to each co-venturer's interest. The
Income Fund owns an 80.27% interest in the restaurant property. The sale of the
restaurant property in Appleton, Wisconsin, was structured to qualify as a
like-kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code. As a result, no gain was recognized for federal income tax
purposes. Therefore, the Income Fund was not required to distribute any of the
net sales proceeds from the sale of this restaurant property to Limited
Partners for the purpose of paying federal and state income taxes.
In March 1997, the Income Fund sold its restaurant property in Oviedo,
Florida, for $620,000 and received net sales proceeds of $610,384, resulting in
a gain of $41,148 for financial reporting purposes. This restaurant property
was originally acquired by the Income Fund in November 1994 and had a cost of
approximately $509,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $100,700 in excess of its original purchase price. In January
1998, the Fund reinvested the net sales proceeds in an IHOP restaurant property
in Memphis, Tennessee, as tenants-in-common with affiliates of the general
partners. In connection therewith, the Fund and its affiliates entered into an
agreement whereby each co-venturer will share in the profits and losses of the
restaurant property in proportion to each co-venturers interest. The Fund owns
a 40.42% interest in the restaurant property.
Currently, the Income Fund's primary source of capital is cash from
operations (which includes cash received from tenants, distributions from the
joint venture and interest received, less cash paid for expenses). Cash from
operations was $3,780,424, $3,753,726 and $2,481,395 for the years ended
December 31, 1997, 1996 and 1995, respectively. The increase in cash from
operations during 1997 and 1996, each as compared to the previous year, is
primarily a result of changes in income and expenses as described in "Results
of Operations" below and changes in the Income Fund's working capital.
None of the restaurant properties owned by the Income Fund is or may be
encumbered. Subject to certain restrictions on borrowing, however, the Income
Fund may borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. In addition, the Income Fund
will not borrow unless it first obtains an opinion of counsel that such
borrowing will not constitute acquisition indebtedness. Certain of our
affiliates from time to time incur certain operating expenses on behalf of the
Income Fund for which the Income Fund reimburses the affiliates without
interest.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties are invested in money market accounts or other short-term, highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1997, the
Income Fund had $1,673,869 invested in such short-term investments as compared
to $1,546,203 at December 31, 1996. The funds remaining at December 31, 1997,
after payment of distributions and other liabilities will be used to meet the
Fund's working capital and other needs.
During 1995, certain of our affiliates incurred on behalf of the Income Fund
$258,466 for certain organizational and offering expenses. In addition, during
1996 and 1995, the affiliates incurred on behalf of the Income Fund $9,356 and
$97,589, respectively, for certain acquisition expenses during the years ended
December 31, 1997, 1996 and 1995, the affiliates incurred and $84,319, $105,144
and $131,272, respectively, for certain operating expenses. As of December 31,
1997 and 1996, the Income Fund owed $3,351 and $2,292, respectively, to related
parties for such amounts, accounting and administrative services and management
fees. As of February 28, 1998, the Income Fund had reimbursed the affiliates
all such amounts. Other liabilities, including distributions payable, decreased
to $1,030,043 at December 31, 1997, from $1,108,751 at December 31, 1996,
primarily as a result of the payment during the year ended December 31, 1997,
of
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construction costs accrued for certain restaurant properties at December 31,
1996. Other liabilities also decreased due to a decrease in rents paid in
advance at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,600,000, $3,543,751 and $2,437,832 for the years ended
December 31, 1997, 1996 and 1995, respectively. This represents distributions
of $0.80, $0.79 and $0.61 per Unit for the years ended December 31, 1997, 1996
and 1995, respectively. No amounts distributed to the Limited Partners for the
years ended December 31, 1997, 1996 and 1995, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the Limited Partners' return on their adjusted capital contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant property.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant 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
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs. We have the right to cause the Income Fund to
maintain additional reserves if, in our discretion, we determine such reserves
are required to meet the Income Fund's working capital needs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 42 wholly-owned restaurant properties (including one restaurant property
in Oviedo, Florida, which was sold in March 1997), and during the nine months
ended September 30, 1998, the Income Fund owned and leased 43 wholly-owned
restaurant properties (including two restaurant properties in Madison and
Chattanooga, Tennessee exchanged for two restaurant properties in Lawrence,
Kansas and Indianapolis, Indiana), to operators of fast-food and family-style
restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $2,975,910 and $3,204,973,
respectively, in rental income from operating leases (net of adjustments to
accrued rental income) and earned income from direct financing leases from
these restaurant properties, $988,282 and $1,064,223 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income during the quarter and nine months ended September 30,
1998, as compared to the quarter and nine months ended September 30, 1997, is
partially attributable to the fact that in July 1998, the tenant of the
restaurant property in Las Vegas, Nevada ceased restaurant operations and
vacated the restaurant property. As a result, during the nine months ended
September 30, 1998, the Income Fund wrote off approximately $77,300 of accrued
rental income (non-cash accounting adjustments relating to the straight-lining
of future scheduled rent increases over the lease term in accordance with
generally accepted accounting principles) relating to this restaurant property.
The Income Fund also established an allowance for doubtful accounts during the
nine months ended September 30, 1998, of approximately $47,000 for rental and
earned income amounts due from this tenant due to the fact that collection of
such amounts is questionable. The Income Fund will continue to pursue the
collection of past due amounts and will recognize such amounts as income if
collected. We are currently seeking either a new tenant or buyer for this
restaurant property. The Income Fund will not recognize any rental and earned
income from this restaurant property until a new tenant for this restaurant
property is located or until the restaurant property is sold and the proceeds
from the sale are reinvested in an additional restaurant property.
In addition, the decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, is partially attributable to the fact
that in June 1998, the Income Fund stopped receiving rental income from the
tenant, Long John Silver's, Inc, which filed for bankruptcy and rejected the
leases relating to
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two restaurant properties. In addition, during the nine months ended September
30, 1998, the Income Fund wrote off approximately $42,200 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) relating to these two restaurant
properties. We are currently seeking either new tenants or purchasers for these
restaurant properties. The Income Fund will not recognize any rental and earned
income from these restaurant properties until new tenants for these restaurant
properties are located or until the restaurant properties are sold and the
proceeds from such sales are reinvested in additional restaurant properties.
In addition, the decrease in rental and earned income during the nine months
ended September 30, 1998, is partially the result of a decrease in rental
income due to the sale of the restaurant property in Oviedo, Florida, in March
1997. The net sales proceeds were reinvested in a restaurant property in
Memphis, Tennessee, with certain of our affiliates as tenants-in-common,
resulting in an increase in equity in earnings of joint venture, as described
below.
During the nine months ended September 30, 1997, the Income Fund also owned
and leased one restaurant property as tenants-in-common with one of our
affiliates and during the nine months ended September 30, 1998, the Income Fund
owned and leased one restaurant property indirectly through a joint venture
arrangement and two restaurant properties with certain of our affiliates as
tenants-in-common. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $98,414 and $55,126,
respectively, attributable to net income earned by these joint ventures,
$33,458 and $18,506 of which was earned during the quarters ended September 30,
1998 and 1997, respectively. The increase in net income earned by joint
ventures during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to the fact that in January 1998, the Income Fund reinvested the
net sales proceeds it received from the 1997 sale of the restaurant property in
Oviedo, Florida, in an IHOP restaurant property in Memphis, Tennessee, with
certain of our affiliates as tenants-in-common.
During at least one of the nine months ended September 30, 1998 and 1997,
four restaurant chains, Denny's, Golden Corral Family Steakhouse Restaurant,
Jack in the Box, and Boston Market, each accounted for more than 10% of the
Income Fund's total rental income (including the Income Fund's share of the
rental income from the restaurant properties owned by the unconsolidated joint
venture in which the Income Fund is a co-venturer and restaurant properties
owned with affiliates as tenants-in-common). It is anticipated that, based on
the minimum rental payments required by the leases, Denny's, Golden Corral
Family Steakhouse Restaurant and Jack in the Box will continue to contribute
more than 10% of the Income Fund's total rental income during the remainder of
1998 and subsequent years. Any failure of these restaurant chains could
materially affect the Income Fund's income.
In October 1998, the tenant of five of the Boston Market restaurant
properties (including one restaurant property held as tenants-in-common with
one of our affiliates) filed for bankruptcy. If the leases are eventually
rejected, the Income Fund anticipates that rental income relating to these
restaurant properties will terminate until new tenants or buyers for the
restaurant properties are located. However, we do not anticipate that any
decrease in rental income due to lost revenues relating to these restaurant
properties will have a material effect on the Income Fund's financial position
or results of operations.
Operating expenses, including depreciation and amortization expense, were
$644,138 and $606,602 for the nine months ended September 30, 1998 and 1997,
respectively, $243,121 and $189,905 of which were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to the fact that the Income Fund accrued insurance and real estate
tax expenses as a result of Long John Silver's, Inc. filing for bankruptcy and
rejecting the leases relating to two restaurant properties in June 1998. The
Income Fund will continue to incur certain expenses, such as real estate taxes,
insurance, and maintenance relating to the restaurant properties until new
tenants or purchasers are located. The Income Fund is currently seeking either
new tenants or buyers for these restaurant properties.
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In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Income Fund recorded
approximately $13,100 in real estate tax expense, due to the fact that in
October 1998, the tenant of five Boston Market restaurant properties (including
one restaurant property held as tenants-in-common with certain of our
affiliates) filed for bankruptcy, as described above. If the tenant decides to
reject the leases, the Income Fund will continue to incur certain expenses,
such as real estate taxes, insurance and maintenance until new tenants or
buyers for the restaurant properties are located. If the tenant does not reject
the leases, the Income Fund does not anticipate incurring such expenses in
future periods.
As a result of the sale of the restaurant property in Oviedo, Florida, in
1997 the Income Fund recognized a gain for financial reporting purposes of
$41,148 during the nine months ended September 30, 1997. No restaurant
properties were sold during the nine months ended September 30, 1998.
During the quarter and nine months ended September 30, 1998, the Income Fund
established an allowance for loss on land and building of $204,399 for
financial reporting purposes relating to the restaurant property in Celina,
Ohio. The loss represents the difference between the restaurant property's
carrying value at September 30, 1998 and the current estimate of net realizable
value at September 30, 1998 for this restaurant property. No such allowance was
established during the quarter and nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund owned and leased 41 wholly-owned restaurant properties
during 1995, 43 wholly-owned restaurant properties (including one restaurant
property in Appleton, Wisconsin, which was sold in April 1996) during 1996, and
42 wholly-owned restaurant properties (including one restaurant property in
Oviedo, Florida, which was sold in March 1997) during 1997. In addition, during
1997 and 1996, the Income Fund owned and leased one restaurant property with an
affiliate, as tenants-in-common. As of December 31, 1997, the Income Fund
owned, either directly or through a joint venture arrangement, 42 restaurant
properties which are subject to long-term, triple-net leases that provide for
minimum base annual rental amounts (payable in monthly installments) ranging
from approximately $21,600 to $220,600. All of the leases provide for
percentage rent based on sales in excess of a specified amount. In addition,
the majority of the leases provide that, commencing in specified lease years
(generally the sixth lease year), the annual base rent required under the terms
of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $4,266,069, $4,297,558 and $2,698,956, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1997, as compared to 1996, is primarily attributable
to the sale of the restaurant property in Oviedo, Florida in March 1997 and the
sale of the restaurant property in Appleton Wisconsin in April 1996. The
decrease during 1997 as compared to 1996 is partially offset by the acquisition
of two additional restaurant properties in 1996 that were operational for a
full year in 1997, as compared to a partial year in 1996. The increase in
rental and earned income during 1996, as compared to 1995, is primarily
attributable to the acquisition of additional restaurant properties in 1995,
and the fact that, with the exception of one restaurant property sold in April
1996, the restaurant properties owned at December 31, 1995, were operational
for a full year in 1996, as compared to a partial year in 1995.
During the years ended December 31, 1997 and 1996, the Income Fund earned
$35,604 and $37,600 in contingent rental income as a result of the gross sales
of three restaurant properties meeting the threshold during 1997 and 1996,
under the terms of their leases requiring payment of contingent rental income.
In addition, for the years ended December 31, 1997 and 1996, the Income Fund
earned $73,507 and $19,668 attributable to net income earned by a joint venture
as a result of the Income Fund reinvesting the net sales proceeds it received
from the sale of the restaurant property in Appleton, Wisconsin, in a
restaurant
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property in Fayetteville, North Carolina, in October 1996, with an affiliate,
as tenants-in-common. The increase in net income earned by this joint venture
during 1997, as compared to 1996, is primarily attributable to the fact that
the restaurant property was operational for a full year in 1997, as compared to
a partial year in 1996.
During at least one of the years ended December 31, 1997, 1996 and 1995,
four lessees of the Income Fund, Golden Corral Corporation, Foodmaker, Inc.,
Checkers Drive-In Restaurants, Inc. and DenAmerica Corp. each contributed more
than 10% of the Income Fund's total rental income (including the Income Fund's
share of rental income from the restaurant property owned with an affiliate as
tenants-in-common). As of December 31, 1997, Golden Corral Corporation was the
lessee under leases relating to six restaurants, Foodmaker, Inc. was the lessee
under leases relating to five restaurants, Checkers Drive-In Restaurants, Inc.
was the lessee under leases relating to seven restaurants, and DenAmerica Corp.
was the lessee under leases relating to eight restaurants. It is anticipated
that, based on the minimum rental payments required by the leases, Golden
Corral Corporation, Foodmaker, Inc. and DenAmerica Corp. each will continue to
contribute more than 10% of the Income Fund's total rental income in 1998 and
subsequent years. In addition, during at least one of the years ended December
31, 1997, 1996 and 1995, five restaurant chains, Golden Corral, Jack in the
Box, Checkers Drive-In Restaurants, Long John Silver's and Denny's each
accounted for more than 10% of the Income Fund's total rental income (including
the Income Fund's share of rental income from the restaurant property owned
with an affiliate as tenants-in-common). In subsequent years, it is anticipated
that Golden Corral, Jack in the Box and Denny's each will continue to account
for more than 10% of the total rental income to which the Income Fund is
entitled under the terms of the leases. Any failure of these lessees or
restaurant chains could materially affect the Income Fund's income.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $73,634, $75,160 and $321,137, respectively, in interest income
from investments in money market accounts or other short-term, highly liquid
investments. The decrease in interest income during 1996, as compared to 1995,
is primarily attributable to the decrease in the amount of funds invested in
short-term liquid investments as a result of the acquisition of additional
restaurant properties during 1995 and the payment during 1996 of construction
costs accrued for certain restaurant properties at December 31, 1995.
Operating expenses, including depreciation and amortization expense, were
$836,815, $814,325 and $592,800 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997 and 1996,
each as compared to the previous year, is partially attributable to an increase
in depreciation expense as the result of the acquisition of additional
restaurant properties during 1996 and 1995, and the fact that the restaurant
properties acquired during 1996 and 1995 were operational for a full year in
1997 and 1996, respectively, as compared to a partial year in 1996 and 1995,
respectively. Operating expenses also increased during 1997 and 1996, each as
compared to the previous year, as a result of the Income Fund incurring
additional taxes relating to the filing of various state tax returns during
1997 and 1996.
As a result of the sale of the restaurant property in Oviedo, Florida, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $41,148 for financial reporting purposes, for the year
ended December 31, 1997. As a result of the sale of the restaurant property in
Appleton, Wisconsin, as described in "Liquidity and Capital Resources," the
Income Fund recognized a gain for financial reporting purposes of $124,305 for
the year ended December 31, 1996. No restaurant properties were sold during
1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of the consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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
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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 Income Fund's restaurant 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
restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XVII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
February 10, 1995, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants are to be constructed, to be
leased primarily to operators of national and regional fast-food, family-style
and casual dining restaurant chains. The leases are triple-net leases, with the
lessee generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of September 30, 1998, the Income Fund owned 28
restaurant properties, which includes three restaurant properties owned by
joint ventures in which the Income Fund is a co-venturer and three restaurant
properties owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital is cash from operations (which
includes cash received from tenants, distributions from joint ventures, and
interest and other income received, less cash paid for expenses). Cash from
operations was $1,881,998 and $1,912,554 for the nine months ended September
30, 1998 and 1997, respectively. The decrease in cash from operations for the
nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, is primarily a result of changes in the Income Fund's
working capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In September 1997, the Income Fund entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the Income Fund which has the
same general partners, to construct and hold one restaurant property. As of
September 30, 1998, the Income Fund had contributed $311,048 to the joint
venture. Construction of the restaurant was completed in January 1998, and as
of September 30, 1998, the Income Fund owned a 60.06% interest in the profits
and losses of the joint venture.
In addition, during the nine months ended September 30, 1998, the Income
Fund received $306,100 from the developer of the restaurant properties in
Aiken, South Carolina and Weatherford, Texas. This represents a reimbursement
from the developer upon final reconciliation of total construction costs, to
the total construction costs funded by the Income Fund in accordance with the
development agreement.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts or other short-term, highly liquid
investments pending the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to partners. At September 30, 1998, the
Income Fund had $1,462,427 invested in such short-term investments, as compared
to $1,238,799 at December 31, 1997. The funds remaining at September 30, 1998,
after the payment of distributions and other liabilities, will be used to meet
the Income Fund's working capital and other needs.
Total liabilities of the Income Fund, including distributions payable,
decreased to $720,196 at September 30, 1998, from $765,083 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $1,800,000 and $1,687,500 for the nine months ended
September 30, 1998 and 1997, respectively ($600,000 for each of the quarters
ended September 30, 1998 and 1997). This represents distributions of $0.60 and
$0.56 per Unit for the nine months ended September 30, 1998 and 1997,
respectively ($0.20 per Unit for each of the quarters ended September 30, 1998
and 1997). No distributions were made to the general partners for the
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quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the Limited Partners for the nine months ended September 30,
1998 and 1997, are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distribution to the Limited Partners
on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
On September 2, 1995, the Income Fund commenced an offering to the public of
up to 3,000,000 Units of Limited Partnership interest. The Income Fund's
offering of Units terminated on September 19, 1996, at which time the maximum
proceeds of $30,000,000 (3,000,000 Units) had been received from investors. The
Income Fund, therefore, will derive no additional capital resources from the
offering.
Net proceeds to the Income Fund from its offering of Units, after deduction
of organizational and offering expenses, totaled $26,400,000. As of December
31, 1995, approximately $1,539,000 had been used to invest in one restaurant
property and to pay acquisition fees and certain acquisition expenses. During
1996, the Income Fund acquired 23 additional restaurant properties, including
one restaurant property owned by a joint venture in which the Income Fund is a
co-venturer and one restaurant property, owned with an affiliate, as tenants-
in-common, at a cost of approximately $23,406,500, including acquisition fees
and miscellaneous acquisition expenses. During 1997, the Income Fund used the
majority of its remaining net offering proceeds to acquire two additional
restaurant properties, as tenants-in-common, with certain of our affiliates. In
addition, the Income Fund entered into two joint ventures, CNL Mansfield Joint
Venture and CNL Kingston Joint Venture, with certain of our affiliates, to own
an approximate 21% interest and 60.06% interest, respectively, in two
restaurant properties. As a result of the above transactions, as of December
31, 1997, the Income Fund had acquired 28 restaurant properties, including
three restaurant properties owned by joint ventures in which the Income Fund is
a co-venturer and three restaurant properties owned with affiliates as tenants-
in-common, and had paid acquisition fees totaling $1,350,000 to one of our
affiliates. The remaining net offering proceeds of approximately $258,000 from
the Income Fund's offering of Units were reserved for Income Fund purposes.
Until restaurant properties were acquired by the Income Fund, all Income
Fund proceeds were held in short-term, highly liquid investments which we
believed to have appropriate safety of principal. This investment strategy
provided high liquidity in order to facilitate the Income Fund's use of these
funds to acquire restaurant properties at such time as restaurant properties
suitable for acquisition were located.
Currently, the Income Fund's primary source of capital is cash from
operations (which includes cash received from tenants, distributions from the
joint ventures and interest received, less cash paid for expenses). Cash from
operations was $2,495,114, $1,232,948 and $9,012 for the years ended December
31, 1997 and 1996 and the period February 10, 1995 (date of inception) through
December 31, 1995, respectively. The increase in cash from operations during
1997 and 1996, each as compared to the previous year, is primarily a result of
changes in income and expenses as described in "Results of Operations" below.
None of the restaurant properties owned by the Income Fund is or may be
encumbered. Subject to certain restrictions on borrowing, however, the Income
Fund may borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for
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federal income tax purposes and also will limit the Income Fund's outstanding
indebtedness to three percent of the aggregate adjusted tax basis of its
restaurant properties. In addition, the Income Fund will not borrow unless it
first obtains an opinion of counsel that such borrowing will not constitute
acquisition indebtedness. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties and
cash reserves are invested in money market accounts or other short-term, highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1997, the
Income Fund had $1,238,799 invested in such short-term investments as compared
to $4,716,719 at December 31, 1996. The decrease in the amount invested in
short-term investments during 1997, as compared to 1996, is primarily a result
of the payment of construction costs during 1997 relating to the restaurant
properties that were under construction at December 31, 1996 and the
acquisition of additional restaurant properties through joint ventures and with
certain of our affiliates as tenants-in-common during 1997. The funds remaining
at December 31, 1997, after payment of distribution and other liabilities, were
used during 1998 to meet the Income Fund's working capital and other needs.
During the year ended December 31, 1996 and the period February 10, 1995
(date of inception) through December 31, 1995, certain of our affiliates
incurred on behalf of the Income Fund $231,885 and $356,450, respectively, for
certain organizational and offering expenses. In addition, during the years
ended December 31, 1997 and 1996 and the period February 10, 1995 (date of
inception) through December 31, 1995, the affiliates incurred on behalf of the
Income Fund $11,262, $69,835 and $30,424, respectively, for certain acquisition
expenses and $59,451, $64,906 and $790, respectively, for certain operating
expenses. As of December 31, 1997 and 1996, the Income Fund owed $2,875 and
$17,153, respectively, to related parties for such amounts, accounting and
administrative services and management fees. As of February 28, 1998, the
Income Fund had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, decreased to $865,877 at December 31, 1997,
from $2,197,032 at December 31, 1996, as a result of the payment during 1997,
of construction costs accrued for certain restaurant properties at December 31,
1996. The decrease is partially offset by an increase in distributions payable
to the Limited Partners and an increase in deferred rental income at December
31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $2,287,500, $1,166,689 and $28,275 for the years ended
December 31, 1997 and 1996 and the period February 10, 1995 (date of inception)
through December 31, 1995, respectively. This represents distributions of
$0.76, $0.55 and $0.08 per Unit for the years ended December 31, 1997 and 1996
and the period February 10, 1995 (date of inception) through December 31, 1995,
respectively. No amounts distributed or to be distributed to the Limited
Partners for the years ended December 31, 1997 and 1996 and the period February
10, 1995 (date of inception) through December 31, 1995, are required to be or
have been treated by the Income Fund as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions.
We believe that the restaurant properties are adequately covered by
insurance. In addition, we have obtained contingent liability and property
coverage for the Income Fund. This insurance is intended to reduce the Income
Fund's exposure in the event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant properties.
Due to low operating expenses and ongoing cash flow, we do not believe that
working capital reserves are necessary at this time. In addition, because all
leases of the Income Fund's restaurant properties are on a triple-net basis, it
is not anticipated that a permanent reserve for maintenance and repairs is
necessary at this time. To the extent, however, that the Income Fund has
insufficient funds for such purposes, we will contribute to the Income Fund an
aggregate amount of up to one percent of the offering proceeds for maintenance
and repairs. We have the right to cause the Income Fund to maintain reserves
if, in our discretion, we determine such reserves are required to meet the
Income Fund's working capital needs.
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Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
and its consolidated joint venture, CNL/GC El Cajon Joint Venture, owned and
leased 23 wholly-owned restaurant properties, to operators of fast-food and
family-style restaurant chains. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund earned $2,114,810 and
$1,951,596, respectively, in rental income from operating leases and earned
income from direct financing leases from these restaurant properties, $697,907
and $715,430 of which was earned during the quarters ended September 30, 1998
and 1997, respectively. The increase in rental and earned income during the
nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, is primarily attributable to the fact that two restaurant
properties were operational for only a partial nine months ended September 30,
1997, as compared to a full nine months ended September 30, 1998, due to
acquisitions by the Income Fund during 1997.
The decrease in rental and earned income during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is primarily
attributable to a decrease in rental income due to the fact that during 1998,
the Income Fund reduced the monthly base rental income due from the tenants of
the restaurant properties in Aiken, South Carolina and Weatherford, Texas, as a
result of receiving reimbursements of construction costs from the developer, as
described above in "Liquidity and Capital Resources."
In October 1998, the tenant of three Boston Market restaurant properties
filed for bankruptcy. If the leases are eventually rejected, the Income Fund
anticipates that rental income relating to these restaurant properties will
terminate until a new tenant for these restaurant properties is located or
until the restaurant properties are sold and the proceeds from such sales are
reinvested in additional restaurant properties. However, we do not anticipate
that any decrease in rental income due to lost revenues relating to these
restaurant properties will have a material effect on the Income Fund's
financial position or results of operations.
In addition, during the nine months ended September 30, 1998 and 1997, the
Income Fund also owned and leased three restaurant properties with affiliates
as tenants-in-common and two restaurant properties indirectly through joint
venture arrangements. In connection therewith, during the quarters and nine
months ended September 30, 1998 and 1997, the Income Fund earned $105,321 and
$71,795, respectively, attributable to net income earned by these joint
ventures, $35,536 and $26,437 of which were earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
these joint ventures is primarily due to the fact that the restaurant
properties owned by the joint ventures and the restaurant properties held as
tenants-in-common with certain of our affiliates, were operational for the full
quarter and nine months ended September 30, 1998, as compared to a partial
quarter and nine months ended September 30, 1997.
During at least one of the nine months ended September 30, 1998 and 1997,
five lessees of the Income Fund, Golden Corral Corporation, National Restaurant
Enterprises, Inc., DenAmerica Corp., Foodmaker, Inc., and San Diego Food
Holdings, Inc. each contributed more than 10% of the Income Fund's total rental
and earned income (including the Income Fund's share of total rental and earned
income from joint ventures and properties held as tenants-in-common). As of
September 30, 1998, Golden Corral Corporation, and National Restaurant
Enterprises, Inc., were each lessees under leases relating to three
restaurants, DenAmerica Corporation and Foodmaker, Inc., were each lessees
under leases relating to four restaurants and San Diego Holdings, Inc. was the
lessee under a lease relating to one restaurant. It is anticipated that, based
on the minimum rental payments required by the leases, these tenants will each
continue to contribute more than 10% of the Income Fund's total rental income
during the remainder of 1998 and subsequent years. Any failure of these lessees
could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$427,437 and $431,363 for the nine months ended September 30, 1998 and 1997,
respectively, of which $157,067 and $139,928 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during
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the nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, is primarily attributable to a decrease in administrative
expenses, which includes services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; Limited Partner
distributions and reporting; and investor relations. In addition, operating
expenses also decreased for the nine month period ended September 30, 1998, due
to a decrease in depreciation expense as a result of the reimbursement from the
developer of construction costs relating to the restaurant properties in Aiken,
South Carolina and Weatherford, Texas, as described above in "Liquidity and
Capital Resources."
The decrease in operating expenses during the nine months ended September
30, 1998, as compared to the nine months ended September 30, 1997, was
partially offset by, and the increase during the quarter ended September 30,
1998, as compared to the quarter ended September 30, 1997, was partially
attributable to, the fact that the Income Fund accrued insurance and real
estate taxes as a result of the tenant of three Boston Market restaurant
properties filing for bankruptcy, as described above. If the tenant decides to
reject the leases, the Income Fund will continue to incur certain expenses,
such as real estate taxes, insurance and maintenance until a new tenant or
buyer for these restaurant properties is located.
The Years Ended December 31, 1997, 1996 and 1995
No significant operations commenced until the Income Fund received the
minimum offering proceeds of $1,500,000 on November 3, 1995.
The Income Fund owned and leased one wholly-owned restaurant property during
1995 and 22 wholly-owned restaurant properties during 1996 and 1997. During
1996, the Income Fund owned and leased one restaurant property through a joint
venture arrangement in which the Income Fund is a co-venturer, and owned and
leased one restaurant property with one of our affiliates, as tenants-in-
common. During 1997 the Income Fund was a co-venturer in three joint ventures
that each owned and leased one restaurant property and also owned and leased
three restaurant properties with certain of our affiliates, as tenants-in-
common. As of December 31, 1997, the Income Fund owned, either directly or
through joint venture arrangements, 28 restaurant properties which are subject
to long-term, triple-net leases. The leases of the restaurant properties
provide for minimum base annual rental payments (payable in monthly
installments) ranging from approximately $66,200 to $248,700. All of the leases
provide for percentage rent based on sales in excess of a specified amount. In
addition, the majority of the leases provide that, commencing in specified
lease years (generally the sixth lease year), the annual base rent required
under the terms of the lease will increase.
During the years ended December 31, 1997 and 1996, the Income Fund and its
consolidated joint venture, CNL/GC El Cajon Joint Venture, earned $2,642,743
and $1,185,279, respectively, in rental income from operating leases and earned
income from direct financing leases. The increase in rental and earned income
during 1997, as compared to 1996, is primarily attributable to the fact that
the majority of the restaurant properties were operational for a full year in
1997, as compared to a partial year in 1996. In addition, for the years ended
December 31, 1997 and 1996, the Income Fund earned $100,918 and $4,834,
respectively, attributable to net income earned by unconsolidated joint
ventures in which the Income Fund is a co-venturer. The increase in net income
earned by unconsolidated joint ventures during 1997, as compared to 1996, is
primarily attributable to the Income Fund investing in two restaurant
properties with certain of our affiliates as tenants-in-common and in two joint
ventures in which the Income Fund is a co-venturer, during 1997, as described
above in "Liquidity and Capital Resources." Net income earned by joint ventures
is expected to increase in 1998 as the restaurant properties owned by the joint
ventures or with affiliates as tenants-in-common will be operational for a full
year during 1998 as compared to a partial year during 1997.
During at least one of the years ended December 31, 1997 and 1996 and the
period February 10, 1995 (date of inception) through December 31, 1995, five
lessees, or group of affiliated lessees, of the Income Fund, (i) Golden Corral
Corporation, (ii) National Restaurant Enterprises, Inc., (iii) DenAmerica Corp.
(iv) RTM Indianapolis, Inc. and RTM Southwest Texas, Inc., (hereinafter
referred to as RTM, Inc.) and (v) Foodmaker, Corp., each contributed more than
10% of the Income Fund's total rental income (including rental and earned
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income from the Income Fund's consolidated joint venture and the Income Fund's
share of rental income from two restaurant properties owned by unconsolidated
joint venture and three restaurant properties owned with separate affiliates as
tenants-in-common). As of December 31, 1997, RTM, Inc., Golden Corral
Corporation and National Restaurant Enterprises, Inc., were each lessee under
leases relating to three restaurants and DenAmerica Corp. and Foodmaker, Inc.,
were each the lessee under leases relating to four restaurants. It is
anticipated that based on the minimum rental payments required by the leases,
Golden Corral Corporation, National Restaurant Enterprises, Inc., DenAmerica
Corp. and Foodmaker, Inc. each will contribute more than 10% of the Income
Fund's total rental income in 1998 and subsequent years. In addition, six
restaurant chains, Golden Corral, Arby's, Denny's, Burger King, Jack in the Box
and Boston Market each accounted for more than 10% of the Income Fund's total
rental income during at least one of the years ended December 31, 1997 and 1996
and the period February 10, 1995 (date of inception) through December 31, 1995
(including rental and earned income from the Income Fund's consolidated joint
venture, the Income Fund's share of rental income from two restaurant
properties owned by unconsolidated joint ventures and three restaurant
properties owned with certain of our affiliates as tenants-in-common). In
subsequent years, it is anticipated that Golden Corral, Jack in the Box, Burger
King and Boston Market, each will contribute more than 10% of the Income Fund's
rental income to which the Income Fund is entitled under the terms of the
leases. Any failure of these lessees or restaurant chains could materially
adversely affect the Income Fund's income.
During the years ended December 31, 1997 and 1996 and the period February
10, 1995 (date of inception) through December 31, 1995, the Income Fund also
earned $69,779, $244,406 and $12,153, respectively, in interest income from
investments in money market accounts or other short-term, highly liquid
investments. The decrease in interest income during 1997, as compared to 1996,
is primarily attributable to the decrease in the amount of funds invested in
short-term, liquid investments due to the payment during 1997, of construction
costs accrued at December 31, 1996, the acquisition of two restaurant
properties as tenants-in-common with affiliates, and as a result of acquiring
interests in two joint ventures as described above in "Liquidity and Capital
Resources." The increase in interest income during 1996, as compared to 1995,
was primarily attributable to an increase in the amount of funds invested in
short-term liquid investments as a result of additional Limited Partner
contributions during 1996.
Operating expenses, including depreciation and amortization expense, were
$569,157, $348,744 and $3,802 for the years ended December 31, 1997 and 1996
and the period February 10, 1995 (date of inception) through December 31, 1995,
respectively. The increase in operating expenses during 1996, as compared to
1995, is primarily attributable to an increase in depreciation expense as the
result of the acquisition of additional restaurant properties during 1996. The
increase during 1997, as compared to 1996, is primarily attributable to the
fact that the restaurant properties acquired during 1996 were operational for a
full year in 1997, as compared to a partial year during 1996. In addition,
operating expenses increased during 1997 and 1996, each as compared to the
previous year, as a result of an increase in management fees derived from the
increased rental revenues, as described above. Operating expenses also
increased during 1997, as compared to 1996, as a result of the Income Fund
incurring taxes relating to the filing of various state tax returns during
1997. Operating expenses also increased during 1996, as compared to 1995, as a
result of an increase in administrative expenses associated with operating the
Income Fund and its restaurant properties.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, are triple-net leases and
contain provisions that we 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 volume
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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 Income Fund's restaurant 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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of the affiliates of we consists
of a network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by we and our affiliates to become Year 2000 compliant will be
incurred by the general partners and affiliates; therefore, these costs will
have no impact on the Income Fund's financial position or results of
operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XVIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
February 10, 1995, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants are to be constructed,
which are leased primarily to operators of selected national and regional
fast-food, family-style and casual dining restaurant chains. The leases are
triple-net leases, with the lessee generally responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of September 30,
1998, the Income Fund owned 24 restaurant properties, which included one
restaurant property owned by a joint venture in which the Income Fund is a co-
venturer.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
On September 20, 1996, the Income Fund commenced an offering to the public
of up to 3,500,000 Units of limited partnership interest pursuant to a
registration statement on Form S-11 under the Securities Act of 1933, as
amended, effective August 11, 1995. The Income Fund's offering of Units
terminated on February 6, 1998 at which time the maximum offering proceeds of
3,500,000 Units ($35,000,000) had been received from investors. The Income
Fund therefore will derive no additional capital resources from the offering.
As of September 30, 1998, net proceeds to the Income Fund from its offering
of units, after deduction of organizational and offering expenses, totaled
$30,800,000. Of this amount, approximately $29,855,600 had been used to invest
or committed for investment in 24 restaurant properties, including one
restaurant property owned by a joint venture in which the Income Fund is a co-
venturer, and to pay acquisition fees and certain acquisition expenses,
leaving approximately $944,400 of offering proceeds available for investment
in restaurant properties. As of September 30, 1998, the Income Fund had
incurred $1,575,000 in acquisition fees to one of our affiliates.
The Income Fund presently is negotiating to acquire additional restaurant
properties, but as of October 20, 1998, had not acquired any such restaurant
properties.
During the nine months ended September 30, 1998 and 1997, the Income Fund
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received,
less cash paid for expenses) of $2,158,678 and $909,568, respectively. The
increase in cash from operations for the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, is primarily a result
of changes in income and expenses as described in "Results of Operations"
below.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In August 1998, the Income Fund entered into a joint venture arrangement,
Columbus Joint Venture, with certain of our affiliates to construct and hold
one restaurant property. As of September 30, 1998, the Income Fund had
contributed $166,025 to purchase land and pay for construction costs relating
to the joint venture. When construction is completed, the Income Fund will
have an approximate 40% interest in the profits and losses of the joint
venture.
Until restaurant properties are acquired by the Income Fund, all Income
Fund proceeds are held in short-term, highly liquid investments which we
believe to have appropriate safety of principal. This investment strategy
provides high liquidity in order to facilitate the Income Fund's use of these
funds to acquire restaurant properties at such time as restaurant properties
suitable for acquisition are located. At September 30, 1998, the
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Income Fund had $1,866,555 invested in such short-term investments, as compared
to $4,143,327 at December 31, 1997. The decrease in the amount invested in
short-term investments is primarily attributable to acquiring one additional
restaurant property and investing in Columbus Joint Venture, as described
above, and as a result of the payment during the nine months ended September
30, 1998, of construction costs accrued for certain restaurant properties at
December 31, 1997. The funds remaining at September 30, 1998, will be used to
purchase and develop additional restaurant properties, to pay acquisition
costs, to pay Limited Partner distributions, to meet the Income Fund's working
capital and other needs and, in our discretion, to create cash reserves.
During the nine months ended September 30, 1997, certain of our affiliates
incurred on behalf of the Income Fund $210,866 for certain organizational and
offering expenses. In addition, during the nine months ended September 30, 1998
and 1997, certain of our affiliates incurred on behalf of the Income Fund
$35,864 and $125,693, respectively, for certain acquisition expenses and
$65,271 and $35,259, respectively, for certain operating expenses. As of
September 30, 1998 and 1997, the Income Fund owed $14,652 and $75,844,
respectively, to related parties for such amounts, fees and other
reimbursements. As of October 20, 1998, the Income Fund had reimbursed all such
amounts. Amounts payable to other parties, including distributions payable,
decreased to $725,865 at September 30, 1998, from $1,629,719 at December 31,
1997, primarily as a result of the payment during the nine months ended
September 30, 1998, of construction costs accrued for certain restaurant
properties at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $1,957,764 and $800,312 for the nine months ended September
30, 1998 and 1997, respectively ($700,000 and $379,266 for the quarters ended
September 30, 1998 and 1997, respectively). This represents distributions of
$0.56 and $0.41 per weighted average Limited Partner unit outstanding for the
nine months ended September 30, 1998 and 1997, respectively ($0.20 and $0.15
per unit for the quarters ended September 30, 1998 and 1997, respectively). No
distributions were made to us for the quarters and nine months ended September
30, 1998 and 1997. No amounts distributed to the Limited Partners for the nine
months ended September 30, 1998 and 1997, are required to be or have been
treated by the Income Fund as a return of capital for purposes of calculating
the limited partners' return on their adjusted capital contributions. The
Income Fund intends to continue to make distributions of cash available for
distribution to the Limited Partners on a quarterly basis.
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
As of December 31, 1997, the Income Fund had accepted subscriptions for
3,500,000 Units and had received subscription proceeds for 3,414,576 Units,
representing $34,145,759 of capital contributed by Limited Partners pursuant to
its public offering of Units. The remaining proceeds of $854,241, representing
the remaining 85,424 Units were received during the period January 1, 1998
through February 6, 1998.
As of December 31, 1997, net proceeds to the Income Fund from its offering
of Units, after deduction of organizational and offering expenses, totaled
$30,022,641. During 1996, the Income Fund invested or committed for investment
approximately $2,960,800 of such proceeds in two restaurant properties and to
pay acquisition fees and certain acquisition expenses. During 1997, the Income
Fund completed construction of the restaurant property under construction in
1996 and acquired 20 additional restaurant properties (one of which was under
construction as of December 31, 1997 and completed in February 1998). As a
result of the above transactions, as of December 31, 1997, the Income Fund had
invested approximately $27,645,000 of the net
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proceeds in 22 restaurant properties, and to pay acquisition fees and
miscellaneous acquisition expenses, leaving approximately $2,377,700 of net
offering proceeds available for investment in restaurant properties. As of
December 31, 1997, the Income Fund had paid $1,536,559 in acquisition fees to
one of our affiliates.
Currently, the Income Fund's primary source of capital is cash from
operations (which includes cash received from tenants and interest received,
less cash paid for expenses). Cash from operations was $1,361,610 and $27,146
for the years ended December 31, 1997 and 1996. The increase in cash from
operations for the year ended December 31, 1997, as compared to the year ended
December 31, 1996, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Income Fund's
working capital.
None of the restaurant properties owned or to be acquired by the Income Fund
is or may be encumbered. Subject to certain restrictions on borrowing, however,
the Income Fund may borrow funds but will not encumber any of the restaurant
properties in connection with any such borrowing. The Income Fund will not
borrow for the purpose of returning capital to the Limited Partners or under
arrangements that would make the Limited Partners liable to creditors of the
Income Fund. We further have represented that we will use our reasonable
efforts to structure any borrowing so that it will not constitute "acquisition
indebtedness" for federal income tax purposes and also will limit the Income
Fund's outstanding indebtedness to three percent of the aggregate adjusted tax
basis of its restaurant properties. Certain of our affiliates from time to time
incur certain expenses on behalf of the Income Fund for which the Income Fund
reimburses the affiliates without interest.
Until restaurant properties are acquired by the Income Fund, all Income Fund
proceeds are held in short-term, highly liquid investments which we believe to
have appropriate safety of principal. This investment strategy provides high
liquidity in order to facilitate the Income Fund's use of these funds to
acquire restaurant properties at such time as restaurant properties suitable
for acquisition are located. At December 31, 1997, the Income Fund had
$4,143,327 invested in such short-term investments, as compared to $5,371,325
at December 31, 1996. The decrease in the amount invested in short-term
investments is primarily a result of the payment during 1997, of costs relating
to the restaurant property that was under construction at December 31, 1996 and
the acquisition of additional restaurant properties during 1997. The funds
remaining at December 31, 1997 were used to pay construction costs relating to
several restaurant properties that were incurred but unpaid at December 31,
1997, to purchase and develop additional restaurant properties, to pay
acquisition costs, to pay distributions, to meet the Income Fund's working
capital and other needs and, in our discretion, to create cash reserves.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (date of inception) through December 31, 1995, certain of our
affiliates incurred on behalf of the Income Fund $211,216, $285,858 and
$196,174, respectively, for certain organizational and offering expenses. In
addition, during 1997 and 1996, affiliates incurred $134,138 and $18,036,
respectively, for certain acquisition expenses and $44,166 and $893,
respectively, for certain operating expenses. As of December 31, 1997 and 1996,
the Income Fund owed $118,231 and $83,889, respectively, to related parties for
such amounts, fees and other reimbursements. As of March 13, 1998, the Income
Fund had reimbursed the affiliates all such amounts. Amounts payable to other
parties, including distributions payable, increased to $1,629,719 at December
31, 1997, as compared to $160,222 at December 31, 1996, primarily as a result
of an increase in distributions payable to Limited Partners and an increase in
construction costs payable at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $1,310,885 and $57,846, respectively, for the years ended
December 31, 1997 and 1996 (representing distributions of $0.57 and $0.11 per
Unit, respectively, based on the weighted average number of Units outstanding
during the period the Income Fund was operational). No amounts distributed or
to be distributed to the Limited Partners for the years ended December 31, 1997
and 1996, are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions.
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We have obtained contingent liability and property coverage for the Income
Fund. This insurance policy is intended to reduce the Income Fund's exposure in
the unlikely event a tenant's insurance policy lapses or is insufficient to
cover a claim relating to the restaurant property.
Income Fund net income is expected to increase in 1998, as rental income
increases due to the acquisition of additional restaurant properties during
1998 and the fact that restaurant properties acquired during 1997 will earn
rental income for a full year in 1998, as compared to a partial year in 1997.
Accordingly, we believe that the anticipated decrease in the Income Fund's
liquidity in 1998, due to its investment of the remaining net offering proceeds
in additional restaurant properties and the payment of construction costs
relating to several restaurant properties incurred but unpaid at December 31,
1997, will not have an adverse effect on the Income Fund's operations during
1998.
Due to low operating expenses, ongoing cash flow from rental income obtained
from restaurant properties after they are acquired and the fact that the Income
Fund will not enter into a commitment to purchase a restaurant property until
sufficient cash is available for such purchase, we do not believe that working
capital reserves are necessary at this time. In addition, because all of the
leases for the Income Fund's restaurant properties are on a triple-net basis,
it is not anticipated that a permanent reserve for maintenance and repairs is
necessary at this time. To the extent, however, that the Income Fund has
insufficient funds for such purposes, we will contribute to the Income Fund an
aggregate amount of up to one percent of the offering proceeds for maintenance
and repairs. We have the right to cause the Income Fund to maintain reserves
if, in our discretion, we determine such reserves are required to meet the
Income Fund's working capital needs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 20 wholly-owned restaurant properties, three of which were under
construction, and during the nine months ended September 30, 1998, the Income
Fund owned and leased 23 wholly-owned restaurant properties, to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the nine months ended September 30, 1998 and 1997, the Income Fund earned
$2,228,324 and $711,461, respectively, in rental income from operating leases
and earned income from direct financing leases from these restaurant
properties, $781,638 and $437,927 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively. The increase in rental and earned
income during the quarter and nine months ended September 30, 1998, as compared
to the quarter and nine months ended September 30, 1997, is primarily
attributable to the acquisition of additional restaurant properties subsequent
to September 30, 1997, and the fact that restaurant properties acquired during
the quarter and nine months ended September 30, 1997, were operational for the
full quarter and nine months ended September 30, 1998, as compared to a partial
quarter and nine months ended September 30, 1997.
In October 1998, the tenant of four Boston Market restaurant properties
filed for bankruptcy. If the leases are eventually rejected, the Income Fund
anticipates that rental income relating to these restaurant properties will
terminate until a new tenant is located or until the restaurant properties are
sold and the proceeds from such sales are reinvested in additional restaurant
properties. However, we do not anticipate that any decrease in rental income
due to lost revenues relating to these restaurant properties will have a
material effect on the Income Fund's financial position or results of
operations.
Operating expenses, including depreciation and amortization, were $453,362
and $194,483 for the nine months ended September 30, 1998 and 1997,
respectively, $171,052 and $87,845 of which was incurred during the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to an increase in depreciation expense as the result of the
acquisition of additional restaurant properties subsequent to September 30,
1997, and the fact that restaurant properties acquired during the quarter and
nine months ended September 30, 1997, were operational for the full
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quarter and nine months ended September 30, 1998, as compared to a partial
quarter and nine months ended September 30, 1997.
Operating expenses also increased during the quarter and nine months ended
September 30, 1998 as a result of an increase in administrative expenses for
services related to accounting; financial, tax and regulatory compliance and
reporting; lease and loan compliance; Limited Partner distributions and
reporting; and investor relations (including administrative services in
connection with selling Units of limited partnership interest) and management
fees as a result of the increase in rental revenues, as described above. The
increase during the nine months ended September 30, 1998 was also due to the
Income Fund incurring additional taxes relating to the filing of various state
tax returns during 1998.
In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Income Fund recorded
approximately $23,500 in real estate tax expenses due to the fact that in
October 1998, the tenant of the four Boston Market restaurant properties filed
for bankruptcy, as described above. If the tenant decides to reject the leases,
the Income Fund will continue to incur certain expenses, such as real estate
taxes, insurance and maintenance until a new tenant or buyer for these
restaurant properties is located.
The Years Ended December 31, 1997, 1996 and 1995
No significant operations commenced until the Income Fund received and
released from escrow the minimum offering proceeds of $1,500,000 on October 11,
1996.
The Income Fund owned and leased two restaurant properties in 1996 and 22
restaurant properties in 1997 (including one restaurant property which was
under construction at December 31, 1997), which are subject to long-term
triple-net leases. The leases of the restaurant properties provide for minimum
base annual rental payments (payable in monthly installments) ranging from
approximately $60,400 to $243,600. 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 lease year), the annual base rent required under the terms
of the lease will increase.
During the years ended December 31, 1997 and 1996, the Income Fund earned
$1,290,621 and $1,373, respectively, in rental income from operating leases and
earned income from direct financing leases. The increase in rental and earned
income during 1997, as compared to 1996, is primarily attributable to the
acquisition of additional restaurant properties subsequent to December 31,
1996. Because the Income Fund did not commence significant operations until it
received the minimum offering proceeds on October 11, 1996, and has not yet
acquired all of its restaurant properties, Income Fund revenues for the year
ended December 31, 1997, represent only a portion of revenues which the Income
Fund is expected to earn during the full year in which the Income Fund's
restaurant properties are operational.
During at least one of the years ended December 31, 1997 and 1996, six
lessees, or group of affiliated lessees, of the Income Fund, Golden Corral
Corporation, Foodmaker, Inc., Tiffany, L.L.C., IHOP restaurant properties,
Inc., Platinum Rotisserie, L.L.C. and Carrols Corporation each contributed more
than 10% of the Income Fund's total rental income. As of December 31, 1997,
Golden Corral Corporation and Foodmaker, Inc. were each the lessee under leases
relating to four restaurants, Tiffany, L.L.C. was the lessee under a lease
relating to one restaurant, IHOP restaurant properties, Inc. was the lessee
under leases relating to two restaurants, Platinum Rotisserie, L.L.C. was the
lessee under a lease relating to one restaurant and Carrols Corporation was the
lessee under a lease relating to one restaurant. In addition, during at least
one of the years ended December 31, 1997 and 1996, five restaurant chains,
Golden Corral, Jack in the Box, Boston Market, IHOP and Burger King each
accounted for more than 10% of the Income Fund's total rental income. Because
the Income Fund's first restaurant property was not purchased until December
1996, the foregoing information regarding the lessees and restaurant chains
which contributed a significant amount of the Income Fund's total
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rental income during the years ended December 31, 1997 and 1996, may or may not
be representative of the lessees and restaurant chains which will account for
more than 10% of the Income Fund's rental income during 1998 and subsequent
years. Because the Income Fund has not completed its acquisition of restaurant
properties as yet, it is not possible to determine which lessees or restaurant
chains will contribute more than 10% of the Income Fund's total rental income
during 1998 and subsequent years. In the event that certain lessees or
restaurant chains contribute more than 10% of the Income Fund's rental income
in future years, any failure of such lessees or restaurant chains could
materially adversely affect the Income Fund's income.
During the years ended December 31, 1997 and 1996, the Income Fund earned
$162,621 and $30,241 in interest income from investments in money market
accounts or other short-term, highly liquid investments. The increase in
interest income during 1997, as compared to 1996, is primarily attributable to
the increase in the amount of funds invested in short-term liquid investments
as a result of additional Limited Partner capital contributions during 1997. As
of December 31, 1997, the majority of these funds had been invested in
restaurant properties; therefore, the Income Fund expects interest income to
decrease in 1998.
Operating expenses, including depreciation and amortization expense, were
$298,482 and $4,704 for the years ended December 31, 1997 and 1996. The
increase in operating expenses during 1997 is primarily attributable to an
increase in depreciation expenses as the result of the acquisition of
additional restaurant properties during 1997. Operating expenses also increased
during 1997, as compared to 1996, as a result of an increase in administrative
expenses associated with operating the Income Fund and its restaurant
properties and an increase in management fees as a result of the increase in
rental revenues. The dollar amount of operating expenses is expected to
increase, and the amount of general operating and administrative expenses as a
percentage of total revenues is expected to decrease, in 1998 as the Income
Fund acquires additional restaurant properties and the restaurant property
under construction becomes operational.
General
In March 1998, the Financial Accounting Standards Board reached a consensus
in EITF 97-11, entitled "Accounting for Internal Costs Relating to Real Estate
restaurant property Acquisitions." EITF 97-11 provides that internal costs of
identifying and acquiring operating restaurant property should be expensed as
incurred. Due to the fact that the Income Fund does not have an internal
acquisitions function and instead, contracts these services from CNL Fund
Advisors, Inc., one of our affiliates, EITF 97-11 had no material effect on the
Income Fund's financial position or results of operations.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, and the leases the Income
Fund expects to enter into, are or are expected to be on a triple-net basis and
contain provisions that management believes will 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 Income Fund's
restaurant 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 restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
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The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and transfer agent. The Income Fund depends on its
tenants for rents and cash flows, its financial institutions for availability
of cash and its transfer agent to maintain and track investor information. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
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BUSINESS OF THE FUNDS
General
Between 1985 and 1995, each Fund was organized as a Florida limited
partnership to purchase existing fast-food, family-style and casual dining
restaurant properties, including land and buildings, as well as restaurant
properties upon which such restaurants would be constructed, the land
underlying the restaurant building, with the building owned by the lessee or a
third party, or the building only with the land owned by a third party. The
restaurant properties, located across the United States, typically are
freestanding and are leased on a "triple-net" basis to operators of national
and regional restaurant chains selected by the General Partners. Restaurant
properties purchased by the Funds are leased under arrangements requiring base
annual rent equal to a specified percentage of the Funds' cost of purchasing a
particular restaurant property, generally with contractual rent increases. See
"-- Description of Leases -- Computation of Lease Payments."
As is the case with APF, the General Partners have structured the Funds'
investments to allow them to participate, to the maximum extent possible, in
any sales growth in these restaurant industry segments, as reflected in the
restaurant properties and certain provisions of the leases held by the Funds.
Thus, like APF, the Funds generally structure their leases with percentage rent
requirements based on gross sales of the particular restaurant. Gross sales may
increase even absent real growth because increases in the restaurant's costs
are passed on to the consumers through increased prices, and increased prices
are reflected in gross sales. In addition, as with APF's leases, the Funds'
leases provide that a minimum level of rent is payable regardless of the amount
of gross sales at a particular restaurant property to provide regular cash flow
to the Funds. The Funds have also endeavored to maximize growth and minimize
risks associated with ownership and leasing of real estate that operates in
these restaurant industry segments through several methods:
. careful selection and screening of their lessees in order to reduce risks
of tenant default;
. monitoring statistics relating to restaurant chains and continuing to
develop relationships in the industry; and
. acquisition of restaurant properties for all cash, with no debt or liens
relating to the restaurant properties.
For a description of the standards which the General Partners have employed
in selecting restaurant chains and particular restaurant properties within a
restaurant chain for investment, see "-- Standards for Investment." The
partnership agreements of the Funds impose no restrictions on the geographic
area or areas within the United States in which restaurant properties acquired
by any particular Fund may be located. Accordingly, the General Partners have
strategically acquired restaurant properties to diversify among restaurant
chains and the geographic location of the restaurant properties, and the
restaurant properties acquired by the Funds are located throughout the United
States. While the Funds may acquire restaurant properties in both fee and by
leasehold, the Funds mostly hold restaurant properties in fee.
APF believes that freestanding, triple-net leased restaurant properties of
the type in which the Funds have invested are attractive to tenants because
freestanding properties typically offer high visibility to passing traffic,
ease of access from a busy thoroughfare, tenant control over the site to set
hours of operation and maintenance standards and distinctive building designs
conducive to customer name recognition.
Management Services
Upon APF's acquisition of the Advisor, APF will assume the obligations of
the Advisor to provide management services relating to the Funds and their
restaurant properties pursuant to the terms of the management agreement that is
currently in place between each Fund and the Advisor.
The Advisor is responsible for assisting the Funds in acquiring restaurant
properties, negotiating leases, collecting rental payments, inspecting the
restaurant properties and the tenants' books and records and
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responding to tenant inquiries and notices. The Advisor also provides
information to each Fund about the status of the leases and the restaurant
properties. In exchange for these services, the Advisor is entitled to receive
a management fee from each Fund which, generally, is an annual fee equal to:
(a) for CNL Income Fund, Ltd through CNL Income Fund III, Ltd., .50% of the
value of total assets under management valued at cost (or 1% of the sum of
gross rental revenues derived from the restaurant properties, if that amount is
less), and (b) for CNL Income Funds IV, Ltd. through XVIII, Ltd., 1% of the sum
of gross rental revenues (excluding noncash lease accounting adjustments) that
the Fund derives from the restaurant properties. The management fee generally
is payable monthly. Under certain agreements, the Advisor may determine whether
or not to take the management fee, which cannot exceed fees that are
competitive for similar services in the same geographic area, in whole or in
part in a given year, in the sole discretion of the Advisor. In such cases, all
or any portion of the management fee not taken as to any fiscal year is
deferred without interest. In addition, for certain Funds the management fee is
subordinated to the limited partners receipt of their preferred return. The
management agreement continues until a Fund no longer owns an interest in any
restaurant properties unless terminated at an earlier date upon 60 days' prior
notice by either party.
Site Selection and Acquisition of Restaurant Properties
The Funds purchase and lease restaurant properties based principally on an
examination and evaluation by the Advisor of the potential value of the site,
the financial condition and business history of the proposed lessee, the
demographics of the area in which the restaurant property is located or to be
located, the proposed purchase price and proposed lease terms, geographic and
market diversification and potential sales expected to be generated by the
restaurant. In addition, the potential lessee must meet at least the minimum
standards established by a restaurant chain for its operators. The Advisor also
performs an independent break-even analysis of the potential profitability of a
restaurant property using historical data and other data developed by the
Advisor and provided by the restaurant chains.
In each restaurant property acquisition, the Advisor negotiates the land and
building lease agreement with the lessee. In certain instances, the Advisor
negotiates an assignment of an existing lease if the General Partners, based on
the recommendation of the Advisor, determine that the terms of an acquisition
and lease of a restaurant property, taken as a whole, are favorable to the
Fund. In such cases, the terms of the lease may vary substantially from the
Funds' standard lease terms. Generally, the leases are structured to be long-
term triple-net lease agreements, which provide for monthly rental payments
plus a percentage of gross sales, which will increase the value of the land and
buildings and provide an inflation hedge. See "-- Description of Leases" below
for a discussion of the terms of the Funds' leases. In connection with a
restaurant property acquisition, the lessee provides at its own expense all
furniture, fixtures, and equipment (such as deep fryers, grills, refrigerators
and freezers) necessary to operate the buildings on a restaurant property as a
restaurant.
Some leases have been negotiated to provide the lessee with the opportunity
to purchase the restaurant property under certain conditions, generally either
at the greater of fair market value or 120% of the original purchase price. In
addition, tenants are generally offered a right of first refusal to purchase
the restaurant property in the event an offer is received from a third party to
purchase the restaurant property. Certain leases provide the lessee with the
right to purchase the restaurant property at a purchase price based on various
measures of value contained in an independent appraisal of the restaurant
property.
The purchase of each restaurant property owned by the Funds was supported by
an appraisal of the real estate prepared by an independent appraiser. The
purchase price of each such restaurant property, plus any acquisition fees paid
by the Funds to the Advisor in connection with such purchase, did not exceed
the restaurant property's appraised value.
The titles to restaurant properties purchased by the Funds are insured by
appropriate title insurance policies and/or abstract opinions consistent with
normal practices in the jurisdictions in which the restaurant properties are
located.
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Standards for Investment
Selection of Restaurant Chains. The selection of restaurant chains by the
Advisor and the General Partners of the Funds is based on an evaluation of
several factors:
. the operations of restaurants in the restaurant chain;
. the number of restaurants operated throughout the restaurant chain's
system;
. the relationship of average restaurant gross sales to the average capital
costs of a restaurant; and
. the restaurant chain's relative competitive position among the same type
of restaurants offering similar types of food, name recognition and
market penetration.
None of the restaurant chains is affiliated with the Advisor, the Funds or
the General Partners.
Selection of Restaurant Properties and Lessees. In making investments in
restaurant properties, the Advisor and the General Partners consider relevant
real property and financial factors, including:
. the condition, use and location of the restaurant property;
. the income-producing capacity of the restaurant properties;
. the prospects for long-term appreciation;
. the relative success of the restaurant chain in the geographic area in
which the restaurant property is located; and
. the management capability and financial condition of the lessee.
In selecting lessees, the Advisor and the General Partners have historically
considered the prior experience of the lessee in the restaurant industry, the
net worth of the lessee, past operating results of other restaurants currently
or previously operated by the lessee and the lessee's prior experience in
managing restaurants within a particular restaurant chain.
In selecting specific restaurant properties within a particular restaurant
chain and in selecting lessees for each Fund's restaurant properties, the
Advisor applies the following minimum criteria.
. Each restaurant property was located in what is believed to be a prime
business location.
. Base (or minimum) annual rent provided a specified minimum return on the
Fund's cost of purchasing and, if applicable, developing the restaurant
property, and the lease typically also will provide for automatic
increases in base rent at specified times during the lease term and/or
for payment of percentage rent based on gross sales.
. The initial lease term typically was at least 15 to 20 years.
. In evaluating prospective tenants, the Advisor examined, among other
factors, the lessee's ranking in its market segment, trends in sales in
each restaurant chain, overall changes in consumer preferences, and the
lessee's ability to adapt to changes in market and competitive
conditions, the lessee's historical financial performance, and its
current financial condition.
In general, a Fund has not invested in a restaurant property, if, as a
result, more than 25% of its gross proceeds from its offering of Units would be
invested in restaurant properties of a single restaurant chain or if more than
30% of its gross proceeds would be invested in restaurant properties in a
single state.
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Description of Restaurant Properties
General. As of September 30, 1998, the Funds owned, in the aggregate, 621
restaurant properties, all of which are currently triple-net leased. The
following table provides certain annualized information with respect to the
Funds' restaurant properties owned as of September 30, 1998.
<TABLE>
<CAPTION>
Number of
States in
Total which Average
Number of Restaurant Age of Aggregate Percent
Restaurant Properties Restaurant Total of Total
Fund Properties(1) are Located Properties Revenue Revenue
- ---- ------------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd.... 17 11 13.4 $1,102,000 2.1%
CNL Income Fund II,
Ltd.................... 38 18 12.2 2,200,000 4.2
CNL Income Fund III,
Ltd.................... 28 17 10.9 1,858,000 3.5
CNL Income Fund IV,
Ltd.................... 37 15 11.2 2,467,000 4.7
CNL Income Fund V,
Ltd.................... 25 13 12.2 1,554,000 3.0
CNL Income Fund VI,
Ltd.................... 42 17 10.6 3,301,000 6.3
CNL Income Fund VII,
Ltd.................... 40 13 10.3 2,736,000 5.2
CNL Income Fund VIII,
Ltd.................... 36 12 9.9 3,300,000 6.3
CNL Income Fund IX,
Ltd.................... 41 17 10.1 3,284,000 6.2
CNL Income Fund X,
Ltd.................... 48 17 10.2 3,525,000 6.7
CNL Income Fund XI,
Ltd.................... 39 20 9.2 3,750,000 7.1
CNL Income Fund XII,
Ltd.................... 49 15 7.3 4,183,000 8.0
CNL Income Fund XIII,
Ltd.................... 47 17 7.2 3,172,000 6.0
CNL Income Fund XIV,
Ltd.................... 56 16 5.7 3,699,000 7.0
CNL Income Fund XV,
Ltd.................... 50 18 6.5 3,238,000 6.2
CNL Income Fund XVI,
Ltd.................... 44 18 7.5 3,621,000 6.9
CNL Income Fund XVII,
Ltd.................... 28 12 4.5 2,649,000 5.0
CNL Income Fund XVIII,
Ltd.................... 24 14 5.0 2,951,000 5.6
</TABLE>
- --------
(1) The total number of properties for each Fund includes wholly-owned
properties and properties held in joint ventures and as tenants in common
with a third party or another Fund.
Land. Lot sizes generally range from 25,000 to 65,000 square feet depending
upon building size and local demographic factors. Restaurants located on land
within shopping centers are freestanding and generally are located on smaller
parcels if sufficient common parking was available. Restaurant properties
purchased by a Fund are in locations zoned for commercial use which were
reviewed for beneficial traffic patterns and volume of traffic. Generally, the
cost of the underlying land ranges from $150,000 to $500,000, although the cost
of the land for particular restaurant properties was higher or lower in some
cases.
Buildings. Either before or after construction or renovation, the restaurant
properties acquired by the Funds are one of a restaurant chain's approved
designs. Building and site preparation costs have varied
depending upon the size of the building and the site and the area in which the
restaurant property is located. Building and site preparation costs ranged from
$250,000 to $1,250,000 for each restaurant property.
Generally, the restaurant properties acquired by the Funds consist of both
land and building, although in a number of cases a Fund may have acquired only
the land underlying the restaurant building with the building owned by a tenant
or a third party, and also may have acquired the building only with the land
owned by a third party. In general, the restaurant properties acquired by the
Funds are freestanding and surrounded by paved parking areas. Buildings are
suitable for conversion to various uses, although modifications would be
required prior to use for other than restaurant operations.
A lessee generally is required by the lease agreement to make such capital
expenditures as may be reasonably necessary to refurbish restaurant buildings,
premises, signs, and equipment so as to comply with the lessee's obligations
under the franchise agreement to reflect the current commercial image of its
restaurant chain. These capital expenditures will be paid by the lessee during
the term of the lease.
C-217
<PAGE>
The following table shows the distribution of restaurant properties of the
Funds by restaurant chain as of September 30, 1998.
<TABLE>
<CAPTION>
CNL Income Fund(1)
----------------------------------------------------------------------------
I II III IV V VI VII VIII IX X XI XII XIII XIV XV XVI XVII XVIII
--- --- --- --- --- --- --- ---- --- --- --- --- ---- --- --- --- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arby's.................. -- 1 -- 2 2 1 -- -- -- -- -- 1 1 -- -- 2 3 2
Boston Market........... -- 1 -- 1 1 -- 1 -- -- 1 -- -- -- 4 4 5 4 4
Burger King............. 1 1 1 -- 2 5 10 13 18 12 12 2 5 1 -- -- 4 1
Checkers................ -- 2 -- 1 -- -- 1 -- -- -- -- -- 8 15 14 6 -- --
Chevy's Fresh Mex....... 1 1 1 -- 1 1 1 -- -- 1 -- -- 1 -- -- -- -- 1
Denny's................. -- 3 2 4 3 2 -- 1 4 3 7 9 3 6 2 9 2 --
Golden Corral........... 5 6 6 3 2 5 5 5 2 4 3 2 3 4 5 6 4 5
Hardee's................ -- -- -- -- 1 2 6 4 6 7 5 11 11 6 7 -- -- --
IHOP.................... -- 2 2 1 1 5 -- -- 1 -- -- -- -- -- -- 2 -- 2
Jack in the Box......... -- 1 -- 1 -- 1 3 2 -- 5 8 10 5 6 4 5 4 4
KFC..................... -- 3 4 1 -- 3 2 2 -- -- 1 1 -- -- -- 1 -- --
Long John Silver's...... -- -- -- -- -- -- -- -- -- 2 -- 9 8 9 9 6 -- --
Perkins................. -- -- 1 -- -- -- -- 1 2 3 -- -- -- -- -- -- -- --
Pizza Hut............... 2 5 4 5 1 -- -- -- -- 6 -- -- -- -- -- -- -- --
Popeyes................. 1 4 1 -- -- 4 5 1 -- -- -- -- -- -- -- -- 1 --
Shoney's................ -- -- -- 6 -- 1 2 5 6 4 -- 2 -- -- -- 1 -- --
Taco Bell............... -- -- 2 1 2 1 1 -- -- -- -- -- -- 2 1 -- 1 --
Wendy's................. 5 2 -- 4 1 -- -- 1 -- -- -- -- 1 -- 1 1 2 1
Other(2)................ 2 6 4 7 8 10 3 11 2 -- 3 2 1 3 3 -- 3 4
</TABLE>
- --------
(1) The total number of properties for each Fund includes wholly-owned
properties and properties held in joint ventures and as tenants in common
with a third party or another Fund.
(2) This category encompasses all restaurant chains that comprise less than 1%
of the total of all restaurant properties of all of the Funds.
Description of Leases
This section provides a summary of the leases of the restaurant properties
owned by the Funds. The terms and conditions of any lease, however, entered
into by any of the Funds with regard to a restaurant property may vary from
those described below. The Advisor in all cases used its best efforts to obtain
terms at least as favorable as those described below. If the General Partners
determined, based on the recommendation of the Advisor, that the terms of an
acquisition and lease of a restaurant property, taken as a whole, were
favorable to a Fund, the General Partners may have, in their sole discretion,
caused a Fund to enter into a lease with terms which are substantially
different than the terms described below. In making such determination, the
General Partners considered such factors as the type and location of the
restaurant, the creditworthiness of the lessee, the purchase price of the
restaurant property, the prior performance of the lessee, and the prior
business experience of the principals of the Advisor or its affiliates, with a
restaurant chain or restaurant operator or their experience with such
restaurant chain or restaurant operator.
General. In general, the leases are triple-net leases, which means that the
lessees are required to pay all repairs, maintenance, property taxes and
insurance. The lessees also are required to pay for utilities and the cost of
any renovations permitted under the leases. A Fund is the lessor under the
lease except in certain circumstances in which it may be a party to a joint
venture or co-tenancy arrangement which, in turn, owns the restaurant property.
In those cases, the joint venture, rather than the Fund, will be the lessor,
and all references in this section to the Fund as lessor therefore should be
read accordingly. See "-- Joint Venture/Co-Tenancy Arrangements."
Term of Leases. Each Fund's restaurant properties are leased for an initial
term of either 15 or 20 years with two to five renewal options for five years
each. The minimum rental payment under the renewal option generally is greater
than that due for the final lease year of the initial term of the lease. Upon
termination of the lease, the lessee will surrender possession of the
restaurant property to the Fund, together with any improvements made to the
restaurant property during the term of the lease.
C-218
<PAGE>
As of September 30, 1998, the average remaining initial lease term with
respect to the Funds' restaurant properties was approximately 13 years. Leases
accounting for approximately 65% of annualized base rent for the nine months
ended September 30, 1998, have initial lease terms extending until at least
December 31, 2009.
The following table shows the aggregate number of leases in the Funds'
restaurant property portfolio which expire each calendar year through the year
2009, as well as the number of leases which expire after December 31, 2009. The
table does not reflect the exercise of any of the renewal options provided to
the tenant under the terms of such leases.
Lease Expiration Table
<TABLE>
<CAPTION>
Base Rent
-------------------
Year Number Amount(1) Percent
- ---- ------ ----------- -------
<S> <C> <C> <C>
1999................................................. 2 $ 99,000 0.2%
2000................................................. 4 142,000 0.3
2001................................................. 7 532,000 1.0
2002................................................. 15 1,062,000 2.0
2003................................................. 4 278,000 0.5
2004................................................. 7 980,000 1.8
2005................................................. 22 2,629,000 5.0
2006................................................. 30 3,058,000 5.8
2007................................................. 32 2,711,000 5.1
2008................................................. 35 2,729,000 5.2
2009................................................. 29 3,212,000 6.1
Thereafter........................................... 402 35,354,000 67.0
--- ----------- -----
Totals(1).......................................... 589 $52,786,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) The leases for 32 properties with aggregate base rental income of
approximately $1,640,000 have expired or been terminated, including six
Boston Market restaurant properties and 16 Long John Silver restaurant
properties. Those properties are being actively marketed for re-lease or
sale.
Computation of Lease Payments. During the initial term of the lease, the
lessee pays the Fund, as lessor, minimum annual rent equal to a specified
percentage of the Fund's cost of purchasing the restaurant property. Generally,
the leases provide for the escalation of the minimum annual rent at
predetermined intervals during the term of the lease. In the case of
acquisition of restaurant properties that were to be constructed or renovated
pursuant to a development agreement, the Fund's costs of purchasing the
restaurant property included the purchase price of the land, including all
fees, costs and expenses paid by the Fund in connection with its purchase of
the land, and all fees, costs and expenses disbursed by the Fund for
construction of restaurant improvements.
In addition to minimum annual rent, in many cases, the lessee pays the Fund
"percentage rent." Percentage rent is computed as a percentage of gross sales
of the restaurant operating at a particular restaurant property. The leases
generally provide that percentage rent will commence in the first lease year in
which gross sales exceed a specified amount. Certain leases, however, provide
that percentage rent is to be paid quarterly beginning at the end of the first
two years of the lease and each succeeding quarter thereafter to the extent the
restaurant gross sales in that quarter exceed the average quarterly gross sales
during the first two lease years. Gross sales include sales of all products and
services of the restaurant, excluding sales taxes, tips paid to serving people
and sales from vending machines.
Assignment and Sublease. In general, no lease may be assigned or subleased
without the Fund's prior written consent (which may not be unreasonably
withheld) except to a tenant's corporate franchiser, corporate
C-219
<PAGE>
affiliate or subsidiary, a successor by merger or acquisition, or, in certain
cases, another franchisee, if such assignee or sublessee agrees to operate the
same type of restaurant on the premises. The leases set forth certain factors,
such as the financial condition of the proposed lessee or subtenant, that are
deemed to be a reasonable basis for the Fund's refusal to consent to an
assignment or sublease. The original lessee generally remains fully liable,
however, for the performance of all lessee obligations under the lease
following any such assignment or sublease unless the Fund agrees in writing to
release the original lessee from its lease obligations.
Alterations to Premises. A lessee generally has the right, without the prior
consent of the Fund and at the lessee's own expense, to make certain immaterial
structural modifications to the restaurant building and improvements (with a
cost limitation set forth on the lease) or, with the Fund's prior written
consent and at the lessee's own expense, to make material structural
modifications that may include demolishing and rebuilding the restaurant. Under
certain leases, the lessee, at its own expense, may make any type of
alterations to the leased premises without the Fund's consent but must provide
the Fund with plans of any proposed structural modifications at least 30 days
before construction of the alterations commences. Certain leases may require
the lessee to post a payment and performance bond for any structural
alterations with a cost in excess of a certain amount.
Right of Lessee to Purchase. If the Fund wishes at any time to sell a
restaurant property pursuant to a bona fide offer from a third party, the
lessee of that restaurant property will generally have the right to purchase
the restaurant property for the same price, and on the same terms and
conditions, as contained in the offer. In certain cases, the lessee also has a
right to purchase the restaurant property seven to 20 years after commencement
of the lease at a purchase price equal to the greater of (i) the restaurant
property's appraised value at the time of the lessee's purchase, or (ii) a
specified amount, generally equal to the Fund's purchase price of the
restaurant property, plus a predetermined percentage of such purchase price.
Alternatively, a limited number of leases provide for a purchase option price
which is computed pursuant to a formula that looks to various measures of value
contained in an independent appraisal of the restaurant property. The General
Partners negotiated only such formulae that they expected would result in
reasonable approximations of the fair market value of the restaurant property
at the time the option is exercised.
Substitution of Restaurant Properties. Certain leases provide the lessee the
right to offer the substitution of another restaurant property selected by the
lessee and improved with the same restaurant chain approved by the landlord in
the event that the tenant determines in its reasonable business discretion
exercised in good faith that a restaurant property is inadequate or
unprofitable for the purposes for which such restaurant property is used
pursuant to the lease. In that event, the lessee has the right to offer the
Fund the opportunity to exchange the restaurant property for another restaurant
property (the "Substituted Restaurant Property") with a value of not less than
the current value of the original leased restaurant property as determined by
an independent appraisal of both restaurant properties.
Generally, if the Fund approves the substitution, a closing shall take place
within 60 days following the Fund's approval of the substitution. The terms of
the lease for the Substituted Restaurant Property shall generally be identical
to the terms of the lease as the original property, except that the lease term
shall equal the remainder of the term of the original lease. The tenant must
pay all reasonable costs associated with the substitution.
In some cases if the Fund does not approve a proposed substitution, the
tenant has the right to submit alternate restaurant properties to the Fund for
the Fund's approval. If no restaurant properties are accepted by the Fund, the
tenant has the option to purchase the original restaurant property in
accordance with a formula set forth in the lease.
Special Conditions. Certain leases provide that the Fund will not be
permitted to own or operate, directly or indirectly, another restaurant
property of the same or similar type as the leased restaurant property that is
or will be located within a specified distance of the leased restaurant
property.
Insurance, Taxes, Maintenance, and Repairs. Substantially all of the leases
require that the lessee pay all taxes and assessments, maintenance, repair,
utility and insurance costs applicable to the real estate and permanent
improvements. Lessees are required to maintain all restaurant properties in
good order and repair.
C-220
<PAGE>
Lessees generally are required, under the terms of the leases, to maintain,
for the benefit of the Fund and the lessee, casualty insurance in an amount not
less than the full replacement value of the building and other permanent
improvements (or a percent of such value in the case of certain leases, but in
no case less than 90%), as well as liability insurance, generally for
$1,000,000 for each location and event with an umbrella policy of $5,000,000.
All lessees, other than those lessees with a substantial net worth, generally
also are required to obtain "rental value" or "business interruption" insurance
to cover losses due to the occurrence of an insured event for a specified
period, generally six to 12 months. In general, no lease was entered into
unless, in the opinion of the Advisor, the insurance required by the lease
would adequately insure the restaurant property.
The lessees generally are required to maintain the restaurant property and
repair any damage to the restaurant property, except damage occurring during
the last 24 months of the lease term (as extended), which in the opinion of the
lessee renders the restaurant property unsuitable for occupancy, in which case
the lessee will have the right instead to pay the insurance proceeds to the
Fund and terminate the lease.
Joint Venture/Co-Tenancy Arrangements
Certain Funds have entered into joint ventures or co-tenancy arrangements to
own and operate a restaurant property with unaffiliated persons or entities,
either alone or together with another Fund, provided that the Fund, alone or
together with another Fund, acquired a controlling equity interest in such
joint venture or co-tenancy property and possesses the power to direct or cause
the direction of the management and policies of such joint venture or co-
tenancy property.
Under the terms of each joint venture agreement, the Fund and each joint
venture partner are jointly and severally liable for all debts, obligations and
other liabilities of the joint venture. In addition, the General Partners or
their affiliates are entitled to reimbursement, at cost, for actual expenses
incurred by them or their affiliates on behalf of the Fund. Joint ventures
entered into to purchase and hold a restaurant property for investment
generally have an initial term of 15 to 20 years (generally the same term as
the initial term of the lease for the restaurant property in which the joint
venture invests), and, after the expiration of the initial term, will continue
in existence from year to year unless terminated at the option of either joint
venturer or unless terminated by an event of dissolution as specified in the
agreement governing the 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. In addition,
in any joint venture with another Fund, in the event that one party desires to
sell the restaurant property and the other party does not desire to sell,
either party has the right to trigger dissolution of the joint venture by
sending a notice to the other party. The notice will establish the price and
terms for the sale or purchase of the other party's interest in the joint
venture to the other party. The joint venture or partnership agreement grants
the receiving party the right to elect either to purchase the other party's
interest on the terms set forth in the notice or to sell its own interest on
such terms.
Financing
No Fund nor any general partnership or joint venture in which a Fund is a
partner or joint venturer has acquired restaurant properties by incurring
indebtedness. Generally, the partnership agreements governing each Fund do not
permit the Fund to borrow to make investments. Subject to certain restrictions,
however, the Funds may borrow funds but are not permitted to encumber any of
the restaurant properties in connection with any such borrowing. The Funds do
not borrow for the purpose of returning capital to the limited partners or
under arrangements that would make them liable to creditors of a Fund. The
General Partners have limited each Fund's outstanding indebtedness to 3% of the
aggregate adjusted tax basis of its restaurant properties and have endeavored
to structure any borrowing so that it will not constitute "acquisition
indebtedness" for federal income tax purposes. In addition, a Fund may not
incur indebtedness unless it first obtains an opinion of counsel that such
borrowing will not constitute acquisition indebtedness. Notwithstanding the
foregoing, the General Partners or their affiliates are entitled to
reimbursement, at cost, for actual expenses incurred by them on behalf of a
Fund.
C-221
<PAGE>
Sale of Restaurant Properties
The Funds generally hold their restaurant properties until the General
Partners determine either that their sale or other disposition is advantageous
in view of each Fund's investment objectives, or that such objectives will not
be met. Generally, the intention has been to sell each Fund's restaurant
properties within seven to 12 years after their acquisition or as soon
thereafter as market conditions permit. In deciding whether to sell restaurant
properties, the General Partners have considered factors such as potential
capital appreciation, net cash flow and federal income tax considerations. The
terms of certain leases, however, may require a Fund to sell a restaurant
property if the lessee exercises its option to purchase a restaurant property
after a specified portion of the lease term has elapsed. See "-- Description of
Leases -- Right of Lessee to Purchase," above. No Fund has any obligation to
sell all or any portion of a restaurant property at any particular time, except
as may be required under lessee or joint venture purchase options.
In connection with sales of restaurant properties by the Funds, purchase
money security interests may have been taken by the Funds as part payment of
the sales price. The terms of payment are affected by custom in the area in
which the restaurant property is located and by prevailing economic conditions.
When a purchase money security interest is accepted in lieu of cash upon the
sale of a Fund's restaurant property, the Fund continues to have a mortgage on
the restaurant property and the proceeds of the sale will be realized over a
period of years rather than at closing of the sale.
Competition
The competitive environment in which the Funds operate is substantially
similar to that of APF, as described above on page C-52.
C-222
<PAGE>
RISK FACTORS AND BENEFITS TO THE PRINCIPALS
There are various risks involved in the Acquisitions, including those
described below. In addition to the other information included in this
Information Memorandum, you should carefully review the following risk factors.
This Information Memorandum also contains forward-looking statements. Such
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Although APF believes that its expectations reflected in such forward-
looking statements are based on reasonable assumptions, such expectations may
not prove to be correct. Important factors could cause such actual results to
differ materially from the expectations reflected in these forward-looking
statements including those set forth below, as well as general economic,
business and market conditions, changes in federal and local laws and
regulations, costs or difficulties relating to the Acquisitions and related
transactions and increased competitive pressures.
Risks Relating to and Resulting from the Acquisitions
Uncertainty Regarding Trading Prices for the APF Shares. There is no
established trading market for the APF Shares, and it is possible that the APF
Shares will trade at prices substantially below $10.00 per APF Share (which is
the price per share at which the APF Shares have been sold in all three of
APF's public offerings) or the historical per share book value of the assets of
APF.
In addition, the existing APF stockholders have not had an active trading
market in which they could sell their APF shares and any limited partners of
the Funds who become APF stockholders as a result of the Fund Acquisitions will
have transformed their investment in non-tradable Units into an investment in
freely tradable APF shares. Consequently, some of these stockholders may choose
to sell their APF Shares upon Listing at a time when demand for APF Shares is
relatively low. The market price of the APF Shares may be volatile after
Listing, and the APF Shares could trade at amounts substantially less than
$10.00 per APF Share as a result of increased selling activity following
issuance of the APF Shares, the interest level of investors in purchasing the
APF Shares after the Acquisitions and the amount of distributions to be paid by
APF.
Risks Associated with Becoming Self-Advised. Upon completion of APF's
acquisition of the Advisor, APF will become responsible for the first time for
its own day-to-day operations, including raising capital, analyzing
investments, making acquisitions, completing due diligence, managing assets and
accounting services. In addition, APF will acquire the Advisor's restaurant
development capabilities and will therefore bear the risks associated with real
estate development. There can be no assurance that APF will be able to
integrate the advisory and real estate development functions into its business
successfully. APF's overhead, on a consolidated basis, will increase as a
result of being self-administered and of expanding its operations to include
development services. If APF's existing or prospective tenants decide to limit
their expansion plans or elect not to use APF's development services, APF may
not be able to generate sufficient additional revenues to offset the additional
expenses of performing functions formerly performed by the Advisor.
Risks of Default on Mortgage Loans and Market Risks of
Securitizations. Following the CNL Restaurant Business Acquisitions, APF will
perform the lending and securitization activities currently performed by the
CNL Restaurant Financial Services Group. The CNL Restaurant Financial Services
Group has previously securitized one portfolio of mortgage loans by
contributing them to a trust which subsequently issued trust certificates
representing beneficial ownership interests in the pool of mortgage loans. The
CNL Restaurant Financial Services Group ultimately received the net proceeds
paid to the trust from the sale of the trust certificates. Following the
acquisition of the CNL Restaurant Financial Services Group, APF will oversee
those lending and securitization operations. APF's experience with direct
oversight of such mortgage financing is limited and there can be no assurance
that APF will be able to integrate successfully the lending and securitization
operations into its business. Certain additional risks of mortgage lending and
securitization transactions, to which APF will be subject, are discussed below.
C-223
<PAGE>
APF will be subject to certain risks inherent in the business of lending,
such as the risk of default of the borrower or bankruptcy of the borrower. Upon
a default by a borrower, APF may not be able to sell the property securing a
mortgage loan at a price that would enable it to recover the balance of the
defaulted mortgage loan. In addition, the mortgage loans could be subject to
regulation by federal, state and local authorities which could interfere with
APF's administration of the mortgage loans and any collections upon a
borrower's default.
In addition, APF's ability to access securitization markets for mortgage
loans on favorable terms could be adversely affected by a variety of factors,
including adverse market conditions, interest rate fluctuations and adverse
performance of its loan portfolio or servicing responsibilities. If APF is
unable to access securitization markets, it would have to retain as assets
those mortgage loans it would otherwise securitize (thereby remaining exposed
to the related credit and repayment risks on such mortgage loans) and seek a
different source for funding its operations than securitizations.
APF will report gains on sales of mortgage loans in any securitization based
in part on the estimated fair value of the mortgage-related securities retained
by APF. In a securitization, APF would expect to retain a residual-interest
security and retain an interest-only strip security. The fair value of the
residual-interest and interest-only strip security would be the present value
of the estimated net cash flows to be received after considering the effects of
prepayments and credit losses. The capitalized mortgage servicing rights and
mortgage-related securities would be valued using prepayment, default and
interest rate assumptions that APF believes are reasonable. The amount of
revenue recognized upon the sale of loans or loan participations will vary
depending on the assumptions utilized.
APF may have to make adjustments to the amount of revenue it recognizes for
a securitization if the rate of prepayment, rate of default and the estimates
of the future costs of servicing utilized by APF vary from APF's estimates. For
example, APF's gain upon the sale of loans will have been either overstated or
understated if prepayments and/or defaults are greater than or less than
anticipated. In addition, higher levels of future prepayments, and/or increases
in delinquencies or liquidations, would result in a lower valuation of the
mortgage-related securities. These adjustments would adversely affect APF's
earnings in the period in which the adjustment is made. Such adjustments may be
material if APF's estimates are significantly different from actual results.
Risks Involved in Hedging Transactions. The CNL Restaurant Financial
Services Group has invested, and APF will continue to invest, in derivative
financial securities and instruments for the sole purpose of providing
protection against fluctuations in interest rates. From the time that APF's
fixed rate loans are originated until the time that they are sold through a
securitization transaction, APF will hedge against fluctuations in interest
rates through the use of derivative financial instruments. At September 30,
1998, the CNL Restaurant Financial Services Group had outstanding interest rate
swap contracts aggregating $133.6 million in notional amount. Based on
prevailing interest rates, the CNL Restaurant Financial Services Group would
have paid approximately $8.5 million if it had terminated the swap contracts at
September 30, 1998. APF intends to terminate these agreements upon
securitization of the fixed-rate mortgage loans, at which time both the gain or
loss on the securitization and the gain or loss on the hedge will be measured
and recognized.
Conflicts of Interest in the Acquisitions; Substantial Benefit to Related
Parties. There are conflicts of interest inherent in the structure of the
Acquisitions. James M. Seneff, Jr. and Robert A. Bourne, who serve as the
Chairman of the Board of Directors and Chief Executive Officer, and as the Vice
Chairman and Treasurer of APF, respectively, have financial interests in the
CNL Restaurant Businesses and the Funds that may cause their interests to
diverge from those of independent APF stockholders. For a detailed description
of these financial interests, see "-- Benefits to the Principals Resulting from
the Acquisition," below.
In an effort to reduce conflicts of interest, as part of the CNL Restaurant
Business Acquisitions, Mr. Seneff and certain of his affiliates, Mr. Bourne and
certain other executive officers of the Advisor have agreed that, for a period
of three years following the consummation of such acquisitions, they will not
engage in any restaurant property or financing services competitive with the
services that APF will be able to provide as a result of those acquisitions.
C-224
<PAGE>
Risk of Environmental Liabilities. Various federal, state and local laws
subject property owners or operators to liability for the costs of removal or
remediation of certain hazardous substances on a property. Such laws often
impose liability without regard to whether the owner or operator knew of, or
was responsible for, the release of hazardous substances. With respect to the
restaurant properties that APF will acquire if the Fund Acquisitions are
consummated, the presence of, or the failure to properly remediate hazardous
substances may adversely affect the ability of tenants to operate restaurant
chains and may hinder APF's ability to borrow against contaminated properties.
Also, the presence of hazardous waters on a property could result in personal
injury or similar claims by private plaintiffs. The costs of complying with
these environmental laws for the restaurant properties to be acquired from the
Funds may adversely affect APF's operating costs and the value of the
restaurant properties.
The risk of environmental liabilities associated with the restaurant
properties that APF will acquire if the Fund Acquisitions are consummated are
similar to the risks associated with the restaurant properties currently owned
by APF. However, satisfactory Phase I environmental site assessments have been
obtained for all of APF's properties, but Phase I assessments have not been
obtained for certain of the Funds' restaurant properties. APF intends to obtain
Phase I assessments for all such restaurant properties prior to the Closing.
Pursuant to the terms of the Fund Merger Agreements, APF has the right to
refuse to acquire any Fund which has estimated environmental liabilities in
excess of 10% of the value of the APF Share consideration proposed to be paid
to such Fund by APF (based on the assigned value of $10.00 per APF Share).
Dilution of Existing Stockholders in Public Offering. Concurrently with or
shortly after consummation of the Fund Acquisitions, APF intends to engage in
an underwritten public offering of APF Shares, if market conditions permit.
This future sale of APF Shares could adversely affect the market price of the
APF Shares. Based on the number of APF Shares outstanding at January 31, 1999
and assuming APF had acquired the CNL Restaurant Businesses as of that date, if
all of the Funds are acquired by APF, APF will have 147,279,427 APF Shares
outstanding (net of expenses to be paid by the Funds in the form of a reduction
in the number of APF Shares paid to each Fund and assuming no limited partners
of the Funds elect the Cash/Notes Option). Of such outstanding shares,
134,979,427 will be freely tradable in the open market.
Risk that the Acquisitions will Affect APF's Continued Qualification as a
REIT. APF's management believes that it operates in a manner that enables APF
to meet the requirements for qualification as a REIT for federal income tax
purposes. A REIT generally is not taxed at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 95% of its
income to its stockholders annually. In addition, the REIT must meet certain
asset tests at the end of each calendar year. APF has not requested, and does
not plan to request a ruling from the Internal Revenue Service that it
qualifies as a REIT. It has received an opinion, however, from its tax counsel,
Shaw Pittman, that it has met the requirements for qualification as a REIT for
the taxable years ended through 1998 and that it is in a position to continue
such qualification. Shaw Pittman's opinion is based upon representations made
by APF regarding relevant factual matters, upon existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable regulations
issued under the Code and reported administrative and judicial interpretations
of the Code and regulations, upon Shaw Pittman's review of relevant documents
and upon the assumption that APF will operate in the manner described in this
Information Memorandum.
Opinions of counsel are not binding on the Internal Revenue Service or on
any court. Furthermore, the conclusions stated in the opinions are conditioned
on, and APF's continued qualification as a REIT will depend on, APF's
management meeting various requirements.
If APF fails to qualify as a REIT, it would be subject to federal income tax
at regular corporate rates. In addition to these taxes, APF may be subject to
the federal alternative minimum tax and various state income taxes. Unless APF
is entitled to relief under specific statutory provisions, it could not elect
to be taxed as a REIT for four taxable years following the year during which it
was disqualified. Therefore, if APF loses its REIT status, the funds available
for distribution to stockholders would be reduced substantially for each of the
years involved.
C-225
<PAGE>
Benefits to the Principals Resulting from the Acquisitions
The executive officers of APF, including Mr. Seneff and Mr. Bourne, who
serve as the Chairman of the Board of Directors and Chief Executive Officer,
and as the Vice Chairman and Treasurer of APF, respectively, have financial
interests in the Acquisitions that may cause their interests to diverge from
those of independent APF stockholders. Because of their interests in the CNL
Restaurant Businesses and the Funds, Messrs. Seneff and Bourne were excluded
from the Special Committee that reviewed the Strategic Alternatives and
determined that the Acquisitions were in the best interests of APF
stockholders.
As the sole stockholders of CNL Group Inc., the majority stockholder of the
Advisor, Mr. Seneff and his wife will receive as consideration for their
indirect ownership interest in the Advisor 4,905,040 of the 7,600,000 APF
Shares allocated by the Board for the acquisition of the Advisor. Mr. Seneff
will receive an additional 2,518,303 APF Shares as consideration for the
acquisition by APF of his interest in the CNL Restaurant Financial Services
Group based on the allocation by the Board of 4,700,000 APF Shares for the
acquisition of the CNL Restaurant Financial Services Group. In addition, Mr.
Bourne will receive 1,216,000 and 760,216 APF Shares, to be paid by APF as
consideration for his interests in the Advisor and the CNL Restaurant Financial
Services Group, respectively. The benefits that may be realized by Messrs.
Seneff and Bourne as a result of the CNL Restaurant Business Acquisitions are
likely to exceed the benefits that they would derive from the Advisor and the
CNL Restaurant Financial Services Group if such acquisitions do not occur.
As General Partners of the Funds, Messrs. Seneff and Bourne will receive an
estimated aggregate of 273,499 APF Shares in exchange for their general partner
interests if all of the Funds are acquired. In addition, in their capacity as
General Partners, Messrs. Seneff and Bourne are liable for the repayment of the
Funds' obligations and debts, which will be assumed by APF if the Funds are
acquired. As directors of APF, however, Messrs. Seneff and Bourne will instead
have limited liability to APF, its stockholders or third parties.
Following the Acquisitions, Mr. Seneff will continue to serve as the
Chairman of the Board of Directors of APF and Mr. Bourne will continue to serve
as Vice Chairman. As APF directors, they will be entitled to receive
performance-based incentives, including stock options, under AFP's 1999
Performance Incentive Plan or any option, incentive compensation or other
similar plan approved by the stockholders.
C-226
<PAGE>
COMMON STOCK OWNERSHIP AFTER THE ACQUISITIONS
The following table presents certain information regarding beneficial
ownership of the APF Shares by the directors and executive officers of APF,
including the Principals, both as of , 1999 (the "Record Date"), the record
date for determining the beneficial owners of APF Shares entitled to vote on
the approval of the Restated Articles, and on a pro forma basis. On the Record
Date, there were 74,696,927 APF Shares outstanding. The pro forma numbers are
based on the assumption that there will be 147,279,427 APF Shares outstanding
(net of expenses to be paid by the Funds in the form of a reduction in the
number of APF Shares paid to each Fund and assuming no limited partners of the
Funds elect the Cash/Notes Option) following the Acquisitions if all of the
Funds are acquired.
<TABLE>
<CAPTION>
Beneficial Ownership as Beneficial Ownership
of the Record Date Following the Acquisitions
---------------------------------- --------------------------------
Name of Beneficial Owner Number Percent(3) Number Percent(3)
- ------------------------ ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
James M. Seneff, Jr..... 20,000 (1) * 7,580,092 5.1%
Robert A. Bourne........ -- * 2,112,965 1.4
G. Richard Hostetter.... 5,479 (2) * 5,479 *
Richard C. Huseman...... -- * -- *
J. Joseph Kruse......... -- * -- *
All directors and
executive officers as a
group (10 persons)(4).. 25,479 (1)(2) * 10,923,142 7.4%
</TABLE>
- --------
* Less than 1%
(1) Represents shares held by the CNL Group, Inc., of which Mr. Seneff is a
principal stockholder.
(2) Represents shares held by SunTrust Bank of Chattanooga, on behalf of Mr.
Hostetter, in an individual retirement account.
(3) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For each beneficial owner, APF Shares
subject to options or conversion rights exercisable within 60 days of
, 1999 are deemed outstanding.
(4) It is expected that following the CNL Restaurant Business Acquisitions, the
number of executive officers of APF will increase such that the group of
directors and executive officers of APF will consist of 13 persons. Based
on 147,279,427 APF Shares outstanding upon completion of the Acquisitions,
those 13 persons would beneficially own 10,752,608 APF Shares, representing
7.3% of the then outstanding APF Shares. The number and percentage of APF
Shares that will be beneficially owned by the 10 persons who currently are
the directors and executive officers of APF is greater than the number and
percentage of APF Shares that will be beneficially owned by the directors
and executive officers of APF following the Acquisitions due to changes in
the composition of the executive officers that are expected to occur in
connection with the CNL Restaurant Business Acquisitions.
ADDITIONAL INFORMATION
APF stockholders who have more questions about the Acquisitions or would
like to request any additional information should contact D.F. King & Co.,
Inc., the proxy solicitation firm hired by APF to assist in answering
stockholder questions and administering the Special Meeting at the following
address:
D. F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 207-3159
C-227
<PAGE>
Exhibit D-1
[LETTERHEAD OF MERRILL LYNCH]
February 10, 1999
Special Committee of the Board of Directors
CNL American Properties Fund, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Gentlemen:
CNL American Properties Fund, Inc., a Maryland corporation ("APF"), CFC
Acquisition Corp., a Maryland corporation and wholly-owned subsidiary of APF
("Acquisition 1"), CFS Acquisition Corp., a Maryland corporation and a wholly
owned subsidiary of APF ("Acquisition 2"), CNL Financial Corp., a Florida
corporation ("CNL Financial"), CNL Financial Services, Inc., a Florida
corporation ("CNL Services" and, together with CNL Financial, the "CNL
Financial Companies"), CNL Group, Inc., a Florida corporation ("CNL Group"),
and the principal stockholders of the CNL Financial Companies propose to enter
into an Agreement and Plan of Merger (the "Financial Companies Agreement")
pursuant to which the CNL Financial will be merged with Acquisition 1 and CNL
Services will be merged with Acquisition 2 (the "Financial Companies Mergers")
in a transaction in which the outstanding shares of common stock, par value
$1.00 per share, of CNL Financial and CNL Services will be converted into the
right to receive an aggregate of 4,700,000 shares of common stock, par value
$.01 per share, of APF (the "APF Shares"). In addition, APF, CFA Acquisition
Corp., a Maryland corporation and a wholly-owned subsidiary of APF
("Acquisition 3"), CNL Fund Advisors, Inc., a Florida corporation (the "CNL
Advisory Company" and, together with the CNL Financial Companies, the "CNL
Companies"), CNL Group and certain of the principal stockholders of the CNL
Advisory Company propose to enter into an Agreement and Plan of Merger (the
"Advisory Company Agreement" and, together with the Financial Companies
Agreement, the "Agreements") pursuant to which the CNL Advisory Company will be
merged with Acquisition 3 (the "Advisory Company Merger" and, together with the
Financial Companies Mergers, the "Mergers") in a transaction in which the
outstanding shares of the common stock, par value $1.00 per share, of the CNL
Advisory Company will be converted into the right to receive 7,600,000 APF
Shares (such shares, together with APF Shares to be issued in the Financial
Companies Mergers being referred to herein as the "Merger Consideration"). We
understand that the CNL Companies are affiliates of APF.
You have asked us whether, in our opinion, the Merger Consideration to be
issued in the Mergers, when viewed as a single transaction, is fair, from a
financial point of view, to APF.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed certain publicly available business and financial
information relating to the CNL Companies and APF that we deemed to be
relevant;
(2) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the CNL Companies and APF, as well as the amount and timing of
the cost savings and related expenses and synergies expected to result from
the Mergers (the "Expected Synergies"), furnished to us by the CNL
Companies and APF;
(3) conducted discussions with members of senior management and
representatives of the CNL Companies and APF concerning the matters
described in clauses (1) and (2) above, as well as their
D-1-1
<PAGE>
respective businesses and prospects before and after giving effect to the
Mergers and the Expected Synergies;
(4) reviewed valuation multiples for the common stock of the CNL
Companies and the APF Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant as well as
conducted a discounted cash flow analysis of the free cash flows of APF and
of the CNL Companies;
(5) reviewed the results of operations of the CNL Companies and APF and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) compared the proposed financial terms of the Mergers with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) participated in certain discussions among representatives of the CNL
Companies and APF and their financial and legal advisors;
(8) reviewed the potential pro forma impact of the Mergers;
(9) reviewed drafts of the Agreements; and
(10) reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the CNL Companies or APF or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct any physical inspection of the properties or facilities of the CNL
Companies or APF. With respect to the financial forecast information and the
Expected Synergies furnished to or discussed with us by the CNL Companies or
APF, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgment of the CNL Companies' or APF's
management as to the expected future financial performance of the CNL Companies
or APF, as the case may be, and the Expected Synergies. We have further assumed
that the Mergers will qualify as a tax-free reorganization for U.S. federal
income tax purposes. We have also assumed that the final form of each of the
Agreements will be substantially similar to the last draft of each such
Agreement reviewed by us. Our opinion is necessarily based upon market,
economic and other conditions as they exist and can be evaluated on, and on the
information made available to us as of, the date hereof. We have assumed that
in the course of obtaining the necessary consents or approvals (contractual or
otherwise) for the Mergers, no restrictions will be imposed that will have a
material adverse effect on the contemplated benefits of the Mergers. Our
opinion views the Mergers as a single transaction and does not cover either the
Financial Companies Mergers or the Advisory Company Merger as stand-alone
transactions.
We are acting as financial opinion provider to APF in connection with the
Mergers and, upon the rendering this opinion, will receive a fee from APF for
such services. We are also acting as financial opinion provider and rendering a
fairness opinion to APF in connection with certain other proposed mergers of up
to 18 limited partnerships affiliated with APF and the CNL Companies and will
receive a fee from APF for such services. In addition, APF has agreed to
indemnify us for certain liabilities arising out of these engagements.
We are currently engaged by APF to act as underwriter or placement agent in
connection with certain proposed equity financings for APF that may in the
future be undertaken by APF and, if we act in this capacity in connection with
such a financing, we will receive customary compensation for this service as
provided under the terms of such engagement. In addition, we were retained (i)
in June 1998 by APF to act as financial advisor in connection with the review
of certain strategic alternatives considered by APF and (ii) in July 1998 by
the CNL Financial Companies to act as financial advisor and lead placement
agent in connection with the structuring and issuance of certain franchise
loan-backed securities, and have received fees for the rendering of such
services. In addition, in the ordinary course of our business, we may in the
future actively trade APF
D-1-2
<PAGE>
Shares for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities. This opinion
is solely for the use and benefit of the Special Committee of the Board of
Directors of APF in its evaluation of the Mergers and shall not be used for
any other purpose. Our opinion does not address the merits of the underlying
decision by APF to engage in the Mergers. This opinion does not constitute a
recommendation to any shareholder of APF as to how such shareholder should
vote on any matter presented to such shareholder, including any vote with
respect to the authorization of additional shares for issuance by APF, and is
not intended to be relied upon or confer any rights or remedies upon any
employee, creditor, shareholder or other equity holder of APF or any other
party. This opinion shall not be reproduced, disseminated, quoted, summarized
or referred to at any time, in any manner or for any purpose, nor shall any
public references to Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") or any of its affiliates be made by APF or any of its
affiliates, without the prior written consent of Merrill Lynch. We are not
expressing any opinion herein as to the prices at which APF Shares may trade
following the announcement or consummation of the Mergers.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration to be issued in the Mergers,
when viewed together as a single transaction, is fair, from a financial point
of view, to APF.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner & Smith Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
D-1-3
<PAGE>
Exhibit D-2
[LETTERHEAD OF MERRILL LYNCH]
February 10, 1999
Special Committee of the Board of Directors
CNL American Properties Fund, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Gentlemen:
CNL American Properties Fund, Inc., a Maryland corporation ("APF"), CNL APF
Partners, L.P., a Delaware limited partnership (the "Operating Partnership"),
CNL APF GP Corp., a Delaware corporation (the "OP General Partner"), and Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (together with Messrs. Bourne and Seneff, the "General Partners"),
propose to enter into separate Agreements and Plans of Merger (collectively,
the "Agreements") with each of the 18 CNL Income Funds set forth on Schedule A
attached hereto (collectively, the "CNL Income Funds") pursuant to which the
CNL Income Funds will be merged with the Operating Partnership (collectively,
the "Mergers") in a transaction in which the outstanding general and limited
partner interests in the CNL Income Funds (the "Units") will be converted into
the right to receive a maximum of 61,000,000 shares of common stock, par value
$.01 per share, of APF (the "APF Shares") or, at the option of any holder of
limited partner interests who qualifies as a dissenting partner, a combination
of cash and Callable Notes of APF (together with the APF Shares, the "Merger
Consideration") in lieu of such APF Shares. For purposes of our opinion, we
have assumed that all Units will be converted into the right to receive APF
Shares. We understand that the CNL Income Funds are affiliates of APF.
You have asked us whether, in our opinion, the Merger Consideration to be
issued in the Mergers, when viewed as a single transaction, is fair, from a
financial point of view, to APF.
In arriving at the opinion set forth below, we have, among other things:
(1) reviewed certain publicly available business and financial
information relating to the CNL Income Funds and APF that we deemed to be
relevant;
(2) reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the CNL Income Funds and APF, as well as the amount and timing
of the cost savings and related expenses and synergies expected to result
from the Mergers (the "Expected Synergies"), furnished to us by APF and the
General Partners regarding the CNL Income Funds;
(3) reviewed and analyzed the appraisals of the CNL Income Funds
prepared by Valuation Associates, an independent real estate appraisal
firm, as well as conducted an independent summary valuation analysis of the
CNL Income Funds' real estate assets;
(4) conducted discussions with members of senior management and
representatives of the CNL Income Funds, the General Partners and APF
concerning the matters described in clauses (1) and (2) above, as well as
their respective businesses and prospects before and after giving effect to
the Mergers and the Expected Synergies;
(5) reviewed valuation multiples for the APF Shares and compared them
with those of certain publicly traded companies that we deemed to be
relevant as well as conducted a discounted cash flow analysis of the free
cash flows of APF and of the CNL Income Funds' real estate assets.
D-2-1
<PAGE>
(6) reviewed the results of operations of the CNL Income Funds and APF
and compared them with those of certain other comparable entities that we
deemed to be relevant;
(7) compared the proposed financial terms of the Mergers with the
financial terms of certain other transactions that we deemed to be
relevant;
(8) participated in certain discussions among representatives of the CNL
Income Funds, the General Partners and APF and their financial and legal
advisors;
(9) reviewed the potential pro forma impact of the Mergers;
(10) reviewed drafts of the Agreements; and
(11) reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of APF or an appraisal of any of the assets or liabilities of the
CNL Income Funds. In addition, we have not assumed any obligation to conduct
any physical inspection of the properties or facilities of the CNL Income Funds
or APF. With respect to the financial forecast information and the Expected
Synergies furnished to or discussed with us by the CNL Income Funds or APF, we
have assumed that they have been reasonably prepared and reflect the best
currently available estimates and judgment of the General Partners' or APF's
management as to the expected future financial performance of the CNL Income
Funds or APF, as the case may be, and the Expected Synergies. We also have not
assumed any obligation to review the income tax consequences of the Mergers on
the CNL Income Funds or APF or their respective equity holders. We have also
assumed that the final form of each of the Agreements will be substantially
similar to the last draft of each such Agreement reviewed by us. Our opinion is
necessarily based upon market, economic and other conditions as they exist and
can be evaluated on, and on the information made available to us as of, the
date hereof. We have assumed that in the course of obtaining the necessary
consents or approvals (contractual or otherwise) for the Mergers, no
restrictions will be imposed that will have a material adverse effect on the
contemplated benefits of the Mergers. In addition, we have been advised by the
Special Committee, and have assumed for purposes of our opinion, that the
Mergers will occur at the same time. Our opinion views the Mergers as a single
transaction and does not cover any merger of a CNL Income Fund with the
Operating Partnership as a stand-alone transaction.
We are acting as financial opinion provider to APF in connection with the
Mergers and, upon the rendering this opinion, will receive a fee from APF for
such services. We are also acting as financial opinion provider to APF in
connection with certain other proposed mergers of three corporations affiliated
with APF and the CNL Income Funds and will receive a fee from APF for such
services. In addition, APF has agreed to indemnify us for certain liabilities
arising out of these engagements.
We are currently engaged by APF to act as underwriter or placement agent in
connection with certain proposed equity financings for APF that may in the
future be undertaken by APF and, if we act in this capacity in connection with
such a financing, we will receive customary compensation for this service as
provided under the terms of such engagement. In addition, we were retained (i)
in June 1998 by APF to act as financial advisor in connection with the review
of certain strategic alternatives considered by APF and (ii) in July 1998 by
the CNL Financial Corp. and CNL Financial Services, Inc. to act as financial
advisor and lead placement agent in connection with the structuring and
issuance of certain franchise loan-backed securities and have received fees for
the rendering of such services. In addition, in the ordinary course of our
business, we may in the future actively trade APF Shares for our own account
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities. This opinion is solely for the use and
benefit of the Special Committee of the Board of Directors of APF in its
evaluation of the Mergers and shall not be used for any other purpose. Our
opinion does not address the merits of the underlying decision by APF to engage
in the Mergers. This opinion does not constitute a recommendation to any
shareholder of APF as to how such
D-2-2
<PAGE>
shareholder should vote on any matter presented to such shareholder, including
any vote with respect to the authorization of additional shares for issuance
by APF, and is not intended to be relied upon or confer any rights or remedies
upon any employee, creditor, shareholder or other equity holder of APF or any
other party. This opinion shall not be reproduced, disseminated, quoted,
summarized or referred to at any time, in any manner or for any purpose, nor
shall any public references to Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") or any of its affiliates be made by APF or any
of its affiliates, without the prior written consent of Merrill Lynch. We are
not expressing any opinion herein as to the prices at which APF Shares may
trade following the announcement or consummation of the Mergers.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Merger Consideration to be issued in the Mergers,
when viewed together as a single transaction, is fair, from a financial point
of view, to APF.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
D-2-3
<PAGE>
Exhibit E
FORM OF FUND MERGER AGREEMENT
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), , a Florida limited partnership (the "Fund"), and
Robert A. Bourne, James M. Seneff, Jr., and CNL Realty Corporation, a Florida
corporation (together with Messrs. Bourne and Seneff, the "General Partners").
APF, the Operating Partnership, the OP General Partner, the Fund and the
General Partners are referred to collectively herein as the "Parties" and
individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
E-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to fully paid and nonassessable APF Common Shares
( APF Common Shares if the Reverse Split [defined below] occurs before the
Closing) (the "Share Consideration") pursuant to the terms of Section 4.2
below, (ii) shall cease to be outstanding, and (iii) shall be canceled and
retired and shall cease to exist, and each Partner, as the holder of such Fund
Interests shall cease to have any rights with respect thereto, except the right
to receive either (A) APF Common Shares therefor in accordance with this
Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance with
Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $ , based on Valuation Associates' appraisal.
Such consideration shall be payable 10% in cash and 90% in Callable Notes due
in 2006 (the "Notes"). The Notes will bear interest at a fixed rate equal to
120% of the applicable federal rate as of the date the consent solicitation on
Form S-4 is mailed to the limited partners. The Share Consideration shall be
reduced on a one-for-one basis for all APF Shares otherwise distributable to
Dissenting Partners had such Dissenting Partners not elected the Cash/Note
Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the APF Common Shares which may be issued in connection with APF's
acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions and
the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
E-27
<PAGE>
ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
E-28
<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
E-29
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
E-30
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
E-31
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
E-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND , Ltd.
By: CNL Realty Corporation, as
General Partner
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL REALTY CORPORATION
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
/s/ Robert A. Bourne
Robert A. Bourne, as General Partner
/s/ James M. Seneff, Jr.
James M. Seneff, Jr., as General
Partner
E-33
<PAGE>
Exhibit F
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets--As of September 30, 1998 and
December 31, 1997....................................................... F-2
Condensed Consolidated Statements of Earnings--For the Quarters ended
September 30, 1998 and 1997 and for the Nine Months ended September 30,
1998 and 1997........................................................... F-3
Condensed Consolidated Statements of Stockholders Equity--For the Nine
Months ended September 30, 1998 and 1997................................ F-4
Condensed Consolidated Statements of Cash Flows--For the Nine Months
ended September 30, 1998 and 1997....................................... F-5
Notes to Condensed Consolidated Financial Statements--For the Quarters
and Nine Months ended September 30, 1998 and 1997....................... F-6
Report of Independent Accountants........................................ F-16
Consolidated Balance Sheets--As of December 31, 1997 and 1996............ F-17
Consolidated Statements of Earnings--For the Years ended December 31,
1997, 1996 and 1995..................................................... F-18
Consolidated Statements of Stockholders' Equity--For the Years ended
December 31, 1997, 1996 and 1995........................................ F-19
Consolidated Statements of Cash Flows--For the Years ended December 31,
1997, 1996 and 1995..................................................... F-20
Notes to Consolidated Financial Statements--For the Years ended December
31, 1997, 1996 and 1995................................................. F-21
</TABLE>
F-1
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.......................... $298,967,972 $205,338,186
Net investment in direct financing leases.......... 117,028,760 47,613,595
Investment in joint venture........................ 631,374 --
Other investments.................................. 16,200,316 --
Mortgage notes receivable.......................... 18,503,397 17,622,010
Equipment notes receivable......................... 15,020,109 13,548,044
Cash and cash equivalents.......................... 88,666,489 47,586,777
Certificates of deposit............................ 2,007,800 2,008,224
Receivables, less allowance for doubtful accounts
of $314,406 and $99,964, respectively............. 575,104 635,796
Accrued rental income.............................. 3,071,451 1,772,261
Other assets....................................... 5,711,195 2,952,869
------------ ------------
$566,383,967 $339,077,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $ 6,765,575 $ 2,459,043
Accrued construction costs payable................. 3,045,304 10,978,211
Accounts payable and accrued expenses.............. 156,916 1,060,497
Due to related parties............................. 2,552,411 1,524,294
Rents paid in advance.............................. 437,497 517,428
Deferred rental income............................. 1,015,758 557,576
Other payables..................................... 222,580 56,878
------------ ------------
Total liabilities.............................. 14,196,041 17,153,927
------------ ------------
Minority interest.................................. 282,544 285,734
------------ ------------
Commitments (Note 14)
Stockholders' equity:
Preferred stock, without par value. Authorized
and unissued 3,000,000 shares................... -- --
Excess shares, $0.01 par value per share.
Authorized and unissued 78,000,000 shares....... -- --
Common stock, $0.01 par value per share.
Authorized 125,000,000 and 75,000,000 shares,
respectively, issued and outstanding 62,118,679
and 36,192,971, respectively.................... 621,187 361,930
Capital in excess of par value................... 556,830,578 323,525,961
Accumulated distributions in excess of net
earnings........................................ (5,546,383) (2,249,790)
------------ ------------
Total stockholders' equity..................... 551,905,382 321,638,101
------------ ------------
$566,383,967 $339,077,762
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases......... $ 6,310,554 $3,819,866 $17,322,785 $ 7,826,671
Earned income from direct
financing leases......... 2,829,024 851,463 5,624,414 1,809,955
Interest income from
mortgage
notes receivable......... 437,444 437,134 1,301,493 1,252,326
Other interest income..... 1,839,871 419,384 4,775,552 1,347,188
Other income.............. 19,139 9,369 40,866 16,310
----------- ---------- ----------- -----------
11,436,032 5,537,216 29,065,110 12,252,450
----------- ---------- ----------- -----------
Expenses:
General operating and
administrative........... 471,568 183,374 1,443,295 664,585
Professional services..... 30,601 8,655 95,709 53,334
Asset management fees to
related party............ 518,533 234,665 1,248,393 493,921
State and other taxes..... 214,866 65,741 397,569 173,604
Depreciation and
amortization............. 1,044,193 526,207 2,693,020 1,105,611
----------- ---------- ----------- -----------
2,279,761 1,018,642 5,877,986 2,491,055
----------- ---------- ----------- -----------
Earnings Before Minority
Interest in Income of
Consolidated Joint Venture
and Equity in Loss of
Unconsolidated Joint
Venture.................... 9,156,271 4,518,574 23,187,124 9,761,395
Minority Interest in Income
of Consolidated
Joint Venture.............. (7,787) (7,860) (23,167) (23,586)
Equity in Loss of
Unconsolidated Joint
Venture.................... (104) -- (104) --
----------- ---------- ----------- -----------
Net Earnings................ $ 9,148,380 $4,510,714 $23,163,853 $ 9,737,809
=========== ========== =========== ===========
Earnings Per Share of Common
Stock (Basic and Diluted).. $ 0.16 $ 0.18 $ 0.49 $ 0.48
=========== ========== =========== ===========
Weighted Average Number of
Shares of Common Stock
Outstanding................ 56,421,932 25,371,886 47,633,909 20,368,867
=========== ========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and Year Ended December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock distributions
------------------- Capital in in excess
Number Par excess of of net
of Shares Value par value earnings Total
---------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 13,944,715 $139,447 $123,687,929 $ (959,949) $122,867,427
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan..... 22,248,256 222,483 222,260,077 -- 222,482,560
Stock issuance costs... -- -- (22,422,045) -- (22,422,045)
Net earnings........... -- -- -- 15,564,456 15,564,456
Distributions declared
and paid
($0.74 per share)..... -- -- -- (16,854,297) (16,854,297)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1997................... 36,192,971 361,930 323,525,961 (2,249,790) 321,638,101
Subscriptions received
for common stock
through public
offerings and
distribution
reinvestment plan..... 25,925,708 259,257 258,997,822 -- 259,257,079
Stock issuance costs... -- -- (25,693,205) -- (25,693,205)
Net earnings........... -- -- -- 23,163,853 23,163,853
Distributions declared
and paid
($0.57 per share)..... -- -- -- (26,460,446) (26,460,446)
---------- -------- ------------ ------------ ------------
Balance at September 30,
1998................... 62,118,679 $621,187 $556,830,578 $ (5,546,383) $551,905,382
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities....... $ 26,950,631 $ 10,800,147
------------- -------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases........................................ (103,003,646) (106,915,605)
Investment in direct financing leases.......... (73,492,036) (28,977,515)
Proceeds from sale of buildings and equipment
under direct financing leases................. 2,385,941 7,251,511
Investment in joint venture.................... (633,101) --
Increase in other investments.................. (16,083,055) --
Investment in mortgage notes receivable........ (1,090,000) (4,401,982)
Collection on mortgage notes receivable........ 222,879 186,135
Investment in equipment notes receivable....... (3,363,600) --
Collection on equipment notes receivable....... 1,014,484 --
Increase in restricted cash.................... -- (16,014,345)
Increase in other assets....................... (2,705,428) --
------------- -------------
Net cash used in investing activities......... (196,747,562) (148,871,801)
------------- -------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and stock issuance
costs paid by related parties on behalf of the
Company........................................ (3,455,068) (2,244,153)
Proceeds from borrowing on line of credit....... 4,306,532 16,253,399
Payment on line of credit....................... -- (1,784,577)
Subscriptions received from stockholders........ 259,257,079 149,227,795
Distributions to minority interest.............. (25,429) (25,515)
Distributions to stockholders................... (26,460,446) (10,879,969)
Payment of stock issuance costs................. (22,653,996) (13,584,558)
Other........................................... (92,029) (16,101)
------------- -------------
Net cash provided by financing activities..... 210,876,643 136,946,321
------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 41,079,712 (1,125,333)
Cash and Cash Equivalents at Beginning of
Period.......................................... 47,586,777 42,450,088
------------- -------------
Cash and Cash Equivalents at End of Period....... $ 88,666,489 $ 41,324,755
============= =============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition and
stock issuance costs on behalf of the Company
as follows:
Acquisition costs.............................. $ 799,419 $ 428,114
Stock issuance costs........................... 2,941,149 1,794,722
------------- -------------
$ 3,740,568 $ 2,222,836
============= =============
Land and buildings under operating leases
exchanged for land and buildings under operating
leases.......................................... $ 2,754,419 $ --
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Organization and Nature of Business
CNL American Properties Fund, Inc. was organized in Maryland on May 2, 1994.
CNL APF GP Corp. and CNL APF LP Corp., organized in Delaware in May 1998, are
wholly owned subsidiaries of CNL American Properties Fund, Inc. CNL APF
Partners, LP is a Delaware limited partnership formed in May 1998. CNL APF GP
Corp. and CNL APF LP Corp. are the general and limited partners, respectively,
of CNL APF Partners, LP. The term "Company" includes, unless the text otherwise
requires, CNL American Properties Fund, Inc., CNL APF GP Corp., CNL APF LP
Corp. and CNL APF Partners, LP. The Company was formed primarily for the
purpose of acquiring, directly or indirectly through joint venture or co-
tenancy arrangements, restaurant properties (the "Properties") to be leased on
a long-term, triple-net basis to operators of national and regional fast-food,
family-style and casual dining restaurant chains. The Company also provides
financing (the "Mortgage Loans") for the purchase of buildings, generally by
tenants that lease the underlying land from the Company. In addition, the
Company offers furniture, fixtures and equipment financing through leases or
loans (the "Secured Equipment Leases") to operators of restaurant chains.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. The financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. Operating results for the quarter and nine months
ended September 30, 1998, may not be indicative of the results that may be
expected for the year ending December 31, 1998. Amounts as of December 31,
1997, included in the financial statements, have been derived from audited
financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1997.
The Company accounts for its 85.47% interest in CNL/Corral South Joint
Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Company's consolidated joint venture. All significant intercompany balances and
transactions have been eliminated. The Company accounts for its 44.29% interest
in CNL/Lee Vista Joint Venture using the equity method because it shares
control with the other joint venture partner.
The Company determines the appropriate classification of other investments
in certificates at the time of purchase and reevaluates such designation at
each balance sheet date. Other investments have been classified as available-
for-sale and are carried at fair value, with unrealized holding gains and
losses reported as a separate component of stockholders' equity and in the
statement of comprehensive income, as applicable.
Certain items in the prior year's financial statements have been
reclassified to conform with the 1998 presentation. These reclassifications had
no effect on stockholders' equity or net earnings.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires the reporting of net earnings and all other changes to equity during
the period, except those resulting from investments by owners and distributions
to owners, in a separate statement that begins with net earnings. Currently,
the Company's only component of comprehensive income is net earnings.
F-6
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("FASB") reached a consensus in EITF 97-11, entitled
"Accounting for Internal Costs Relating to Real Estate Property Acquisitions."
EITF 97-11 provides that internal costs of identifying and acquiring operating
properties should be expensed as incurred. Due to the fact that the Company
does not have an internal acquisitions function and instead, contracts these
services from an external advisor, the effectiveness of EITF 97-11 had no
material effect on the Company's financial position or results of operations.
In May 1998, the Emerging Issues Task Force of the FASB reached a consensus
in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Company's financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. Management of the Company anticipates that, due to
its limited use of interest rate swaps, the adoption of FAS 133 will not have a
significant effect on the Company's results of operations or its financial
position.
3. Public Offerings
The Company completed its offering of up to 27,500,000 shares of common
stock ($275,000,000) (the "1997 Offering"), which included 2,500,000 shares
($25,000,000) available only to stockholders who elected to participate in the
Company's reinvestment plan, on March 2, 1998. Following the completion of the
1997 Offering, the Company commenced an offering of up to 34,500,000 shares of
common stock ($345,000,000) (the "1998 Offering"). Net proceeds from the 1998
Offering will be invested in additional Properties and Mortgage Loans.
4. Leases
The Company leases its land, buildings and equipment to operators of
national and regional fast-food, family-style and casual dining restaurants.
The leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." For Property leases
classified as direct financing leases, the building portions of the majority of
the leases are accounted for as direct financing leases while the land portions
of the majority of these leases are accounted for as operating leases. The
Company's equipment financing offered pursuant to leases are recorded as direct
financing leases.
5. Land and Buildings on Operating Leases
In April 1998, a tenant exercised its option under the terms of three lease
agreements to exchange three existing Properties for three replacement
Properties which were approved by the Company. In connection therewith, the
Company exchanged three Boston Market Properties with three replacement Boston
Market Properties. Under the exchange agreements for each Property, each
replacement Property will continue under the terms of the leases of the
original Properties. All closing costs were paid by the tenant. The Company
accounted for these transactions as nonmonetary exchanges of similar productive
assets and recorded the acquisitions of the replacement Properties at the net
book value of the original Properties. No gain or loss was recognized due to
these transactions being accounted for as nonmonetary exchanges of similar
assets.
F-7
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the nine months ended September 30, 1998, the Company sold three
Properties to third parties. The Company received net sales proceeds of
approximately $2,386,000 which approximated the carrying value of the
Properties at the time of sale. As a result, no gain or loss was recognized for
financial reporting purposes.
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $151,703,355 $106,616,360
Buildings....................................... 146,495,502 95,518,149
------------ ------------
298,198,857 202,134,509
Less accumulated depreciation................... (5,033,392) (2,395,665)
------------ ------------
293,165,465 199,738,844
Construction in progress........................ 5,802,507 5,599,342
------------ ------------
$298,967,972 $205,338,186
============ ============
</TABLE>
Some leases provide for scheduled rent increases throughout the lease term
and/or rental payments during the construction of a Property prior to the date
it is placed in service. Such amounts are recognized on a straight-line basis
over the terms of the leases commencing on the date the Property is placed in
service. For the nine months ended September 30, 1998 and 1997, the Company
recognized $2,315,968 and $1,259,180, respectively, of such rental income,
$910,185 and $643,153 of which was earned during the quarters ended September
30, 1998 and 1997, respectively.
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases at September 30, 1998:
<TABLE>
<S> <C>
1998............................................................ $ 6,410,842
1999............................................................ 25,832,805
2000............................................................ 25,862,843
2001............................................................ 26,062,291
2002............................................................ 26,822,220
Thereafter...................................................... 386,335,781
------------
$497,326,782
============
</TABLE>
Since leases are renewable 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 rents
which may be received on the leases based on the percentage of the tenant's
gross sales. These amounts do not include minimum lease payments that will
become due when Properties under development are completed (see Note 14).
F-8
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Net Investment in Direct Financing Leases
The following lists the components of the net investment in direct financing
leases at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Minimum lease payments receivable.............. $ 247,230,809 $ 98,121,853
Estimated residual values...................... 44,974,064 6,889,570
Secured Equipment Lease interest receivable.... 72,231 67,614
Less unearned income........................... (175,248,344) (57,465,442)
------------- ------------
Net investment in direct financing leases...... $ 117,028,760 $ 47,613,595
============= ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at September 30, 1998:
<TABLE>
<S> <C>
1998............................................................ $ 3,435,760
1999............................................................ 13,742,634
2000............................................................ 13,937,068
2001............................................................ 13,709,001
2002............................................................ 13,611,870
Thereafter...................................................... 188,794,476
------------
$247,230,809
============
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or contingent rental payments that may become due in future periods
(see Note 5).
7. Investment in Joint Venture
In June 1998, the Company entered into a joint venture arrangement, CNL/Lee
Vista Joint Venture, with a third party to construct and hold one restaurant
property. As of September 30, 1998, the Company had contributed $631,374 to pay
for construction relating to the Property owned by the joint venture. The
Company has agreed to contribute approximately $854,140 in additional
construction costs to the joint venture. When construction is completed, the
Company expects to have an approximate 68 percent interest in the profits and
losses of the joint venture. The Company accounts for its investment in this
joint venture under the equity method because it shares control with the other
joint venture partner.
The following presents the condensed financial information for the joint
venture at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land on operating lease and construction in
progress...................................... $1,870,009 $ --
Cash........................................... 899 --
Receivables.................................... 28,900 --
Liabilities.................................... 648,884 --
Partners' capital.............................. 1,250,924 --
Net loss....................................... (428) --
</TABLE>
For the quarter and nine months ended September 30, 1998, the Company
recognized a loss of $104 for this joint venture. The Property owned by the
joint venture was not operational as of September 30, 1998.
F-9
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Other Investments
In August 1998, the Company acquired an investment in the Class F, Class G,
and Class H Franchise Loan Certificates, Series 1998-1 (collectively, the
"Certificates") from CNL Funding 98-1, LP a mortgage loan securitization entity
sponsored by CNL Financial Corp., ("CFC") an affiliate of CNL Fund Advisors,
Inc. (the "Advisor"). CFC originated and serviced mortgage loans on restaurant
properties comparable to the triple-net leased properties currently owned by
the Company. After originating the mortgage loans, CFC contributed the loans to
CNL Funding 98-1, LP, the securitization entity which subsequently issued the
Certificates representing beneficial ownership interests in the pool of
mortgage loans.
The Company paid an aggregate purchase price of approximately $16,100,000
for the Certificates, representing an expected blended yield of 12.3%. The
Company classified the investments in these Certificates as available for sale.
At September 30, 1998, the estimated fair value of the Certificates
approximated their carrying value; therefore, the Company did not record any
unrealized gains or losses relating to its investment in Certificates. The
investment in Certificates balance at September 30, 1998 includes $117,261 of
accrued interest.
The Company acquired Class F-1, Class G-1, and Class H-1 Certificates with
fixed pass through rates of 8.4% per annum. These Certificates commenced making
payments of interest monthly in September 1998 and are scheduled to make
payments of principal and interest monthly during the period September 2012
through June 2017.
The Company also acquired Class F-2, Class G-2, and Class H-2 Certificates
with adjustable pass through rates of LIBOR (defined as the per annum London
interbank offered rate for 30 day dollar deposits) plus 2.25% per annum (7.918%
at September 30, 1998). These Certificates commenced making payments of
interest monthly in September 1998 and are scheduled to make payments of
principal and interest monthly during the period April 2012 through March 2017.
9. Mortgage Notes Receivable
During the nine months ended September 30, 1998, the Company accepted two
promissory notes in the aggregate principal sum of $1,090,000, collateralized
by mortgages on the buildings of two Taco Bell Properties. The promissory notes
bear interest at a rate of 9.50% per annum and will be collected in consecutive
monthly installments of principal and interest totaling $11,382 beginning
October 1, 1998, with balloon payments due September 1, 2005 for the remaining
unpaid balances.
Mortgage notes receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Outstanding principal............................ $17,529,539 $16,662,418
Accrued interest income.......................... 129,754 118,887
Deferred financing income........................ (82,181) (85,448)
Unamortized loan costs........................... 926,285 926,153
----------- -----------
$18,503,397 $17,622,010
=========== ===========
</TABLE>
Management believes that the estimated fair value of mortgage notes
receivable at September 30, 1998 and December 31, 1997 approximated the
outstanding principal amount based on estimated current rates at which similar
loans would be made to borrowers with similar credit and for similar
maturities.
F-10
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Equipment Notes Receivable
In June 1998, the Company entered into a promissory note with a borrower for
equipment financing for $2,200,000, which is collateralized by restaurant
equipment. The promissory note bears interest at a rate of ten percent per
annum and is being collected in consecutive monthly installments of principal
and interest of $36,523 which commenced July 1, 1998, with a balloon payment
due December 15, 1998 for the remaining unpaid balance.
In September 1998, the Company entered into two promissory notes with a
borrower for equipment financing for a total of $460,000, which are
collateralized by restaurant equipment. The two promissory notes bear interest
at a rate of ten percent per annum and will be collected in consecutive monthly
installments of principal and interest totaling $7,636 beginning on October 1,
1998 for one promissory note and November 1, 1998, for the other promissory
note, with balloon payments due September 1, 2003 and October 1, 2005,
respectively, for the remaining unpaid balances.
Equipment notes receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Outstanding principal............................. $14,870,516 $13,225,000
Accrued interest income........................... 149,593 323,044
----------- -----------
$15,020,109 $13,548,044
=========== ===========
</TABLE>
Management believes that the estimated fair value of equipment notes
receivable at September 30, 1998 and December 31, 1997 approximated the
outstanding principal amount based on estimated current rates at which similar
loans would be made to borrowers with similar credit and for similar
maturities.
11. Stock Issuance Costs
The Company has incurred certain expenses in connection with the public
offerings of its shares of common stock, including commissions, marketing
support and due diligence expense reimbursement fees, filing fees, legal,
accounting, printing and escrow fees, which have been deducted from the gross
proceeds of the offerings. The Advisor has agreed to pay all organizational and
offering expenses (excluding commissions and marketing support and due
diligence expense reimbursement fees) which exceed three percent of the gross
offering proceeds received from the current offering of shares of common stock
of the Company.
During the nine months ended September 30, 1998 and the year ended December
31, 1997, the Company incurred $25,693,205 and $22,422,045, respectively, in
stock issuance costs, including $20,740,566 and $17,798,605, respectively, in
commissions and marketing support and due diligence expense reimbursement fees
(see Note 13). The stock issuance costs have been charged to stockholders'
equity subject to the three percent cap described above.
12. Distributions
For the nine months ended September 30, 1998 and 1997, approximately 86 and
92 percent, respectively, of the distributions paid to stockholders were
considered ordinary income and approximately 14 and eight percent,
respectively, were considered a return of capital to stockholders for federal
income tax purposes. No amounts distributed to the stockholders for the nine
months ended September 30, 1998 and 1997 are required to be or have been
treated by the Company as a return of capital for purposes of calculating the
stockholders' return on their invested capital. The characterization for tax
purposes of distributions declared for the nine months ended September 30, 1998
may not be indicative of the results that may be expected for the year ending
December 31, 1998.
F-11
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Related Party Transactions
During the nine months ended September 30, 1998 and 1997, the Company
incurred $19,444,281 and $11,192,085, respectively, in selling commissions due
to CNL Securities Corp. for services in connection with the offering of shares.
A substantial portion of these amounts ($18,148,849 and $10,427,281) were paid
by CNL Securities Corp. as commissions to other broker-dealers, during the nine
months ended September 30, 1998 and 1997, respectively.
In addition, CNL Securities Corp. is entitled to receive a marketing support
and due diligence expense reimbursement fee equal to 0.5% of the total amount
raised from the sale of shares, a portion of which may be reallowed to other
broker-dealers. During the nine months ended September 30, 1998 and 1997, the
Company incurred $1,296,285 and $746,139, respectively, of such fees, the
majority of which was re-allowed to other broker-dealers and from which all
bona fide due diligence expenses were paid.
The Advisor is entitled to receive acquisition fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of these Properties and structuring the terms of the Mortgage Loans
equal to 4.5% of the total amount raised from the sale of shares. During the
nine months ended September 30, 1998 and 1997, the Company incurred $11,666,569
and $6,715,251, respectively, of such fees. Such fees are included in land and
buildings on operating leases, net investment in direct financing leases,
mortgage notes receivable, investment in joint venture and other assets.
In connection with the acquisition of Properties that are being or have been
constructed or renovated by affiliates, subject to approval by the Company's
Board of Directors, the Company may incur development or construction
management fees payable to affiliates of the Company. Such fees are included in
the purchase price of the Properties and are therefore included in the basis on
which the Company charges rent on the Properties. During the nine months ended
September 30, 1998 and 1997, the Company incurred $166,876 and $369,570,
respectively, of such fees relating to five and six Properties, respectively.
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor is entitled to receive a one-time Secured
Equipment Lease servicing fee of two percent of the purchase price of the
equipment that is the subject of a Secured Equipment Lease. During the nine
months ended September 30, 1998 and 1997, the Company incurred $22,426 and
$90,592, respectively, in Secured Equipment Lease servicing fees.
The Company and the Advisor have entered into an advisory agreement pursuant
to which the Advisor will receive a monthly asset management fee of one-twelfth
of 0.60% of the Company's real estate asset value and the outstanding principal
balance of the Mortgage Loans as of the end of the preceding month. 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 Advisor. 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 Advisor shall
determine. During the nine months ended September 30, 1998 and 1997, the
Company incurred $1,289,877 and $558,319, respectively, of such fees, of which
$41,484 and $64,398, respectively, was capitalized as part of the cost of the
buildings for Properties under construction.
In August 1998, the Company acquired an investment of approximately
$16,100,000 in Certificates from CFC, as described in Note 8.
The Advisor and its affiliates provide various administrative services to
the Company, including services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; stockholder
distributions and reporting; due diligence and marketing; and investor
relations (including
F-12
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
administrative services in connection with the offering of shares), on a day-
to-day basis. The expenses incurred for these services were classified as
follows for the nine months ended September 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Stock issuance costs.................................. $2,069,626 $1,259,411
General operating and administrative expenses......... 773,806 389,806
---------- ----------
$2,843,432 $1,649,217
========== ==========
</TABLE>
For each of the nine months ended September 30, 1998 and 1997, the Company
acquired two Properties for approximately $3,977,000 and $1,773,300,
respectively, from affiliates of the Company. The Properties were acquired at a
cost no greater than the lesser of the cost of each Property to the affiliate,
including its carrying costs, or the Property's appraised value.
The due to related parties consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Due to the Advisor:
Expenditures incurred on behalf of the Company
and accounting and administrative services... $ 578,362 $ 126,205
Acquisition fees.............................. 939,339 386,972
---------- ----------
1,517,701 513,177
---------- ----------
Due to CNL Securities Corp:
Commissions................................... 968,975 940,520
Marketing support and due diligence expense
reimbursement fees........................... 65,735 63,097
---------- ----------
1,034,710 1,003,617
---------- ----------
Due to other affiliates......................... -- 7,500
---------- ----------
$2,552,411 $1,524,294
========== ==========
</TABLE>
14. Commitments
The Company has entered into various development agreements with tenants
which provide terms and specifications for the construction or renovation of
buildings the tenants have agreed to lease. The agreements provide a maximum
amount of development costs (including the purchase price of the land and
closing costs) to be paid by the Company. The aggregate maximum development
costs the Company has agreed to pay are approximately $20,245,000, of which
approximately $13,104,000 in land and other costs had been incurred as of
September 30, 1998. The buildings currently under construction or renovation
are expected to be operational by March 1999. In connection with the purchase
of each Property, the Company, as lessor, has entered into a long-term lease
agreement.
15. Subsequent Events
On October 13, 1998, the Board of Directors elected to terminate the
Company's reinvestment plan. The Board of Directors based this decision on (i)
the fact that the Company may issue shares under the reinvestment plan only
pursuant to an effective registration statement, (ii) the likelihood that the
1998 Offering will be completed prior to the next distribution date of the
Company and (iii) a determination that it is not in
F-13
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the best interest of the Company at this time to obtain the effectiveness of a
registration statement relating solely to the issuance of shares pursuant to
the reinvestment plan.
The Board of Directors may determine to reinstate the reinvestment plan in
the future subject to obtaining the effectiveness of a registration statement
relating solely to the issuance of shares pursuant to the reinvestment plan.
The shares offered and previously reserved for issuance pursuant to the
reinvestment plan will be available for sale to the public through the 1998
Offering.
The Board of Directors also elected to implement the Company's redemption
plan. Under the redemption plan, the Company may elect to redeem shares,
subject to the conditions and limitations described in the Company's prospectus
(the "Prospectus") as modified by the description below.
At any time, including any time during which the Company is engaged in a
public offering, and prior to such time, if any, as Listing occurs, any
stockholder who purchases shares in the Company's offering or otherwise from
the Company, may present all or any portion equal to at least 25% of such
stockholder's shares to the Company for redemption, in accordance with the
procedures outlined in the Prospectus. At such time, the Company may, at its
option, use up to the full amount of proceeds, if any, from the sale of shares
under the reinvestment plan attributable to a calendar quarter to redeem shares
presented for redemption during such quarter. In addition, the Company may, at
its option, use up to $100,000 per calendar quarter of the proceeds of any
public offering of its shares to redeem shares. Any amount of offering proceeds
which is available for redemptions, but which is unused, may be carried over to
the next succeeding calendar quarter for use in addition to the amount of
offering proceeds and the full amount of proceeds from the sale of shares under
the reinvestment plan that would otherwise be available for redemptions. At no
time during a 12-month period, however, may the number of shares redeemed by
the Company exceed 5% of the number of shares of the Company's outstanding
common stock at the beginning of such 12-month period, even if the amount of
offering proceeds and proceeds from the sale of shares under the reinvestment
plan that would otherwise be available for redemptions would allow the Company
to redeem a greater number of shares.
In addition, the Board of Directors approved an amendment to the advisory
agreement providing for the payment of acquisition fees to the Advisor for
acquisitions made by the Company after the completion of the 1998 Offering and
the investment of all of the proceeds received by the Company from the 1998
Offering (the "Offering Completion Date"). After the Offering Completion Date,
the Company intends to continue to expand its Property portfolio by acquiring
additional Properties using funds from its line of credit. Under the previous
advisory agreement, the Advisor had no incentive to continue providing
acquisition services after the Offering Completion Date because acquisition
fees were limited to 4.5% of the gross proceeds raised by the Company from
equity offerings of the Company. The Advisor has not been paid an acquisition
fee for Properties acquired by the Company using funds from the line of credit,
and will not be paid an acquisition fee for Properties so acquired prior to the
Offering Completion Date, because it is expected that a portion of the proceeds
raised by the Company in the 1998 Offering (on which the Advisor will already
have received an acquisition fee) will be used to repay advances under the line
of credit used to acquire Properties prior to the Offering Completion Date.
In order to provide incentive to the Advisor to continue providing
acquisition services after the Offering Completion Date, the Board of Directors
deemed it to be in the best interests of the Company that the Company pay the
Advisor an acquisition fee, in connection with Properties acquired after the
Offering Completion Date, equal to 4.5% of the purchase price paid by the
Company. The Board of Directors believes that paying acquisition fees after the
Offering Completion Date will permit the Company to continue to benefit
F-14
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from the Advisor's acquisition expertise and more effectively enhance
stockholder value through the continued expansion of the Company's Property
portfolio.
During the period October 1, 1998 through November 2, 1998, the Company
received subscription proceeds for an additional 5,876,665 shares ($58,766,648)
of common stock.
On October 1, 1998 and November 1, 1998, the Company declared distributions
of $4,015,395 and $4,303,336, respectively, or $0.06354 per share of common
stock, payable in December 1998 to stockholders of record on October 1, 1998
and November 1, 1998, respectively.
During the period October 1, 1998 through November 2, 1998, the Company
acquired five Properties (one of which is under construction) for cash at a
total cost of approximately $3,439,000. In connection with the purchase of each
of the five Properties, the Company, as lessor, entered into a long-term lease
agreement. The building under construction is expected to be operational by
April 1999.
F-15
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL American Properties Fund, Inc.
We have audited the accompanying consolidated balance sheets of CNL American
Properties Fund, Inc. (a Maryland corporation) and its subsidiary as of
December 31, 1997 and 1996, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CNL American
Properties Fund, Inc. and its subsidiary as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 22, 1998
F-16
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases less
accumulated depreciation.......................... $205,338,186 $ 60,243,146
Net investment in direct financing leases.......... 47,613,595 15,204,972
Cash and cash equivalents.......................... 47,586,777 42,450,088
Certificates of deposit............................ 2,008,224 --
Receivables, less allowance for doubtful accounts
of $99,964 and $2,857............................. 635,796 142,389
Notes receivable................................... 13,548,044 --
Mortgage notes receivable.......................... 17,622,010 13,389,607
Accrued rental income.............................. 1,772,261 422,076
Intangibles and other assets....................... 2,952,869 2,972,770
------------ ------------
$339,077,762 $134,825,048
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $ 2,459,043 $ 3,521,816
Accrued construction costs payable................. 10,978,211 6,587,573
Accounts payable and other accrued expenses........ 1,060,497 79,817
Due to related parties............................. 1,524,294 997,084
Rents paid in advance.............................. 517,428 118,900
Deferred rental income............................. 557,576 335,849
Other payables..................................... 56,878 28,281
------------ ------------
Total liabilities.............................. 17,153,927 11,669,320
------------ ------------
Minority interest.................................. 285,734 288,301
------------ ------------
Commitments (Note 13)
Stockholders' equity:
Preferred stock, without par value. Authorized
and unissued 3,000,000 shares................... -- --
Excess shares, $0.01 par value per share.
Authorized and unissued 78,000,000 and
23,000,000 shares, respectively................. -- --
Common stock, $0.01 par value per share.
Authorized 75,000,000 and 20,000,000 shares,
respectively, issued and outstanding 36,192,971
and 13,944,715, respectively.................... 361,930 139,447
Capital in excess of par value..................... 323,525,961 123,687,929
Accumulated distributions in excess of net
earnings.......................................... (2,249,790) (959,949)
------------ ------------
Total stockholders' equity..................... 321,638,101 122,867,427
------------ ------------
$339,077,762 $134,825,048
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $12,457,200 $3,731,806 $ 510,841
Earned income from direct financing
leases................................. 3,033,415 625,492 28,935
Interest income from mortgage notes
receivable............................. 1,687,456 1,069,349 --
Other interest income................... 2,254,375 773,404 118,859
Other income............................ 25,487 6,633 496
----------- ---------- ---------
19,457,933 6,206,684 659,131
----------- ---------- ---------
Expenses:
General operating and administrative.... 944,763 542,564 134,759
Professional services................... 65,962 58,976 8,119
Asset and mortgage management fees to
related party.......................... 804,879 251,200 23,078
State taxes............................. 251,358 56,184 20,189
Depreciation and amortization........... 1,795,062 521,871 104,131
----------- ---------- ---------
3,862,024 1,430,795 290,276
----------- ---------- ---------
Earnings before minority interest in
income of consolidated joint venture..... 15,595,909 4,775,889 368,855
Minority Interest in Income of
Consolidated Joint Venture............... (31,453) (29,927) (76)
----------- ---------- ---------
Net Earnings.............................. $15,564,456 $4,745,962 $ 368,779
=========== ========== =========
Earnings Per Share of Common Stock (Basic
and Diluted)............................. $ 0.66 $ 0.59 $ 0.19
=========== ========== =========
Weighted Average Number of Shares of
Common Stock Outstanding................. 23,423,868 8,071,670 1,898,350
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common stock
-------------------- Capital in Accumulated
Number of excess of par distributions in
shares Par value value excess of net earnings Total
---------- --------- ------------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 20,000 $ 200 $ 199,800 $ -- $ 200,000
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan..... 3,845,416 38,454 38,415,704 -- 38,454,158
Stock issuance costs... -- -- (6,403,671) -- (6,403,671)
Net earnings........... -- -- -- 368,779 368,779
Distributions declared
($0.31 per share)..... -- -- -- (638,618) (638,618)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1995................... 3,865,416 38,654 32,211,833 (269,839) 31,980,648
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan..... 10,079,299 100,793 100,692,198 -- 100,792,991
Stock issuance costs... -- -- (9,216,102) -- (9,216,102)
Net earnings........... -- -- -- 4,745,962 4,745,962
Distributions declared
($0.71 per share)..... -- -- -- (5,436,072) (5,436,072)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1996................... 13,944,715 139,447 123,687,929 (959,949) 122,867,427
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan..... 22,248,256 222,483 222,260,077 -- 222,482,560
Stock issuance costs... -- -- (22,422,045) -- (22,422,045)
Net earnings........... -- -- -- 15,564,456 15,564,456
Distributions declared
($0.74 per share)..... -- -- -- (16,854,297) (16,854,297)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1997.................. 36,192,971 $361,930 $323,525,961 $ (2,249,790) $321,638,101
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating
Activities:
Cash received from tenants......... $ 15,440,803 $ 4,543,506 $ 492,488
Cash paid for expenses............. (1,903,876) (928,001) (113,384)
Interest received.................. 3,539,287 1,867,035 119,355
------------- ------------ ------------
Net cash provided by operating
activities........................ 17,076,214 5,482,540 498,459
------------- ------------ ------------
Cash Flows From Investing
Activities:
Additions to land and buildings on
operating leases.................. (143,542,667) (36,104,148) (18,835,969)
Increase in net investment in
direct financing leases........... (39,155,974) (13,372,621) (1,364,960)
Proceeds from sale of buildings and
equipment under direct financing
leases............................ 7,251,510 -- --
Investment in certificates of
deposit........................... (2,000,000) -- --
Investment in notes receivable..... (12,521,401) -- --
Investment in mortgage notes
receivable........................ (4,401,982) (13,547,264) --
Collections on mortgage notes
receivable........................ 250,732 133,850 --
Increase in intangibles and other
assets............................ -- (1,103,896) (628,142)
------------- ------------ ------------
Net cash used in investing
activities........................ (194,119,782) (63,994,079) (20,829,071)
------------- ------------ ------------
Cash Flows From Financing
Activities:
Reimbursement of acquisition,
organization, deferred offering
and stock issuance costs paid by
related parties on behalf of the
Company........................... (2,857,352) (939,798) (2,500,056)
Proceeds from borrowing on line of
credit............................ 19,721,804 3,666,896 --
Payment on line of credit.......... (20,784,577) (145,080) --
Contribution from minority interest
of consolidated joint venture..... -- 97,419 200,000
Subscriptions received from
stockholders...................... 222,482,560 100,792,991 38,454,158
Distributions to minority
interest.......................... (34,020) (39,121) --
Distributions to stockholders...... (16,854,297) (5,439,404) (635,286)
Payment of stock issuance costs.... (19,542,862) (8,486,188) (3,680,704)
Other.............................. 49,001 (54,533) --
------------- ------------ ------------
Net cash provided by financing
activities........................ 182,180,257 89,453,182 31,838,112
------------- ------------ ------------
Net Increase in Cash and Cash
Equivalents........................ 5,136,689 30,941,643 11,507,500
Cash and Cash Equivalents at
Beginning of Year.................. 42,450,088 11,508,445 945
------------- ------------ ------------
Cash and Cash Equivalents at End of
Year............................... $ 47,586,777 $ 42,450,088 $ 11,508,445
============= ============ ============
Reconciliation of Net Earnings to
Net Cash Provided by Operating
Activities
Net earnings........................ $ 15,564,456 $ 4,745,962 $ 368,779
------------- ------------ ------------
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation....................... 1,784,268 511,078 100,318
Amortization....................... 10,794 69,886 3,813
Increase in receivables............ (905,339) (160,984) (44,749)
Decrease in net investment in
direct financing leases........... 1,130,095 259,740 1,078
Increase in accrued rental income.. (1,350,185) (382,934) (39,142)
Increase in intangibles and other
assets............................ (6,869) (4,293) (8,090)
Increase (decrease) in accounts
payable and other accrued
expenses.......................... 153,223 (2,896) 38,461
Increase (decrease) in due to
related parties, excluding
reimbursement of acquisition,
organization, deferred offering
and stock issuance costs paid on
behalf of the Company............. 15,466 (30,929) 42,868
Increase in rents paid in advance.. 398,528 93,549 25,351
Increase in deferred rental
income............................ 221,727 335,849 --
Increase in other payables......... 28,597 18,585 9,696
Increase in minority interest...... 31,453 29,927 76
------------- ------------ ------------
Total adjustments................. 1,511,758 736,578 129,680
------------- ------------ ------------
Net Cash Provided by Operating
Activities......................... $ 17,076,214 $ 5,482,540 $ 498,459
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, organization, deferred
offering and stock issuance costs
on behalf of the Company as
follows:
Acquisition costs.................. $ 514,908 $ 206,103 $ 131,629
Organization costs................. -- -- 20,000
Deferred offering costs............ -- 466,405 --
Stock issuance costs............... 2,351,244 338,212 2,084,145
------------- ------------ ------------
$ 2,866,152 $ 1,010,720 $ 2,235,774
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL American Properties Fund, Inc. (the
"Company") was organized in Maryland on May 2, 1994, primarily for the purpose
of acquiring, directly or indirectly through joint venture or co-tenancy
arrangements, restaurant properties (the "Properties") to be leased on a long-
term, triple-net basis to operators of certain national and regional fast-food,
family-style and casual dining restaurant chains. The Company also provides
financing (the "Mortgage Loans") for the purchase of buildings, generally by
tenants that lease the underlying land from the Company. In addition, the
Company offers furniture, fixtures and equipment financing through leases or
loans ("Secured Equipment Leases") to operators of restaurant chains.
The Company was a development stage enterprise from May 2, 1994 through June
1, 1995. Since operations had not begun, activities through June 1, 1995, were
devoted to organization of the Company.
Principles of Consolidation--The Company accounts for its 85.47% interest in
CNL/Corral South Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Company's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
Real Estate and Lease Accounting--The Company records the acquisition of
land, buildings and equipment at cost, including acquisition and closing costs.
In addition, interest costs incurred during construction are capitalized in
accordance with accounting standards. 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. In addition, the Company
offers equipment financing through leases or loans. The Property leases are
accounted for using either the direct financing or the operating method. The
Secured Equipment Leases are accounted for using the direct financing method.
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
5). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the Company'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 (including rental payments, if any,
required during the construction of a Property) 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. In contrast, deferred rental income represents the aggregate
amount of scheduled rental payments to date (including rental payments due
during construction and prior to the Property being placed in service) in
excess of income recognized on a straight-line basis over the lease term
commencing on the date the Property is placed in service.
When the Properties or equipment are sold, the related cost and
accumulated depreciation for operating leases and the net investment for
direct financing leases, plus any accrued rental income or deferred rental
income, will be removed from the accounts and any gains or losses from
sales will be reflected in income. Management reviews its Properties for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through operations.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management determines 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.
Mortgage Loans--The Company accounts for loan origination fees and costs
incurred in connection with Mortgage Loans in accordance with Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases". This statement requires the deferral of loan origination
fees and the capitalization of direct loan costs. The costs capitalized,
net of the fees deferred, are amortized to interest income as an adjustment
of yield over the life of the loans. The unpaid principal and accrued
interest on the Mortgage Loans, plus the unamortized balance of such fees
and costs are included in mortgage notes receivable (see Note 7).
Cash and Cash Equivalents--The Company 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, money market funds (some of which are backed by
government securities) and certificates of deposit (with maturities of
three months or less when purchased). Cash equivalents are stated at cost
plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks, money market funds and certificates of deposit may exceed
federally insured levels; however, the Company has not experienced any
losses in such accounts. The Company limits investment of temporary cash
investments to financial institutions with high credit standing; therefore,
management believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Organization Costs--Organization costs are amortized over five years
using the straight-line method and are included in intangibles and other
assets. For the years ended December 31, 1997 and 1996, accumulated
amortization of $10,318 and $6,318, respectively, was recorded.
Loan Costs--Loan costs incurred in connection with the Company's
$35,000,000 line of credit have been capitalized and are being amortized
over the term of the loan commitment using the effective interest method.
Income or expense associated with interest rate swap agreements related to
the line of credit is recognized on the accrual basis as earned or incurred
through an adjustment to interest expense. Loan costs are included in
intangibles and other assets. As of December 31, 1997 and 1996, the Company
had aggregate gross loan costs of $100,634 and $54,533, respectively. For
the years ended December 31, 1997 and 1996, accumulated amortization of
$61,783 and $22,034, respectively, was recorded.
Income Taxes--The Company has made an election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal corporate income taxes on
amounts distributed to stockholders, providing it distributes at least 95
percent of its REIT taxable income and meets certain other requirements for
qualifying as a REIT. Accordingly, no provision for federal income taxes
has been made in the accompanying consolidated financial statements.
Notwithstanding the Company's qualification for taxation as a REIT, the
Company is subject to certain state taxes on its income and property.
Earnings Per Share--Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during the
reporting period. The Company does not have any dilutive potential common
shares.
Use of Estimates--Management of the Company has 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. Actual results could differ from those estimates.
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform with the 1997 presentation. These
reclassifications had no effect on stockholders' equity or net earnings.
New Accounting Standards--In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". The statement, which is effective for fiscal years ending
after December 15, 1997, provides for a revised computation of earnings per
share (see Earnings Per Share). Adoption of this standard had no material
effect on the Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure". The statement, which is effective for fiscal years ending
after December 15, 1997, provides for disclosure of the Company's capital
structure. At this time, the Company's Board of Directors has not determined
the relative rights, preferences, and privileges of each class or series of
preferred stock authorized. Since the Company has not issued preferred shares,
the disclosures to this standard are not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income". The
statement, which is effective for fiscal years beginning after December 15,
1997, requires the reporting of net earnings and all other changes to equity
during the period, except those resulting from investments by owners and
distributions to owners, in a separate statement that begins with net earnings.
Currently, the Company's only component of comprehensive income is its net
earnings. The Company does not believe that adoption of this standard will have
a material effect on the Company's financial position or results of operations.
2. Public Offering
The Company has a currently effective registration statement on Form S-11
with the Securities and Exchange Commission for the sale of 27,500,000 shares
($275,000,000) of common stock (the "1997 Offering"). Of the 27,500,000 shares
of common stock, the Company has registered, 2,500,000 shares ($25,000,000) are
available only to stockholders who elect to participate in the Company's
reinvestment plan. The Company has adopted a reinvestment plan pursuant to
which stockholders may elect to have the full amount of their cash
distributions from the Company reinvested in additional shares of common stock
of the Company. Prior to the 1997 Offering, the Company received proceeds from
its initial offering (the "Initial Offering"), of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the Company's
reinvestment plan. As of December 31, 1997, the Company had received aggregate
subscription proceeds from its Initial Offering and 1997 Offering of
$361,729,709 (36,172,971 shares), including $2,464,413 (246,441 shares) issued
through the reinvestment plan.
On October 10, 1997, the Company filed a registration statement with the
Securities and Exchange Commission in connection with the proposed sale by the
Company of up to 34,500,000 shares of common stock (the "1998 Offering") in an
offering expected to commence immediately following the completion of the
Company's 1997 Offering. Of the 34,500,000 shares of common stock to be
offered, 2,000,000 will be available only to stockholders purchasing shares
through the reinvestment plan. The price per share and the other terms of the
1998 Offering, including the percentage of gross proceeds payable to the
managing dealer for selling commissions and expenses in connection with the
offering, payable to the advisor for acquisition fees and acquisition expenses
and reimbursable to the advisor for offering expenses, will be the same as
those for the Company's 1997 Offering. Net proceeds from the 1998 Offering will
be invested in additional Properties and Mortgage Loans.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Leases
The Company leases its land, buildings and equipment to operators of
national and regional fast-food, family-style and casual dining restaurants.
The leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases". For Property leases
classified as direct financing leases, the building portions of the majority of
the leases are accounted for as direct financing leases while the land portions
of these leases are accounted for as operating leases. Substantially all
Property leases have initial terms of 15 to 20 years (expiring between 2006 and
2017) and provide for minimum rentals. In addition, the majority of the
Property leases provide for contingent rentals and/or scheduled rent increases
over the terms of the leases. Each tenant also pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options for the Property leases generally allow
tenants to renew the leases for two to four 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 the greater of the Company's
purchase price plus a specified percentage of such purchase price or fair
market value after a specified portion of the lease has elapsed.
The Secured Equipment Leases recorded as direct financing leases as of
December 31, 1997 provide for minimum rentals payable monthly and have lease
terms ranging from four to seven years. The Secured Equipment Leases generally
include an option for the lessee to acquire the equipment at the end of the
lease term for a nominal fee.
4. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Land.............................................. $106,616,360 $33,850,436
Buildings......................................... 95,518,149 24,152,610
------------ -----------
202,134,509 58,003,046
Less accumulated depreciation..................... (2,395,665) (611,396)
------------ -----------
199,738,844 57,391,650
Construction in progress.......................... 5,599,342 2,851,496
------------ -----------
$205,338,186 $60,243,146
============ ===========
</TABLE>
Some leases provide for scheduled rent increases throughout the lease term
and/or rental payments during the construction of a Property prior to the date
it is placed in service. Such amounts are recognized on a straight-line basis
over the terms of the leases commencing on the date the Property is placed in
service. For the years ended December 31, 1997, 1996 and 1995, the Company
recognized $1,941,054, $517,067 and $39,142, respectively, of such rental
income.
During 1997, the Company sold five of its Properties and the equipment
relating to two Secured Equipment Leases to tenants. The Company received net
proceeds of approximately $7,252,000, which were equal to the carrying value of
the Properties and the net investment in the direct financing leases for the
equipment at the time of the sales. As a result, no gain or loss was recognized
for financial reporting purposes. The Company used the net sales proceeds
relating to the sale of the equipment to repay amounts previously advanced
under its line of credit (see Note 8). The Company reinvested the proceeds from
the sale of Properties in additional Properties.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 18,891,310
1999............................................................ 18,931,518
2000............................................................ 18,960,643
2001............................................................ 19,187,537
2002............................................................ 19,982,822
Thereafter...................................................... 265,518,312
------------
$361,472,142
============
</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. These amounts also do not include minimum lease
payments that will become due when Properties under development are completed
(see Note 13).
5. Net Investment in Direct Financing Leases
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable................ $ 98,121,853 $ 30,162,465
Estimated residual values........................ 6,889,570 1,346,332
Secured equipment lease interest receivable...... 67,614 18,286
Less unearned income............................. (57,465,442) (16,322,111)
------------ ------------
Net investment in direct financing leases........ $ 47,613,595 $ 15,204,972
============ ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. 6,820,081
1999............................................................. 6,820,081
2000............................................................. 6,872,134
2001............................................................. 6,644,067
2002............................................................. 6,546,936
Thereafter....................................................... 64,418,554
-----------
$98,121,853
===========
</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 4).
6. Notes Receivable
In October 1997, the Company entered into two promissory notes with a
borrower for equipment financing, totalling $13,225,000 which are
collateralized by restaurant equipment. The promissory notes bear interest at a
rate of ten percent per annum and will be collected in 84 equal monthly
installments totalling $219,550 beginning January 1, 1998. At December 31,
1997, the Company had advanced $12,521,400 to the
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
borrower and had a remaining balance to fund of $703,600 (included in accounts
payable and other accrued expenses at December 31, 1997). Notes receivable at
December 31, 1997, include accrued interest of $323,044.
Management believes that the estimated fair value of notes receivable at
December 31, 1997 approximated the outstanding principal amount based on
estimated current rates at which similar loans would be made to borrowers with
similar credit and for similar maturities.
7. Mortgage Notes Receivable
During 1996, in connection with the acquisition of land for 35 Pizza Hut
restaurants, the Company accepted three promissory notes in the aggregate
principal sum of $12,847,000, collateralized by mortgages on the buildings on
the 35 Pizza Hut Properties. The promissory notes bear interest at a rate of
10.75% per annum and are being collected in 240 equal monthly installments
totalling $130,426.
During 1997, in connection with the acquisition of land for nine Pizza Hut
restaurants, the Company accepted a promissory note in the principal sum of
$4,200,000, collateralized by a mortgage on the buildings on the nine Pizza Hut
Properties and two additional Pizza Hut buildings. The promissory note bears
interest at a rate of 10.5% per annum and is being collected in 240 equal
monthly installments of $41,943.
Mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Outstanding principal.............................. $16,662,418 $12,713,151
Accrued interest income............................ 118,887 35,285
Deferred financing income.......................... (85,448) (46,268)
Unamortized loan costs............................. 926,153 687,439
----------- -----------
$17,622,010 $13,389,607
=========== ===========
</TABLE>
Management believes that the estimated fair value of mortgage notes
receivable at December 31, 1997 and 1996 approximated the outstanding principal
amount based on estimated current rates at which similar loans would be made to
borrowers with similar credit and for similar maturities.
8. Line of Credit
In March 1996, the Company entered into a line of credit and security
agreement with a bank, the proceeds of which were to be used by the Company to
offer Secured Equipment Leases. The line of credit provided that the Company
would be able to receive advances of up to $15,000,000 until March 4, 1998.
Generally, all advances under the line of credit bore interest at either (i) a
rate per annum equal to 215 basis points above the Reserve Adjusted LIBOR Rate
(as defined in the line of credit) or (ii) a rate per annum equal to the bank's
prime rate, whichever the Company selected at the time advances were made. As a
condition of obtaining the line of credit, the Company agreed to grant to the
bank a first security interest in the Secured Equipment Leases.
In August 1997, the Company's $15,000,000 line of credit was amended and
restated to enable the Company to receive advances on a revolving $35,000,000
uncollateralized line of credit (the "Line of Credit") to provide equipment
financing, to purchase and develop Properties and to fund Mortgage Loans. The
advances bear interest at a rate of LIBOR plus 1.65% or the bank's prime rate,
whichever the Company selects at the time of borrowing. Interest only is
repayable monthly until July 31, 1999, at which time all remaining interest and
principal shall be due. The Line of Credit provides for two one-year renewal
options.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1997 and 1996, the Company obtained
advances totalling $19,721,804 and $3,666,896, respectively, under the Line of
Credit and made principal payments totalling $20,784,577 and $145,080,
respectively. As of December 31, 1997 and 1996, $2,459,043 and $3,521,816,
respectively, of principal was outstanding relating to the Line of Credit, plus
$14,430 and $13,164, respectively, of accrued interest. As of December 31,
1997, the interest rate on amounts outstanding under the Line of Credit was
7.373% (LIBOR plus 1.65%). As of December 31, 1996, the interest rate on
amounts outstanding under the Line of Credit ranged from 7.71% to 7.82% (215
basis points above the Reserve Adjusted LIBOR Rate). The Company believes,
based on current terms, that the carrying value of its note payable at December
31, 1997 and 1996 approximated fair value. The terms of the Line of Credit
include financial covenants which provide for the maintenance of certain
financial ratios. The Company was in compliance with such covenants as of
December 31, 1997.
During 1996, the Company entered into interest rate swap agreements with a
commercial bank to reduce the impact of changes in interest rates on its
floating rate long-term debt. The agreements effectively change the Company's
interest rate exposure on notional amounts totalling approximately $2,110,000
of the outstanding floating rate notes to fixed rates ranging from 8.75% to
nine percent per annum. The notional amounts of the interest rate swap
agreements amortize over the period of the agreements which approximate the
term of the related notes. As of December 31, 1997, the notional balance was
approximately $1,750,000. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreements;
however, the Company does not anticipate nonperformance by the counterparty.
Management does not believe the impact of any payments of a termination
penalty, in the event the Company determines to terminate the swap agreements
prior to the end of their respective terms, would be material to the Company's
financial position or results of operations.
Interest costs (including amortization of loan costs) incurred for the years
ended December 31, 1997 and 1996, were $544,788 and $127,012, respectively, all
of which were capitalized as part of the cost of buildings under construction.
For the years ended December 31, 1997, and 1996, the Company paid interest of
$502,680 and $91,757, respectively. No interest was paid during the year ended
December 31, 1995.
9. Stock Issuance Costs
The Company has incurred certain expenses in connection with the public
offerings of its shares, including commissions, marketing support and due
diligence expense reimbursement fees, filing fees, legal, accounting, printing
and escrow fees, which have been deducted from the gross proceeds of the
offerings. CNL Fund Advisors, Inc. (the "Advisor") has agreed to pay all
organizational and offering expenses (excluding commissions and marketing
support and due diligence expense reimbursement fees) which exceed three
percent of the gross offering proceeds received from the sale of shares of the
Company.
During the years ended December 31, 1997, 1996 and 1995, the Company
incurred $22,422,045, $9,216,102 and $6,423,671, respectively, in
organizational and offering costs, including $17,798,605, $8,063,439 and
$3,076,333, respectively, in commissions and marketing support and due
diligence expense reimbursement fees (see Note 11). Of these amounts, as of
December 31, 1997, 1996 and 1995, $38,041,818, $15,619,773 and $6,403,671,
respectively, have been treated as stock issuance costs and $20,000 has been
treated as organization costs. The stock issuance costs have been charged to
stockholders' equity subject to the three percent cap described above.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Distributions
For the years ended December 31, 1997, 1996 and 1995, 93.33%, 90.25% and
59.82%, respectively, of the distributions received by stockholders were
considered to be ordinary income and 6.67%, 9.75% and 40.18%, respectively,
were considered a return of capital for federal income tax purposes. No amounts
distributed to stockholders for the years ended December 31, 1997, 1996 and
1995 are required to be or have been treated by the Company as a return of
capital for purposes of calculating the stockholders' return on their invested
capital.
11. Related Party Transactions
Certain directors and officers of the Company hold similar positions with
the Advisor and the managing dealer of the Company's common stock offerings,
CNL Securities Corp.
CNL Securities Corp. is entitled to receive selling commissions amounting to
7.5% of the total amount raised from the sale of shares for services in
connection with the offering of shares, a substantial portion of which has been
or will be paid as commissions to other broker dealers. During the years ended
December 31, 1997, 1996 and 1995, the Company incurred $16,686,192, $7,559,474
and $2,884,062, respectively, of such fees, of which approximately $15,563,500,
$7,059,000 and $2,682,000, respectively, were or will be paid by CNL Securities
Corp. as commissions to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a marketing support
and due diligence expense reimbursement fee equal to 0.5% of the total amount
raised from the sale of shares, a portion of which may be reallowed to other
broker-dealers. During the years ended December 31, 1997, 1996 and 1995, the
Company incurred $1,112,413, $503,965 and $192,271, respectively, of such fees,
the majority of which were reallowed to other broker-dealers and from which all
bona fide due diligence expenses were paid.
CNL Securities Corp. will also receive, in connection with each common stock
offering, a soliciting dealer servicing fee payable annually by the Company
beginning on December 31 of the year following the year in which the offering
terminates in the amount of 0.20% of the stockholders' investment in the
Company. CNL Securities Corp. in turn may reallow all or a portion of such fee
to soliciting dealers whose clients purchased shares in such offering held
shares on such date. As of December 31, 1997, no such fees had been incurred.
The Advisor is entitled to receive acquisition fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of the total amount raised from the sale of shares. During the years
ended December 31, 1997, 1996 and 1995, the Company incurred $10,011,715,
$4,535,685 and $1,730,437, respectively, of such fees. Such fees are included
in land and buildings on operating leases, net investment in direct financing
leases, mortgage notes receivable and other assets.
In connection with the acquisition of Properties that are being or have been
constructed or renovated by affiliates, subject to approval by the Company's
Board of Directors, the Company may incur development/ construction management
fees, payable to affiliates of the Company. Such fees are included in the
purchase price of the Properties and are therefore included in the basis on
which the Company charges rent on the Properties. During the years ended
December 31, 1997 and 1996, the Company incurred $369,570 and $159,350,
respectively, of such amounts relating to six and three Properties,
respectively. No such amounts were incurred for the year ended December 31,
1995.
For negotiating Secured Equipment Leases and supervising the Secured
Equipment Lease program, the Advisor is entitled to receive a one-time secured
equipment lease servicing fee of two percent of the purchase price of the
equipment that is the subject of a Secured Equipment Lease. During the years
ended December 31,
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 and 1996, the Company incurred $366,865 and $70,070, respectively, in
Secured Equipment Lease servicing fees. No such amounts were incurred for the
year ended December 31, 1995.
The Company and the Advisor have entered into an advisory agreement pursuant
to which the Advisor will receive a monthly asset and mortgage management fee
of one-twelfth of 0.60% of the Company's real estate asset value and the
outstanding principal balance of the Mortgage Loans as of the end of the
proceeding month. 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
Advisor. 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 Advisor shall determine. During the years ended December 31, 1997,
1996 and 1995, the Company incurred $881,668, $278,902 and $27,950
respectively, of such fees, $76,789, $27,702 and $4,872, respectively, of which
has been capitalized as part of the cost of buildings for Properties that have
been or are being constructed.
Prior to such time, if any, as shares of the Company's common stock are
listed on a national securities exchange or over-the-counter market, the
Advisor is 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 Advisor provides a substantial amount of services in connection
with the sale. However, if the sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
real estate disposition fee is payable only after the stockholders receive
distributions equal to the sum of an annual, aggregate, cumulative,
noncompounded eight percent return on their invested capital ("Stockholders' 8%
Return") plus their aggregate invested capital. No deferred, subordinated real
estate disposition fees have been incurred to date.
A subordinated share of net sales proceeds will be paid to the Advisor upon
the sale of Company assets in an amount equal to ten percent of net sales
proceeds. However, if net sales proceeds are reinvested in replacement
properties or replacement Secured Equipment Leases, no such share of net sales
proceeds will be paid to the Advisor until such replacement property or Secured
Equipment Lease is sold. This amount will be paid only after the stockholders
receive distributions equal to the sum of the stockholders' aggregate invested
capital and the Stockholders' 8% Return. As of December 31, 1997, no such
payments have been made to the Advisor.
The Advisor and its affiliates provide accounting and administrative
services to the Company on a day-to-day basis as well as services in connection
with the offering of shares. For the years ended December 31, 1997, 1996 and
1995, expenses incurred for these services were classified as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Stock issuance costs........................ $1,676,226 $ 769,225 $714,674
General operating and administrative
expenses................................... 556,240 334,603 68,016
---------- ---------- --------
$2,232,466 $1,103,828 $782,690
========== ========== ========
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, the Company
acquired five, four and nine Properties, respectively, for approximately
$5,450,000, $2,610,000 and $6,621,000, respectively, from affiliates of the
Company. The affiliates had purchased and temporarily held title to these
Properties in order to facilitate the acquisition of the Properties by the
Company. Each Property was acquired at a cost no greater than the lesser of the
cost of the Property to the affiliate, including carrying costs, or the
Property's appraised value.
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Due to the Advisor:
Expenditures incurred on behalf of the Company and
accounting and administrative services.............. $ 126,205 $199,068
Acquisition fee...................................... 386,972 383,210
---------- --------
513,177 582,278
---------- --------
Due to CNL Securities Corp.:
Commissions.......................................... 940,520 372,227
Marketing support and due diligence expense
reimbursement fees.................................. 63,097 42,579
---------- --------
1,003,617 414,806
---------- --------
Due to other affiliates................................ 7,500 --
---------- --------
$1,524,294 $997,084
========== ========
</TABLE>
12. Concentration of Credit Risk
The following schedule presents rental, earned and interest income from
individual lessees or borrowers, or affiliated groups of lessees or borrowers,
each representing more than ten percent of the Company's total rental, earned
income and interest income from its Properties, Mortgage Loans and Secured
Equipment Leases for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Castle Hill Holdings V, L.L.C.,
Castle Hill Holdings VI, L.L.C. and
Castle Hill Holdings VII, L.L.C............. $2,636,004 $1,699,986 $ --
Foodmaker, Inc............................... 1,980,338 346,179 66,813
Houlihan's Restaurants, Inc.................. 1,847,574 -- --
DenAmerica Corp.............................. 1,120,534 420,810 66,595
Golden Corral Corporation.................... 1,064,801 577,003 212,406
Northstar Restaurants, Inc................... 328,914 329,117 73,219
Roasters Corp................................ 47,264 187,609 82,136
</TABLE>
In addition, the following schedule presents total rental, earned, and
interest income from individual restaurant chains, each representing more than
ten percent of the Company's total rental, earned income and interest income
from its Properties, Mortgage Loans and Secured Equipment Leases and financing
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Pizza Hut................................... $2,636,004 $1,699,986 $ --
Golden Corral Family Steakhouse
Restaurants................................ 2,531,941 1,459,349 212,406
Boston Market............................... 2,338,949 547,590 73,219
Jack in the Box............................. 1,980,338 346,179 66,813
Denny's..................................... 931,752 420,810 66,595
Kenny Rogers' Roasters...................... 47,264 187,609 82,136
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Although the Company's Properties are geographically diverse throughout the
United States and the Company's lessees and borrowers operate a variety of
restaurant concepts, failure of any one of these restaurant chains or any one
of these lessees or borrowers that contributes more than ten percent of the
Company's rental, earned income and interest income could significantly impact
the results of operations of the Company. However, management believes that the
risk of such a default is reduced due to the essential or important nature of
these Properties for the on-going operations of the lessees and borrowers.
13. Commitments
The Company has entered into various development agreements with tenants
which provide terms and specifications for the construction of buildings the
tenants have agreed to lease. The agreements provide a maximum amount of
development costs (including the purchase price of the land and closing costs)
to be paid by the Company. The aggregate maximum development costs the Company
has agreed to pay are approximately $14,495,000, of which approximately
$10,202,000 in land and other costs had been incurred as of December 31, 1997.
The buildings currently under construction are expected to be operational by
June 1998. In connection with the purchase of each Property, the Company, as
lessor, entered into a long-term lease agreement. The general terms of the
lease agreements are substantially the same as those described in Note 3.
14. Subsequent Events
During the period January 1, 1998 through January 22, 1998, the Company
received subscription proceeds for an additional 1,231,779 shares ($12,317,791)
of common stock.
On January 1, 1998, the Company declared distributions of $2,299,701 or
$.06354 per share of common stock, payable on March 23, 1998, to stockholders
of record on January 1, 1998.
During the period January 1, 1998 through January 22, 1998, the Company
acquired two Properties (both on which restaurants are being constructed) for
cash at a total cost of approximately $1,067,000. The buildings under
construction are expected to be operational by July 1998. In connection with
the purchase of each Property, the Company as lessor, has entered into a long-
term, triple-net lease agreement.
F-31
<PAGE>
CNL FUND ADVISORS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................. F-33
Financial Statements
Consolidated Balance Sheet--As of June 30, 1998......................... F-34
Consolidated Statement of Income--For the Year Ended June 30, 1998...... F-35
Consolidated Statement of Stockholders' Equity--For the Year ended June
30, 1998............................................................... F-36
Notes to Consolidated Financial Statements--For the Year ended June 30,
1998................................................................... F-38
</TABLE>
F-32
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
CNL Fund Advisors, Inc.
Orlando, Florida
We have audited the accompanying consolidated balance sheet of CNL Fund
Advisors, Inc. and Subsidiary as of June 30, 1998, and the related consolidated
statement of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of CNL Fund Advisors,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CNL Fund Advisors, Inc. and Subsidiary as of June 30, 1998, and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ McDirmit, Davis, Lauteria, Puckett,
Vogel & Company, P.A.
October 27, 1998,
except for Note 4, as to which
the date is December 31, 1998
F-33
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 254,569
Accounts receivable--Related parties.............................. 6,031,010
Notes receivable.................................................. 340,000
----------
Total current assets.......................................... 6,625,579
Investments and Other Assets........................................ 227,454
Office Furnishings and Equipment.................................... 173,553
----------
$7,026,586
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $1,247,197
Dividends payable................................................. 2,220,000
Current portion of notes payable--Related party................... 67,620
----------
Total current liabilities..................................... 3,534,817
Long-Term Indebtedness:
Notes payable--Related party...................................... 145,927
Amounts Due Under Deferred Agreements............................... 27,454
----------
Total liabilities and deferred expenses....................... 3,708,198
----------
Stockholders' Equity:
Capital Stock:
Class A Common Stock--Authorized 10,000 shares; par value $1.00
per share; issued and outstanding 6,400........................ 6,400
Class B Common Stock--Authorized 5,000 shares; par value $1.00
per share; issued and outstanding 3,400 shares 3,400
Additional paid-in capital........................................ 3,308,575
Retained earnings................................................. 13
----------
Total stockholders' equity.................................... 3,318,388
----------
$7,026,586
==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-34
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30, 1998
<TABLE>
<S> <C>
Revenues:
Fees............................................................ $19,954,188
Other income.................................................... 227,597
-----------
Total revenues................................................ 20,181,785
-----------
Expenses:
Salaries........................................................ 3,698,192
General and administrative...................................... 4,069,811
-----------
Total expenses................................................ 7,768,003
-----------
Income Before Provision for Income Taxes and Cumulative Effect of
a Change in Accounting for Start-up Costs........................ 12,413,782
Provision for Income Taxes........................................ 4,903,444
-----------
Net Income Before Cumulative Effect of a Change in Accounting for
Start-up Costs................................................... 7,510,338
Cumulative Effect of a Change in Accounting for Start-up Costs,
Net of Income Taxes of $24,617................................... 39,237
-----------
Net Income........................................................ $ 7,471,101
===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-35
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-In Retained
Stock Stock Capital Earnings Total
------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997.... $1,000 $ -- $1,914,915 $ 960,478 $ 2,876,393
Net income for the year
ended June 30, 1998..... -- -- -- 7,471,101 7,471,101
Dividends to parent...... -- -- -- (8,431,566) (8,431,566)
Stock split (Note 2)..... 5,400 -- (5,400) -- --
Issuance of common
stock--Class B
(Note 1)................ 3,400 336,600 -- 340,000
Contributions to
capital................. -- -- 1,062,460 -- 1,062,460
------ ------ ---------- ---------- -----------
Balance, June 30, 1998.... $6,400 $3,400 $3,308,575 $ 13 $ 3,318,388
====== ====== ========== ========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-36
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30, 1998
<TABLE>
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows From Operating Activities:
Cash collected from customers................................. $18,419,269
Cash paid to employees and other operating cash payments...... (6,608,547)
Income tax paid............................................... (5,826,285)
Interest paid................................................. (219,022)
-----------
Net cash provided by operating activities................... 5,419,269
-----------
Cash Flows From Investing Activities:
Purchase of office furnishings and equipment.................... (129,134)
-----------
Net cash used in investing activities....................... (129,134)
-----------
Cash Flows From Financing Activities:
Net proceeds from borrowings.................................... 84,400
Contributions to capital........................................ 1,062,460
Dividends paid to parent........................................ (6,211,566)
-----------
Net cash used in financing activities....................... (5,064,706)
-----------
Net Increase in Cash and Cash Equivalents......................... 225,429
Cash and Cash Equivalents at Beginning of Fiscal Year............. 29,140
-----------
Cash and Cash Equivalents at End of Fiscal Year................... $ 254,569
===========
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income per statement of income.............................. $ 7,471,101
Add item not requiring (providing) cash:
Depreciation.................................................. 63,319
Change in accounting for start-up costs....................... 39,237
-----------
Total....................................................... 7,573,657
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in accounts receivable............................... (2,108,662)
Decrease in income tax payable................................ (922,841)
Increase in accounts payable.................................. 849,661
Increase in amount due under deferred compensation
agreements................................................... 27,454
-----------
Net cash provided by operating activities................... $ 5,419,269
===========
Supplemental Disclosure of Non-Cash Financing Activity:
Notes receivable from issuance of class B common stock.......... $ 340,000
===========
Dividends declared and unpaid................................... $ 2,220,000
===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-37
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended June 30, 1998
Note 1--Summary of Significant Accounting Policies
CNL Fund Advisors, Inc.'s (the "Company") accounting policies are in
conformity with generally accepted accounting principles.
Organization--The Company was organized under the laws of the State of
Florida, as a wholly owned subsidiary of CNL Group, Inc. All outstanding shares
of class A common stock are owned by CNL Group, Inc.
In June, 1998 the Company acquired the stock of CNL Restaurant Development
Company ("CRD") (a wholly owned subsidiary of CNL Group, Inc.) by exchanging
shares of common stock. CRD became a wholly owned subsidiary of the Company.
Accordingly, the Company's consolidated financial statements have been restated
to include the accounts and operations of CRD for all periods presented.
Effective July 1, 1997, the Company acquired CNL Growth Fund Advisors, Inc.
(a wholly owned subsidiary of CNL Group, Inc.) by exchanging shares of common
stock. The Company has accounted for the merger in a manner similar to the
pooling-of-interests method. Accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of CNL
Growth Fund Advisors, Inc. for all periods prior to the merger.
On June 30, 1998, the Company amended its Articles of Incorporation to
authorize 10,000 shares of Class A common stock and 5,000 shares of Class B
common stock. The Class B common shares are generally deemed to be, on a share-
for-share basis, equivalent to one-tenth of a share of the Company's common
shares with regard to voting rights, dividends and liquidation distributions.
On June 30, 1998, the Company issued 3,400 Class B common shares in exchange
for notes receivable of $340,000.
Basis of Presentation--The accompanying consolidated financial statements
include the accounts of the Company and CRD, its wholly owned subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments--The carrying amounts of cash, accounts
receivable, notes receivable and accounts payable approximate fair value
because of the short maturity of these items. The carrying amounts of notes
payable--related party approximate fair value because the interest rates on
these instruments change with market interest rates.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--For purposes of the statement of cash flows, cash
and cash equivalents include cash and cash invested in liquid instruments with
an original maturity date of three months or less.
Accounts Receivable--The Company provides an allowance for doubtful accounts
when necessary. However, in the opinion of management, at June 30, 1998, all
accounts were considered collectible and no allowance was necessary.
Office Furnishings and Equipment--Office furnishings and equipment are
stated at cost and are depreciated primarily using the double-declining balance
method over their estimated useful lives of five to
F-38
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
seven years. Major renewals and betterments are capitalized; replacements,
maintenance and repairs which do not improve or extend the lives of the
respective assets are expensed as incurred. When office furnishings and
equipment are sold or disposed of, the asset account and related accumulated
depreciation account are relieved, and any resulting gain or loss is included
in income.
Income Taxes--The Company follows the consolidation policies of its parent
company, CNL Group, Inc. in paying its portion of the consolidated Federal and
State income taxes, if any, to the parent company.
The Company is reporting on the accrual basis of accounting for both
financial statement and income tax reporting purposes.
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company considers all expected future events other than
enactments of changes in the tax law or rates. Changes in tax laws or rates
will be recognized in the future years in which they occur. For the year ended
June 30, 1998, deferred taxes were immaterial.
Amount Due Under Deferred Compensation Agreements--The Company is included
with its parent company's deferred compensation agreements. The parent company
has entered into nonqualified deferred compensation agreements with certain key
employees. The agreements provide for employee contributions under a salary
reduction plan. Upon retirement, the Company is liable for the employee
contribution and earnings per the employees directed investments. To fund this
future liability, the parent company has acquired life insurance contracts. The
Company anticipates that the death benefit and/or cash value will be available
as the liability comes due.
Note 2--Capital Stock
On June 30, 1998, the Company's board of directors approved a 6.4-for-1
split of the Class A common stock. As a result, 5,400 shares were issued and
additional paid-in capital was reduced by $5,400. The par value of the shares
remained unchanged.
Note 3--Change in Method of Accounting
During the year ended June 30, 1998, the Company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities". This statement
requires all start-up activities and organizational costs to be expensed as
incurred. This resulted in a write-off of $63,854 of capitalized costs, net of
tax of $24,617, during the year ended June 30, 1998.
Note 4--Notes Receivable
The amount due is represented by promissory notes from employees. The notes
carry interest at 7.5% and are collateralized by class B common shares. The
notes were collected in full on December 31, 1998.
F-39
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Investments and Other Assets
At June 30, 1998, investments and other assets consist of the following:
<TABLE>
<S> <C>
Common stock--CNL American Properties Fund, Inc. carried at cost
which approximates fair market value............................ $200,000
Cash surrender value of life insurance........................... 27,454
--------
Total.......................................................... $227,454
========
</TABLE>
Note 6--Office Furnishings and Equipment
Office furnishings and equipment is summarized as follows:
<TABLE>
<S> <C>
Office furnishing and equipment................................... $ 355,036
Less: Accumulated depreciation.................................... (181,483)
---------
Total........................................................... $ 173,553
=========
</TABLE>
Depreciation expense amounted to $63,319 for the year ended June 30, 1998.
Note 7--Income Taxes
Income taxes are summarized as follows:
<TABLE>
<S> <C>
Balance, Beginning of Year..................................... $ 947,458
Provision for income taxes..................................... 4,903,444
Income tax relating to cumulative effect of change in
accounting for start-up costs................................. (24,617)
----------
Total........................................................ 5,826,285
Less: Payments to parent company............................... 5,826,285
----------
Balance, End of Year......................................... $ --
==========
</TABLE>
Note 8--Related Party Transactions
Certain directors and officers of the Company are also directors and
officers of certain real estate investment trusts ("REITs") and investment
partnerships.
The Company provides site selection and property acquisition services to the
various related partnerships and CNL American Properties Fund, Inc. ("APF"), an
unlisted REIT. For the year ended June 30, 1998, the Company earned acquisition
fees in the amount of $13,888,823.
The Company also provides property management and advisory services to
certain related partnerships and APF. For the year ended June 30, 1998, the
Company earned management and advisory fees in the amount of $2,278,569.
The Company also provides development services to CNL Restaurant Services,
Inc., a related company. For the year ended June 30, 1998 the Company earned
development fees of $822,987.
The Company also receives an origination fee from CNL Financial Services,
Inc. ("CFS"), a majority-owned subsidiary of CNL Group, Inc. (See Note 1), for
services rendered in connection with loans originated and serviced by CFS. In
addition, the Company pays CFS for providing credit underwriting services on
its
F-40
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
behalf. For the year ended June 30, 1998, the Company earned origination fees
of $1,695,452 and paid expenses of $304,190 related to credit underwriting
services.
During the year ended June 30, 1998, certain affiliated entities provided
accounting and administrative services to the Company. The Company incurred
costs of $58,943, for such services.
Account receivable--related parties represent amounts due from related
partnerships, corporations and real estate investment trusts for services
rendered, expenses paid on behalf of, and loans advanced to the various
entities. Interest income earned on amounts advanced during the year ended June
30, 1998 amounted to $212,326.
Notes Payable--See Note 11
Note 9--Concentration of Credit Risk
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash equivalents and
accounts receivable.
The Company maintains cash balances at financial institutions and invests in
unsecured money market funds. Accounts at these institutions are insured by the
Federal Deposit Insurance Corporation up to $100,000. At June 30, 1998,
uninsured cash deposits and cash invested in money market funds totaled
$153,644.
Concentrations of credit risk with respect to accounts receivable relates to
the Company's business activity being primarily within the real estate
industry. The Company limits its credit risk by the dispersion of activity
across many geographic areas throughout the United States.
Note 10--Profit Sharing Plan
The Company is included with its parent company's defined contribution
profit sharing plan. This plan qualifies under Section 401(a) and 501(a) of the
Internal Revenue Code of 1974 (ERISA) and is not subject to minimum funding
requirements. The plan covers all eligible employees of the Company and its
subsidiaries upon completion of one year of service. The plan provides for
employee contributions under a salary reduction plan, section 401(k). The
employees may elect to contribute from 1% to 15% of salary to a maximum under
IRS regulations. The Company is required to match 50% of the employee
contribution to a maximum of 3% of salary. For the year ended June 30, 1998,
the Company's contribution, including administration costs, amounted to
$54,208.
F-41
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Notes Payable--Related Party
The Company was allocated a portion of various notes of its parent company
for the acquisition of certain office furniture and equipment used by the
Company. The notes carry interest at prime plus one-quarter to one-half
percent. The aggregate maturities of the allocated indebtedness to the
Company's parent at June 30, 1998 is as follows:
<TABLE>
<S> <C>
Year Ending June 30,
1999.............................................................. $ 67,620
2000.............................................................. 57,830
2001.............................................................. 39,279
2002.............................................................. 30,075
2003.............................................................. 18,743
--------
Total........................................................... $213,547
========
</TABLE>
Interest expense amounted to $219,022 for the year ended June 30, 1998.
Note 12--Dividends
During the year ended June 30, 1998, the Company declared dividends to the
parent company of $8,431,566 of which $6,211,566 were paid. As of June 30,
1998, dividends of $2,220,000 were declared by the Board of Directors for
shareholders of record on June 29, 1998, payable prior to September 1, 1998.
F-42
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-44
Financial Statements
Consolidated Balance Sheets--As of June 30, 1997 and 1998............... F-45
Consolidated Statements of Operations--For the Years ended June 30, 1997
and 1998............................................................... F-46
Consolidated Statements of Stockholders' Equity--For the Years ended
June 30, 1997 and 1998................................................. F-47
Consolidated Statements of Cash Flows--For the Years ended June 30, 1997
and 1998............................................................... F-48
Notes to Consolidated Financial Statements--For the Years ended June 30,
1997 and 1998.......................................................... F-49
</TABLE>
F-43
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
CNL Financial Corporation:
We have audited the accompanying consolidated balance sheets of CNL
Financial Corporation (a Florida corporation) and subsidiaries as of June 30,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended, and for the
period from inception (October 9, 1995) through June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Financial Corporation
and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, and for the period
from inception (October 9, 1995) through June 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Orlando, Florida,
September 4, 1998
F-44
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................... $ 1,808,758 $ 567,534
RESTRICTED CASH..................................... 10,103,916 3,285,313
NOTES RECEIVABLE.................................... 374,482,298 140,781,095
LOAN COSTS, less accumulated amortization of
$699,735 and $60,122 in 1998 and 1997,
respectively....................................... 3,905,133 1,425,802
OTHER ASSETS........................................ 1,298,434 251,803
DEFERRED TAXES...................................... 233,860 --
------------ ------------
$391,832,399 $146,311,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses............. $ 1,836,818 $ 1,122,160
Accrued interest.................................. 993,564 593,876
Deferred taxes.................................... 48,602 --
Notes payable..................................... 358,265,820 140,450,990
Notes payable to related parties.................. 24,290,775 3,854,641
Due to related party.............................. 2,600,458 132,526
Income tax payable................................ 72,009 20,583
Other liabilities................................. -- 5,000
------------ ------------
Total liabilities............................... 388,108,046 146,179,776
============ ============
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $1 par; 1,000 shares authorized, 200
and 100 shares issued and outstanding in 1998 and
1997, respectively .............................. 200 100
Additional paid-in capital........................ 3,887,497 --
Retained (deficit) earnings....................... (163,344) 131,671
------------ ------------
Total stockholders' equity...................... 3,724,353 131,771
------------ ------------
$391,832,399 $146,311,547
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-45
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1998 and 1997 and For The Period From Inception
(October 9, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Period from
Inception
(October 9,
1995) through
1998 1997 June 30, 1996
----------- ---------- --------------
<S> <C> <C> <C>
INTEREST INCOME......................... $20,324,223 $3,346,226 $52,063
----------- ---------- -------
EXPENSES:
Interest and loan cost amortization... 17,452,876 2,875,881 43,251
Servicing and administrative fees
(Note 6)............................. 1,089,516 205,837 3,543
Management fees (Note 6).............. 1,155,523 -- --
General and administrative............ 19,740 54,004 956
Other amortization.................... 17,891 8,641 --
Professional services................. 616,867 6,978 --
Other expenses........................ 361,249 5,130 --
----------- ---------- -------
Total expenses...................... 20,713,662 3,156,471 47,750
----------- ---------- -------
(LOSS) INCOME BEFORE INCOME TAXES....... (389,439) 189,755 4,313
(BENEFIT) PROVISION FOR INCOME TAXES.... (94,504) 61,066 1,331
----------- ---------- -------
NET (LOSS) INCOME....................... $ (294,935) $ 128,689 $ 2,982
=========== ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-46
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended June 30, 1998 and 1997 and For The Period From Inception
(October 9, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Additional Retained
Number of Par Paid-in Earnings/
Shares Value Capital (Deficit) Total
--------- ----- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, October 9, 1995..... -- $-- $ -- $ -- $ --
Issuance of common stock... 100 100 -- -- 100
Net income................. -- -- -- 2,982 2,982
--- ---- ---------- --------- ----------
BALANCE, June 30, 1996....... 100 100 -- 2,982 3,082
Net income................. -- -- -- 128,689 128,689
--- ---- ---------- --------- ----------
BALANCE, June 30, 1997....... 100 100 -- 131,671 131,771
Stock split................ 80 80 -- (80) --
Issuance of common stock,
net of
issuance costs............ 20 20 3,887,497 -- 3,887,517
Net loss................... -- -- -- (294,935) (294,935)
--- ---- ---------- --------- ----------
BALANCE, June 30, 1998....... 200 $200 $3,887,497 $(163,344) $3,724,353
=== ==== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-47
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1998 and 1997, and For The Period From Inception
(October 9, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Period from
Inception
(October 9,
1995) through
1998 1997 June 30, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Cash received from borrowers..... $ 19,571,856 $ 2,691,198 $ 40,243
Cash paid for expenses other
than interest................... (1,776,395) (270,333) (60)
Interest paid on notes payable... (15,881,209) (2,069,137) (13,218)
Taxes paid....................... (39,327) (41,814) --
Other interest received.......... 185,794 28,606 342
Fees collected and not remitted
to related party................ 513,712 (76,623) --
------------- ------------- -----------
Net cash provided by
operating activities........ 2,574,431 261,897 27,307
------------- ------------- -----------
Cash Flows From Investing
Activities:
Investment in notes receivable... (248,861,590) (138,368,232) (6,000,000)
Collections on notes
receivable...................... 15,707,935 4,216,313 --
Increase in restricted cash...... (6,818,603) (3,285,313) --
Payment of note costs............ -- (73,483) --
Payment of organization costs.... (45,517) (60,754) (3,179)
Fee collected and not remitted
to related party................ 115,295
------------- ------------- -----------
Net cash used in investing
activities.................. (240,017,775) (137,571,469) (5,887,884)
============= ============= ===========
Cash Flows From Financing
Activities:
Proceeds from borrowing on notes
payable......................... 230,275,399 219,208,505 6,000,000
Proceeds from borrowing on note
payable to related party........ 20,021,938 3,800,000 --
Repayments on notes payable...... (12,460,567) (84,757,515) --
Payment of loan costs............ (3,134,657) (544,861) 3,179
Contributions from
stockholders.................... 3,887,517 -- 100
Proceeds from related party...... 94,938 28,275 --
Net cash provided by
financing activities........ 238,684,568 137,734,404 6,003,279
Net Increase in Cash and Cash
Equivalents...................... 1,241,224 424,832 142,702
Cash and Cash Equivalents,
beginning of period.............. 567,534 142,702 --
------------- ------------- -----------
Cash and Cash Equivalents, end of
period........................... $ 1,808,758 $ 567,534 $ 142,702
============= ============= ===========
Reconciliation of Net (Loss)
Income to Net Cash Provided by
Operating Activities:
Net (loss) income................ $ (294,935) $ 128,689 $ 2,982
------------- ------------- -----------
Adjustments to reconcile net
(loss) income to net cash
provided by
operating activities--
Amortization of note costs
included in interest income... -- 2,273 --
Amortization of loan costs
included in interest expense.. 639,613 60,019 103
Other amortization............. 17,891 5,990 284
Provision for deferred taxes... (185,258) -- --
Increase in other assets....... (96,113) (10,996) --
Increase in accrued interest
income included in notes
receivable.................... (547,551) (617,698) (11,478)
Increase in due to related
party......................... 2,117,991 44,748 690
Increase in accounts payable,
accrued expenses and income
tax payable................... 108,908 84,640 5,082
Increase in accrued interest
included in notes payable to
related parties............... 414,196 -- --
Increase in accrued interest... 399,689 564,232 29,644
------------- ------------- -----------
Total adjustments............ 2,869,366 133,208 24,325
------------- ------------- -----------
Net cash provided by
operating activities........ $ 2,574,431 $ 261,897 $ 27,307
============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-48
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Organization and Nature of Business
CNL Lending Corporation, a Florida C corporation, was organized on October
9, 1995, and on December 15, 1995, its name was changed to CNL Financial
Corporation (CFC). CFC owns, directly or indirectly, 100 percent of the common
stock, membership units or partnership interests of CNL Financial I, Inc. (Fin
I), CNL Financial II, Inc., CNL Financial III, LLC (Fin III), CNL Financial
III, SPC, Inc., CNL Funding Corporation, CNL Financial LP Holding Corp., CNL
Financial IV, Inc. and CNL Financial IV, LP (Fin IV) (collectively, the
Subsidiaries).
CFC, through the Subsidiaries, is primarily engaged in making loans to
restaurant franchisors and franchisees operating in national and regional fast-
food, family-style and casual dining restaurant chains.
During fiscal 1998, the Company sold 20 shares of common stock for
approximately $3,887,000, net of issuance costs of $112,484, to Five Arrows
Realty Securities LLC (Five Arrows).
Principles of Consolidation
The consolidated financial statements include the accounts of CFC and its
subsidiaries (collectively, the Company). All significant intercompany amounts
have been eliminated.
Cash and Cash Equivalents
The Company 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. Cash equivalents are stated at
cost, which approximates market value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks may exceed federally insured levels; however, the Company has
not experienced any losses in such accounts. The Company limits investment of
temporary cash investments to financial institutions with high credit standing;
therefore, the Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Restricted Cash
Restricted cash consists of cash held in special trust accounts in the name
of the Magenta Trustee and Variable Funding Capital Corporation. The funds on
deposit consist primarily of principal and interest payments received from
borrowers, as well as the required Magenta reserves (see Note 4). These funds
may be invested in direct obligations of the U.S. Government, short-term
commercial paper, money market mutual funds or other interest-bearing time
deposits. Restricted cash is stated at cost, which approximates market value.
Notes Receivable
In accordance with Statement of Financial Accounting Standards (SFAS) No. 65
"Accounting for Certain Mortgage Banking Activities," notes receivable are
recorded at the lower of cost or market, using the aggregate loan basis. The
unpaid principal and accrued interest on the notes receivable, are included in
notes receivable in the accompanying consolidated balance sheets.
Loan Costs
Loan costs consist of costs to issue debt instruments such as attorney fees,
trustee costs and arrangement fees. These costs related to notes payable and
interest-rate swaps have been capitalized and are being amortized over the
terms of the loan commitments using the straight-line method.
F-49
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Assets
Other assets consist primarily of securitization costs, organizational costs
and prepaid expenses.
Notes Payable
The carrying amounts of the Company's notes payable approximate fair value
at June 30, 1998 and 1997, since the interest rates approximate rates currently
available to the Company for borrowings.
Stock Split
A 1.8-for-one stock split was effected September 24, 1997, with the issuance
of 80 common shares and the transfer of $80 from retained earnings to the
common stock account. Par value remained $1 per share subsequent to the split.
Interest-rate Swaps
The Company has entered into interest-rate swap agreements (the Agreements)
as a means of managing its interest-rate exposure. The Agreements have the
effect of converting certain draws of the Company's variable-rate notes payable
to fixed-rate notes payable. Net amounts paid or received are reflected as
adjustments to interest expense. The Agreements are accounted for as hedge
positions as of June 30, 1998 and 1997. The fair values are the estimated
amounts that the Company would receive or pay to terminate the Agreements at
the reporting date, taking into account current interest rates and the current
creditworthiness of the counterparties. At June 30, 1998 and 1997, the Company
estimates it would have paid $8,826,155 and $1,280,375, respectively, to
terminate the Agreements.
Revenue Recognition
The Company recognizes interest income using the effective interest method.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements and tax returns. In estimating future tax
consequences, the Company considers all expected future events other than
enactments of changes in the tax law or rates. Changes in tax laws or rates
will be recognized in the future years in which they occur.
Accounting for Derivatives
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which will require the Company to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
SFAS 133 is effective for all fiscal years beginning after June 15, 1999. SFAS
133 should not be applied retroactively to financial statements of prior
periods. As of June 30, 1998, the Company has not yet determined the impact of
the implementation of this standard.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-50
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
2. Other Assets
Other assets consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Securitization costs................................... $ 935,626 $ --
Organizational costs................................... 109,209 76,427
Prepaid expenses....................................... 119,929 --
Other.................................................. 157,838 181,653
---------- --------
1,322,602 258,080
Less--Accumulated amortization......................... (24,168) (6,277)
---------- --------
$1,298,434 $251,803
========== ========
</TABLE>
Securitization costs consist of costs incurred related to the securitization
transaction (see Note 3) such as attorney and accounting fees. These costs will
be expensed in the period that the securitization transaction occurs.
Organizational costs consist of costs incurred in the formation of the
Company, including legal and accounting fees. These costs are amortized over
five years using the straight-line method.
3. Notes Receivable
Notes receivable consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Outstanding principal............................. $373,305,571 $140,151,919
Accrued interest income........................... 1,176,727 629,176
------------ ------------
$374,482,298 $140,781,095
============ ============
</TABLE>
During the years ended June 30, 1998 and 1997, and for the period from
inception (October 9, 1995) to June 30, 1996, the Company originated
$218,940,681, $125,123,451 and $6,000,000 in new loans, respectively. During
the years ended June 30, 1998 and 1997, the Company also funded construction
draws of $29,920,909 and $13,244,781, respectively.
The amortization periods of the notes receivable range from four to 20
years. The variable-rate notes receivable, which totaled $191,460,014 at June
30, 1998, had interest rates ranging from 8.38 percent to 8.97 percent. The
fixed-rate notes receivable, which totaled $174,260,442 at June 30, 1998, had
interest rates ranging from 8.28 percent to 11.23 percent. The construction
notes receivable totaled $7,585,115 at June 30, 1998, with interest rates at
10.50 percent. Interest income was $20,324,223, $3,346,226 and $51,721 for the
years ended June 30, 1998 and 1997, and for the period from inception (October
9, 1995) to June 30, 1996, respectively.
F-51
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of the annual maturities of the Company's
outstanding notes receivable for each of the next five years and thereafter,
net of the notes receivable that were sold in the securitization transaction
that occurred subsequent to June 30, 1998 (see below):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------------
<S> <C>
1999............................................................ $ 3,227,697
2000............................................................ 3,631,458
2001............................................................ 3,971,181
2002............................................................ 4,334,156
2003............................................................ 4,635,176
Thereafter...................................................... 83,028,4378
------------
$102,828,105
============
</TABLE>
The notes receivable are secured by fee simple and/or leasehold interests in
real estate and/or restaurant equipment and business enterprise value.
The fair value of the notes receivable is estimated based on one of the
following methods: (i) quoted market prices, (ii) current rates for similar
issues, or (iii) present value of the expected cash flows. At June 30, 1998,
the Company estimates that the fair value is $387,543,441.
On August 14, 1998, the Company securitized some of its notes receivable
with a carrying value of approximately $269,445,000 as of June 30, 1998. The
securitization transaction involved notes receivable held by Fin I, Fin III and
Fin IV. Gross proceeds of $275,786,153 were allocated among these entities
based upon the net book value of the notes receivable that were securitized.
The Company retained certain interests and securities from the securitization
with an allocated cost basis of approximately $6,930,000 and estimated fair
value of approximately $7,268,000. Subsequent to June 30, 1998, the Company
recorded a gain, net of the securitization costs, from the securitization and
the subsequent market value adjustment of approximately $3,694,000.
4. Notes Payable
On September 25, 1997, the Company entered into a credit agreement (the
Credit Agreement) with Five Arrows, a related party, which owns 10 percent of
the common stock of the Company as of June 30, 1998. The Credit Agreement
provides that the Company is entitled to receive advances of up to $25,000,000
until September 24, 2003. The outstanding principal balance is due on September
24, 2003. The Credit Agreement is guaranteed by CNL Financial Services, Inc., a
related party (see Note 6). The outstanding balance under the Credit Agreement
at June 30, 1998, was $20,000,000, plus accrued interest of $55,233 included in
notes payable to related parties in the accompanying consolidated balance
sheets. The Company incurred legal fees and closing costs of approximately
$550,000 in connection with the Credit Agreement, which are classified as loan
costs on the accompanying consolidated balance sheets. Advances under the
Credit Agreement bear interest at 12 percent and are payable quarterly. The
Credit Agreement contains restrictive covenants which, among other things,
require the Company to maintain a minimum fixed-charge coverage ratio and debt
to capital ratio before incurring additional indebtedness or paying dividends
and distributions, as defined in the Credit Agreement.
On April 22, 1996, Fin I entered into a Franchise Loan Warehousing Agreement
(the Franchise Loan) with a bank, with limited guarantees by CNL Group, Inc., a
related party (see Note 6). The agreement was amended on December 29, 1997.
Pursuant to the terms of the Franchise Loan, Fin I is entitled to make loans to
the owners of quick service, family style, casual dining or other lender-
approved type of restaurant facility, operated by a franchisor or under a
franchise agreement, and secured by (a) the underlying real property or a
F-52
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
leasehold of real property, and (b) the furnishings, equipment and fixtures
used in the restaurant facility, guaranties, and/or a collateral assignment of
the related franchise agreement. The Franchise Loan provides that Fin I is
entitled to receive advances of up to $150,000,000 until September 29, 1998.
After September 29, 1998, the Company is entitled to receive advances of up to
$100,000,000 until November 12, 1999, with possible extensions through November
12, 2001. Principal repayments are based on the related notes receivable
amortization schedule. The outstanding balance under the Franchise Loan at June
30, 1998 and 1997, was $88,019,396 and $39,215,472, respectively, and accrued
interest, including interest-rate swap charges, was $543,731 and $319,799,
respectively. Fin I incurred legal fees and closing costs of $311,996 in
connection with the Franchise Loan, which are classified as loan costs on the
accompanying consolidated balance sheets. Loan costs increased by $93,455
during fiscal 1998 as a result of the renegotiations and loan amendment entered
into during the year. Advances under the Franchise Loan bear interest at the
average LIBOR rate plus 180 basis points (7.4602 percent and 7.4875 percent at
June 30, 1998 and 1997, respectively).
On April 9, 1997, Fin III entered into a loan agreement (the Magenta Loan)
with Magenta Capital Corporation (Magenta). The Loan was amended on March 27,
1998 (the Magenta Loan Amendment). Pursuant to the terms of the Magenta Loan,
Fin III is entitled to obtain loans for making secured loans to restaurant
franchisees or franchisors, acquiring property and equipment which is to be
leased to restaurant franchisees or franchisors, and carrying out certain other
business activities. The Magenta Loan provides that Fin III is entitled to
receive advances of up to $300,000,000 until April 9, 2002. There are no set
repayment terms and the aggregate outstanding principal is due April 9, 2024.
The outstanding balance under the Magenta Loan at June 30, 1998 and 1997, was
$220,043,424 and $101,235,518, respectively, and accrued interest, including
interest-rate swap charges, was $367,771 and $274,077, respectively. Fin III
incurred legal fees and closing costs of $2,516,284 in connection with the
Magenta Loan, which are classified as loan costs on the accompanying
consolidated balance sheets. Loan costs increased by $1,301,166 during fiscal
1998 as a result of the renegotiations and the Magenta Loan Amendment entered
into during the year. Advances under the Magenta Loan bear interest at the
average rate on the commercial paper (5.76 percent and 5.88 percent at June 30,
1998 and 1997, respectively) used by Magenta to fund the advances.
The loans made by Magenta to Fin III are secured by certain of Fin III's
assets currently existing and which may arise in the future. CNL Group, Inc., a
related party, is also contingently liable under a performance guarantee in
favor of Fin III and Magenta for the payment and performance of any and all
obligations of CNL Financial Services, Inc. related to the Magenta Loan. The
Magenta Loan Amendment requires a reserve of 10 percent of the commitment
amount to be held by the Magenta Trustee (the Trustee). The total required
reserve of $30 million will be delivered to the Trustee through an initial
contribution of $2 million at the closing of the original loan, with additional
contributions of $1 million per month beginning June 30, 1997. The Magenta Loan
Amendment required that $12 million in reserves be held at the end of March
1998, with additional contributions of $1 million per month continuing
beginning April 31, 1998. Reserves in excess of the $2 million initial
contribution may be used by the Trustee to fund borrowings. The required
reserve at June 30, 1998, was $15 million with $10,046,288 included in
restricted cash on the accompanying consolidated balance sheets. The remainder
of the $15 million was used to fund loans during fiscal 1998.
On April 6, 1998, Fin IV entered into a Franchise Loan and Wholesale
Warehouse Mortgage Agreement (the Loan) with a bank, with limited guarantees by
CNL Group, Inc., a related party. Pursuant to the terms of the Loan, Fin IV is
entitled to make loans to quick service, family style, casual dining or other
lender-approved type of restaurant facility and are secured by the underlying
real property or leasehold of real property, furnishings, equipment and
fixtures used in the restaurant facility, and guaranties and/or a collateral
assignment of the related franchise agreement. The Loan provides that Fin IV is
entitled to receive advances of up to $100,000,000 for the first 180 days after
the closing date of the Loan, as well as each securitization transaction, and
thereafter, $200,000,000 until April 5, 1999, with a possible extension through
April 4, 2000. Fin IV, at its
F-53
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
sole discretion, may increase the facility amount to $200,000,000 during the
180 days following each securitization transaction. There are no set repayment
terms. The outstanding balance at June 30, 1998, was $50,203,000 and accrued
interest, including interest-rate swap charges, was $82,062. Fin IV incurred
legal fees and closing costs of $1,039,618 in connection with the Loan, which
are classified as loan costs on the accompanying consolidated balance sheets.
Advances under the Loan bear interest at the average rate on commercial paper
(6.02 percent at June 30, 1998) used by the bank to fund the advances.
Interest expense for the Company for the years ended June 30, 1998 and 1997,
and for the period from inception (October 9, 1995) through June 30, 1996, was
$17,452,876, $2,875,881 and $42,965, respectively, including $639,613, $60,019
and $0, respectively, of loan costs amortization. The weighted average interest
rate on the Fin I Franchise Loan during 1998 and 1997 was 8.50 percent and 8.65
percent, respectively, including amortization of loan and swap costs and the
swap interest charges. The weighted average interest rate on the Magenta Loan
during 1998 and 1997 was 6.66 percent and 7.23 percent, respectively, including
amortization of loan and swap costs and the swap interest charges. The weighted
average interest rate on the Fin IV Franchise Loan during 1998 was 9.94
percent, including amortization of loan and swap costs and the swap interest
charges.
The Company entered into interest-rate swap agreements with two banking
institutions to reduce the effect of changes in interest rates on its floating-
rate debt. The agreements effectively change the Company's interest-rate
exposure on certain floating-rate debt totaling approximately $316,967,000 to
fixed rates ranging from 5.90 percent to 7.39 percent.
The costs incurred to enter the interest-rate swap agreements are amortized
over the period of the agreements, ranging from 10 to 20 years, which
approximate the term of the related notes receivable. The Company is exposed to
credit loss in the event of non-performance by the other party to the interest-
rate swap agreements; however, the Company does not anticipate non-performance
by the counterparty.
Maturities of the Company's outstanding indebtedness were as follows at June
30, 1998:
<TABLE>
<CAPTION>
earYEnding
June 30, Amount
- ----------- ------------
<S> <C>
1999........................................................... $ 1,259,873
2000........................................................... 54,384,998
2001........................................................... 3,944,446
2002........................................................... 4,315,816
2003........................................................... 4,722,255
Thereafter..................................................... 289,638,432
------------
$358,265,820
============
</TABLE>
5. Income Taxes
The (benefit) provision for income taxes consisted of the following for the
years ended June 30, 1998 and 1997, and for the period from inception (October
9, 1995) through June 30, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- ------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 56,349 $54,986 $1,137
State............................................ 34,405 6,080 194
--------- ------- ------
90,754 61,066 1,331
========= ======= ======
Deferred:
Federal.......................................... (172,267) -- --
State............................................ (12,991) -- --
--------- ------- ------
(185,258) -- --
--------- ------- ------
Total (benefit) provision for income taxes..... $ (94,504) $61,066 $1,331
========= ======= ======
</TABLE>
F-54
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of the difference in the Company's (benefit) provision for
income taxes and income taxes calculated at the U.S. Federal statutory codes is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- ------
<S> <C> <C> <C>
Computed income taxes at statutory rate........ $(132,407) $64,517 $1,466
State and local tax effects, net of federal
benefit....................................... 12,991 6,080 156
Personal holding company....................... 24,490 -- --
Other, net..................................... 422 (9,531) (291)
--------- ------- ------
(Benefit) provision for income taxes....... $ (94,504) $61,066 $1,331
========= ======= ======
</TABLE>
The primary difference between the provision for income taxes and the
expected amounts by applying the applicable federal income tax rate to income
before provision for income taxes is the inclusion of state income taxes, net
of the federal tax benefit, personal holding company taxes, and the difference
in tax rates used to record the deferred tax assets and liabilities.
Deferred taxes consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- ----
<S> <C> <C>
Gross deferred tax assets.................................... $233,860 $--
Gross deferred tax liabilities............................... (48,602) --
-------- ----
$185,258 $--
======== ====
</TABLE>
Gross deferred tax assets are primarily related to the amortization of
organizational and loan origination costs. Gross deferred tax liabilities are
primarily related to the prepayment of intangible taxes.
6. Related-Party Transactions
One of the stockholders of the Company, James M. Seneff, Jr., is a principal
shareholder of CNL Group, Inc., the parent company of CNL Financial Services,
Inc. Another stockholder of the Company, Robert A. Bourne, is the president of
CNL Group, Inc., an officer of CNL Financial Services, Inc. and the sole
shareholder of CNL Restaurants II, Inc.
The Company's subsidiaries have entered into servicing and administration
agreements pursuant to which CNL Financial Services, Inc. is entitled to
receive an annual fee of 50 basis points of the applicable notes receivable
balance, as defined in each agreement, payable monthly, based on a 360-day
year. The duties of CNL Financial Services, Inc,. in the role of servicer and
administrator, includes soliciting applications for the loan program,
evaluating creditworthiness of applicants, servicing and collecting of
principal and interest on the outstanding notes receivable balances,
maintaining the accounting records and providing reports to parties of the loan
agreements. The Company incurred $1,089,516, $205,837 and $3,543 in servicing
and administrative fees for the years ended June 30, 1998 and 1997, and for the
period from inception (October 9, 1995) through June 30, 1996, respectively.
During 1998, the Company entered into a management and advisory agreement,
pursuant to which the Company pays for certain services rendered to the Company
by CNL Financial Services, Inc. Under the management and advisory agreement,
the Company must pay CNL Financial Services, Inc. a management fee, advisory
fee, arrangement fee, executive fee, guarantee fee and administration fee, as
defined in the management and advisory agreement. The Company incurred
$1,155,523 in expense related to these fees for the year ended June 30, 1998.
Of this amount, $250,000 was capitalized into loan costs and is being amortized
F-55
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to expense over the life of the loan. The remaining $100,000 was accounted for
by the Company as a reduction of capital related to the issuance of stock in
the current year. Additionally, the agreement provides that CNL Financial
Services, Inc. be eligible for a performance bonus. The performance bonus shall
be determined at the discretion of the Company's Board of Directors. No such
bonus was approved for the year ended June 30, 1998.
At June 30, 1998 and 1997, the Company had recorded a liability to CNL
Financial Services, Inc. of $2,600,458 and $132,526, respectively, primarily
related to application, commitment and origination fees collected by the
Company on behalf of CNL Financial Services, Inc and management,
administrative, arrangement and advisory fees due to CNL Financial Services,
Inc. by the Company.
The Company entered into three promissory note agreements during fiscal
1997, and three promissory note agreements during fiscal 1998 (collectively,
Related Party Notes), with CNL Financial Services, Inc. under which the Company
had borrowed $3,821,938 and $3,800,000, as of June 30, 1998 and 1997,
respectively. The Related Party Notes bear interest at 12 percent, are
unsecured and are due upon demand. At June 30, 1998 and 1997, accrued interest
of $413,604 and $54,641, respectively, was included in notes payable to related
parties.
CNL Group, Inc. has a line of credit with a bank under which the bank has
the option to convert the line of credit to a subordinated debenture prior to
November 12, 1998. Upon the conversion to a subordinated debenture, CNL Group,
Inc. will issue warrants entitling the bank to purchase 10 percent of the
Company's outstanding stock, subject to the antidilution provision contained in
the Company's Shareholders' Agreement dated September 25, 1997. Unexercised
warrants will expire on November 12, 1999.
On January 16, 1997, Fin I loaned $7.4 million to Main Street California II,
Inc., which is owned 100 percent by CNL Restaurants II, Inc., to purchase five
TGI Friday's sites. The loan was subsequently modified on April 30, 1998.
Payments are $77,968 per month with an annual interest rate of 9.64 percent.
The loan period is for 180 months and is secured by leasehold improvements and
equipment. Interest earned from the related party was $709,533 for the year
ended June 30, 1998. At June 30, 1998 and 1997, the outstanding balance on this
loan of $7,071,565 and $7,326,991, respectively, was included in notes
receivable on the accompanying consolidated balance sheets. On August 14, 1998,
this loan was included in the Company's securitization (See Note 3).
7. Concentration of Credit Risk
The following schedule presents interest income by obligor, each
representing more than 10 percent of the Company's total interest income for
the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Obligor 1998 1997
------- ---------- --------
<S> <C> <C>
El Rancho New York Foods, Inc. and
El Rancho New Jersey Foods, Inc........................ $2,120,490 $ --
Valenti Mid Atlantic Management, LLC
and Valenti Mid Atlantic Realty, Inc................... 2,438,435 --
Main Street & Main, Inc................................. -- 364,903
Main Street California II, Inc.......................... -- 336,116
In addition, the following schedule presents interest income of obligors by
individual restaurant chain, each representing more than 10 percent of the
Company's total interest income for the years ended June 30, 1998 and 1997:
<CAPTION>
Chain 1998 1997
----- ---------- --------
<S> <C> <C>
Burger King............................................. $2,881,011 $ --
Taco Bell............................................... 3,187,718 --
TGI Friday's............................................ 5,581,091 992,945
Wendy's................................................. 2,821,160 --
</TABLE>
F-56
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following schedule presents the notes receivable by obligor, each
representing more than 10 percent of the Company's total notes receivable
balances at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Obligor 1998 1997
------- ----------- -----------
<S> <C> <C>
S & A Restaurant Corp............................... $45,854,000 $ --
Main Street & Main, Inc............................. -- 21,245,008
Valenti Mid-Atlantic Realty, LLC.................... -- 25,550,000
</TABLE>
In addition, the following schedule presents the notes receivable of
obligors by individual restaurant chain, each representing more than 10 percent
of the Company's total notes receivable balances at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Chain 1998 1997
----- ----------- -----------
<S> <C> <C>
Burger King.......................................... $47,614,538 $ --
Taco Bell............................................ 40,737,846 22,378,287
TGI Friday's......................................... 71,212,110 52,478,081
Wendy's.............................................. 49,820,676 25,550,000
Applebee's........................................... -- 15,745,741
</TABLE>
Although the Company's properties are geographically diverse throughout the
United States and the obligors operate a variety of restaurant concepts,
default by an obligor contributing more than 10 percent of the Company's
interest income or whose note receivable balance represents more than 10
percent of the Company's total notes receivable could significantly impact the
results of the Company. However, management believes the risk of such default
is reduced due to the essential or important nature of these properties for the
ongoing operations of the obligors.
8.Commitments
In the ordinary course of business, the Company has outstanding loan
commitments to qualified borrowers that are not reflected in the accompanying
consolidated financial statements. These commitments, if accepted by the
potential borrower, obligate the Company to provide funding. The unfunded
commitment totaled approximately $13,376,000 at June 30, 1998.
9.Events Subsequent to Date of Report of Independent Certified Public
Accountants (Unaudited)
On October 2, 1998, the Company reduced the availability on the Magenta Loan
(See Note 4) from $300,000,000 to $150,000,000. In connection with reducing the
availability, the Company expensed approximately $939,000 of previously
capitalized loan costs. Concurrent with reducing the availability on the
Magenta Loan, the Company formed a wholly-owned subsidiary, CNL Financial V, LP
(Fin V) and entered into a loan agreement with Prudential Securities Credit
Corporation (the Prudential Loan). Pursuant to the terms of the Prudential
Loan, Fin V is entitled to obtain loans for making secured loans to certain
restaurant franchisees or franchisors. The Prudential Loan provides that Fin V
is entitled to receive advances of up to $300,000,000. All amounts outstanding
on the Magenta Loan were transferred to either the Franchise Loan or the
Prudential Loan. CNL Financial Services, Inc. and CNL Group are also
contingently liable under a performance guarantee on the Prudential Loan in
favor of Fin V.
On November 12, 1998, the option available to a bank to convert the CNL
Group Inc. line of credit (See Note 6) to a subordinated debenture lapsed.
F-57
<PAGE>
CNL FINANCIAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-59
Financial Statements
Balance Sheets--As of June 30, 1997 and 1998............................ F-60
Statements of Operations--For the years ended June 30, 1997 and 1998 and
the Period from Inception (October 10, 1995 through June 30, 1996)..... F-61
Statements of Stockholders' Equity--For the years ended June 30, 1997
and 1998 and the Period from Inception (October 10, 1995 through June
30, 1996).............................................................. F-62
Statements of Cash Flows--For the years ended June 30, 1997 and 1998 and
the Period from Inception (October 10, 1995 through June 30, 1996)..... F-63
Notes to Financial Statements--For the years ended June 30, 1997 and
1998 and the Period from Inception (October 10, 1995 through June 30,
1996).................................................................. F-64
</TABLE>
F-58
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
CNL Financial Services, Inc.:
We have audited the accompanying balance sheets of CNL Financial Services,
Inc. (a Florida corporation) as of June 30, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 1998 and 1997, and the period from inception (October 10, 1995)
through June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Financial Services,
Inc. as of June 30, 1998 and 1997, and the results of its operations and its
cash flows for years ended June 30, 1998 and 1997, and the period from
inception (October 10, 1995) through June 30, 1996, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Orlando, Florida,
September 4, 1998
F-59
<PAGE>
CNL FINANCIAL SERVICES, INC.
BALANCE SHEETS--JUNE 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 4,430 $ 251,498
Due from related parties (note 2)........................ 6,836,000 3,990,489
Prepaid expenses......................................... 8,304 --
Office furnishings and equipment, net of accumulated
depreciation of $88,462 and $19,996 in 1998 and 1997,
respectively............................................ 239,612 26,844
Other assets............................................. -- 265,105
---------- ----------
$7,088,346 $4,533,936
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses.................. $ 340,826 $ 58,117
Due to related party (Note 2).......................... 869,318 3,545,078
---------- ----------
Total liabilities.................................... 1,210,144 3,603,195
---------- ----------
Commitments (note 5)
Stockholders' equity
Common stock, $1 par value; 10,000 shares authorized,
2,000 and 1,800 issued and outstanding for 1998 and
1997, respectively.................................... 2,000 1,800
Additional paid-in capital............................. 5,231,827 541,614
Retained earnings...................................... 644,375 387,327
---------- ----------
Total stockholders' equity........................... 5,878,202 930,741
---------- ----------
$7,088,346 $4,533,936
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-60
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1998 and 1997, and
The Period From Inception (October 10, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Period From
Inception
Year Ended June 30, (October 10, 1995)
---------------------- Through
1998 1997 June 30, 1996
---------- ---------- ------------------
<S> <C> <C> <C>
Fee revenues (note 2)............... $5,974,885 $1,804,357 $ --
Expenses:
Origination fees (Note 2)......... 1,695,452 -- --
Salaries.......................... 1,448,359 431,001 95,200
General and administrative........ 3,014,760 602,554 93,659
---------- ----------
Total expenses.................. 6,158,571 1,033,555 188,859
---------- ---------- ---------
Operating (loss) income............. (183,686) 770,802 (188,859)
---------- ---------- ---------
Interest income (note 2)............ 608,560 54,641 --
Income (loss) before income taxes... 424,874 825,443 (188,859)
Provision (benefit) for income taxes
(Note 3)........................... 167,826 326,050 (76,793)
---------- ---------- ---------
Net income (loss)................... $ 257,048 $ 499,393 $(112,066)
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended June 30, 1998 and 1997, and
The Period From Inception (October 10, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Number Additional Retained
of Par Paid-in (Deficit)/
Shares Value Capital Earnings Total
------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, at inception (October
10, 1995)..................... $ -- $ -- $ -- $ -- $ --
Issuance of common stock..... 1,800 1,800 541,614 -- 543,414
Net loss..................... -- -- -- (112,066) (112,066)
------ ------ ---------- --------- ----------
Balance, June 30, 1996......... 1,800 1,800 541,614 (112,066) 431,348
Net income................... -- -- -- 499,393 499,393
------ ------ ---------- --------- ----------
Balance, June 30, 1997......... 1,800 1,800 541,614 387,327 930,741
Issuance of common stock, net
of issuance costs........... 200 200 4,690,213 -- 4,690,413
Net income................... -- -- -- 257,048 257,048
------ ------ ---------- --------- ----------
Balance, June 30, 1998......... $2,000 $2,000 $5,231,827 $ 644,375 $5,878,202
====== ====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1998 and 1997, and
The Period From Inception (October 10, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Period From
Inception
(October 10, 1995)
Year Ended June 30, Through
----------------------- June 30,
1998 1997 1996
----------- ---------- ------------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Cash received from customers.. $ 3,802,221 $1,685,914 $ --
Interest income............... 197,650 54,641 --
Cash paid to employees and
other operating cash payments (6,211,431) (895,804) (180,908)
Income tax (paid) refunded.... (493,876) 76,793 --
----------- ---------- ---------
Net cash (used in) provided
by operating activities... (2,705,436) 921,544 (180,908)
----------- ---------- ---------
Cash Flows From Investing
Activities:
Payment of organizational
expenses.................... -- -- (361,506)
Purchase of office
furnishings and equipment... (281,235) (35,434) --
----------- ---------- ---------
Net cash used in investing
activities................ (281,235) (35,434) (361,506)
----------- ---------- ---------
Cash Flows From Financing
Activities:
Net proceeds from borrowings
for office furnishings and
equipment................... 15,592 29,512 --
Proceeds from issuance of
common stock................ 4,690,413 -- 543,414
Net (repayments) advances
from related parties........ (1,944,466) 3,189,517 --
Net advances to related
parties..................... (21,936) (3,854,641) --
----------- ---------- ---------
Net cash provided by (used
in) financing activities.. 2,739,603 (635,612) 543,414
----------- ---------- ---------
Net (decrease) increase in cash
and cash equivalents.......... (247,068) 250,498 1,000
Cash and cash equivalents,
beginning of fiscal year...... 251,498 1,000 --
----------- ---------- ---------
Cash and cash equivalents, end
of fiscal year................ $ 4,430 $ 251,498 $ 1,000
=========== ========== =========
Reconciliation of Net Income to
Net Cash Provided by Operating
Activities:
Net income (loss)............ $ 257,048 $ 499,393 $(112,066)
----------- ---------- ---------
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities--
Amortization................ 25,105 72,301 24,100
Depreciation................ 45,830 8,590 --
(Increase) decrease in due
from related parties (2,583,575) 284,400 (94,198)
Increase in prepaid
expenses................... (8,304) -- --
Decrease in due to related
parties.................... (724,249) -- --
Increase in accounts payable
and accrued expenses....... 282,709 56,860 1,256
----------- ---------- ---------
Total adjustments.......... (2,962,484) 422,151 (68,842)
----------- ---------- ---------
Net cash (used in) provided
by operating activities... $(2,705,436) $ 921,544 $(180,908)
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
1.Significant Accounting Policies
Organization and Nature of Business
CNL Financial Corporation, a Florida C corporation, was organized on October
10, 1995, and on December 15, 1995, its name was changed to CNL Financial
Services, Inc. (the Company). The Company is a majority-owned subsidiary of CNL
Group, Inc. (the Parent). Operations began in March 1996.
The Company is primarily engaged in soliciting applications for CNL
Financial Corporation (CFC), an affiliate under common control, and
subsidiaries' loan program, evaluating creditworthiness of applicants,
servicing and collecting of principal and interest on the outstanding notes
receivable balances, maintaining the accounting records and providing reports
to parties of the loan agreements.
During fiscal 1998, the Company sold 200 shares of common stock for
$1,000,000, net of issuance costs, to Five Arrows Realty Securities, LLC (Five
Arrows). As part of this transaction, the Parent contributed an additional
$3,690,413 to the Company.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include cash and cash invested in liquid instruments with a maturity of three
months or less when purchased.
Office Furnishings and Equipment
Office furnishings and equipment are stated at cost and are depreciated
primarily using an accelerated method over their estimated useful lives of five
to 10 years. Major renewals and betterments are capitalized; replacements,
maintenance and repairs, which do not improve or extend the lives of the
respective assets, are expensed as incurred. When office furnishings and
equipment are sold or disposed of, the asset account and related accumulated
depreciation account are relieved, and any resulting gain or loss is included
in income.
Other Assets
As of June 30, 1997, other assets consist primarily of costs incurred in
connection with the organization and startup of CFC. During fiscal 1998, the
Company entered into an agreement with CFC whereby CFC agreed to reimburse the
Company for $240,000 of these costs. Therefore, these costs were reclassified
to due from related parties as of June 30, 1998.
During the year ended June 30, 1998, the Company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities." This statement
requires all start-up activities and organizational costs to be expensed as
incurred. This resulted in a write-off of approximately $25,105 of capitalized
costs during the year ended June 30, 1998.
Stock Split
A 1.8-for-1 stock split was effected September 24, 1997, with the issuance
of 800 common shares and the transfer of $800 from additional paid-in capital
to the common stock account. Par value remained $1 per share subsequent to the
split. All references to number of shares, except authorized shares in the
financial statements, have been adjusted to reflect the stock split on a
retroactive basis.
Revenue Recognition
Fee revenue includes fees earned for accounting, loan origination and
servicing, management, advisory, and administration services. The Company
recognizes fee revenue as the services are provided.
F-64
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company's taxable income or loss is includable in its Parent's
consolidated federal and state income tax returns. The Company accounts for
income taxes as if it were filing tax returns on a stand-alone basis using an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, the Company considers all expected future
events other than enactments of changes in the tax law or rates. Changes in tax
laws or rates will be recognized in the future years in which they occur.
Amounts payable or receivable related to income taxes are included in the due
from or to related parties accounts. For the years ended June 30, 1998 and
1997, deferred taxes were immaterial.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
2. Related-Party Transactions
One of the principal shareholders of the Parent, James M. Seneff, Jr., is a
stockholder and officer of CFC. Additionally, tbe president of the Parent and
officer of the Company, Robert A. Bourne, is also a stockholder of CFC.
Fees
Substantially all fees earned by the Company are for services provided to
CFC and its subsidiaries. In addition, during 1998, the Company and CFC entered
into a management agreement whereby CFC pays the Company a management fee,
advisory fee, arrangement fee, executive fee, guarantee fee and administration
fee, as defined in the agreement. Additionally, the management and advisory
agreement provides that the Company is eligible for a performance bonus, if
approved, and in such amounts as may be determined by the Board of Directors of
CFC at its discretion. No such bonus was approved for the year ended June 30,
1998.
Due From Related Parties
Due from related parties consisted of the following at June 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Fees receivable........................................ $2,360,458 $ 135,848
Advances receivable.................................... 4,235,542 3,854,641
Organization costs..................................... 240,000 --
$6,836,000 $3,990,489
</TABLE>
The fees receivable are due from CFC or its subsidiaries for services
provided by the Company as described above. Amounts due are unsecured and bear
interest at 12 percent per annum. There are no defined payment terms.
The advances receivable are due from CFC and are unsecured, bear interest at
12 percent per annum, and are due on demand. For the years ended June 30, 1998,
1997 and 1996, the Company earned interest of $608,560, $54,641 and $0,
respectively, related to these advances.
F-65
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The organization costs are due from CFC for expenses incurred by the Company
on behalf of CFC (see Note 1).
CNL Group, Inc. Loan Conversion Option
The Parent has a line of credit with a bank under which the bank has the
option to convert the line of credit to a subordinated debenture prior to
November 12, 1998. Upon the conversion to a subordinated debenture, the Parent
will issue warrants entitling the bank to purchase 10 percent of the Company's
outstanding stock, subject to the antidilution provision contained in the
Company's Shareholders' Agreement dated September 25, 1997. Unexercised
warrants will expire on November 12, 1999.
Performance Guarantees
The Company is also contingently liable under a performance guarantee in
favor of CFC and Five Arrows for the payment and performance of any and all
obligations of the Company related to agreements which it has entered into with
CFC and Five Arrows. As of June 30, 1998, CFC had $20,000,000 outstanding
related to these agreements.
The Parent is also contingently liable under a performance guarantee in
favor of CNL Financial III, LLC, a subsidiary of CFC, and Magenta Capital
Corporation, an unrelated third party, for the payment and performance of any
and all obligations of the Company related to an agreement which it has entered
into with CNL Financial III, LLC and Magenta Capital Corporation. As of June
30, 1998, CNL Financial III, LLC had $220,043,424 outstanding related to this
agreement.
Additionally, the Parent is contingently liable under a performance
guarantee in favor of CNL Financial IV, LP, a subsidiary of CFC, and Variable
Funding Capital Corporation, an unrelated third party, for the payment and
performance of any and all obligations of the Company related to an agreement
(the Magenta Loan) which it has entered into with CNL Financial IV, LP and
Variable Funding Capital Corporation. As of June 30, 1998, CNL Financial IV, LP
had $50,203,000 outstanding related to this agreement.
Loan Guarantee
The Parent is contingently liable under a Limited Recourse Agreement related
to a $150 million Warehouse Agreement between CNL Financial I, Inc., a
subsidiary of CFC, as borrower, and First Union National Bank of Florida, as
lender. Under the terms of the Limited Recourse Agreement, the Parent is liable
for amounts drawn on the Warehouse loan for the purpose of making mortgage
loans if, and only if, the loan was not made in accordance with underwriting
criteria set forth by the lender. Such underwriting services are performed by
the Company.
Due to Related Party
During the years ended June 30, 1998, 1997 and 1996, certain affiliated
entities provided accounting and administrative services to the Company for
which the Company incurred expenses of $1,114,175, $210,628 and $19,017,
respectively. The amount due to related parties of $824,215 and $3,499,975 at
June 30, 1998 and 1997, respectively, represents amounts due to the Parent or
its subsidiaries for these services. Amounts due are unsecured and noninterest-
bearing. There are no defined payment terms.
The Company was allocated a portion of the indebtedness of the Parent for
the acquisition of certain office furniture and equipment used by the Company.
The balances outstanding at June 30, 1998 and 1997, were $45,103 and $29,511,
respectively, and are included in due to related party in the accompanying
balance sheets.
The indebtedness bears interest at 8.75 percent, and is secured by the
underlying office furnishings and equipment of the Company. The aggregate
maturities of the allocated indebtedness to the Parent at June 30, 1998, were
as follows:
F-66
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ending June 30, Amount
-------------------- -------
<S> <C>
1999................................................................. $16,379
2000................................................................. 12,589
2001................................................................. 8,350
2002................................................................. 5,298
2003................................................................. 2,487
-------
$45,103
=======
</TABLE>
Transactions with Related Party
Effective July 1, 1997, the Company entered into an arrangement with CNL
Fund Advisors, Inc. (CFA), a majority-owned subsidiary of CNL Group, Inc.,
which requires CFA to pay the Company for providing credit underwriting
services on its behalf. Additionally, the Company is required to pay CFA an
origination fee for services rendered in connection with all loans originated
and serviced by the Company. The Company received income of $304,190 related to
credit underwriting services and incurred expenses of $1,695,452 related to
origination fees for the year ended June 30, 1998.
3. Income Taxes
The provision (benefit) for income taxes consisted of the following
components for the years ended June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $144,458 $280,651 $(66,406)
State.......................................... 23,368 45,399 (10,387)
-------- -------- --------
$167,826 $326,050 $(76,793)
======== ======== ========
</TABLE>
The difference between the income tax calculated at the U.S. Federal
statutory rates is primarily because of the inclusion of state income taxes,
net of federal benefit.
4. Profit Sharing Plan
Employees of the Company are included in the Parent's defined contribution
profit sharing plan (the Plan). The Plan is designed in accordance with the
applicable sections of the Internal Revenue Code, and is not subject to minimum
funding requirements. The Plan covers all eligible employees of the Company and
its subsidiaries upon completion of one year of service. The Plan provides for
employee contributions under a salary reduction plan, section 401(k). The
employees may elect to contribute up to 15 percent of salary to a maximum under
Internal Revenue Service regulations. The Company matches 50 percent of each
employee's contribution up to a maximum of 3 percent of salary. For the years
ended June 30, 1998, 1997 and 1996, the Company's contribution, including
administration costs, amounted to $8,376, $3,076 and $2,236, respectively.
5. Commitments
The Company has outstanding loan commitments to qualified borrowers that are
not reflected in the accompanying financial statements. These commitments, if
accepted by the potential borrower, obligate the Company to provide funding.
Upon closing of the loan commitments, the funding will be provided by CFC's
subsidiaries. The unfunded commitment totaled approximately $119,806,000 at
June 30, 1998.
F-67
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Event Subsequent to Date of Report of Independent Certified Public
Accountants (Unaudited):
On October 2, 1998, CNL Financial III, LLC, a related party, reduced the
availability on the Magenta Loan (See Note 2) from $300,000,000 to $150,000,000
and suspended the use of the line. Concurrent with the suspension of the
Magenta Loan, CFC formed a wholly-owned subsidiary, CNL Financial V, LP (Fin V)
and entered into an agreement with Prudential Securities Credit Corporation
(the Prudential Loan) which provides that Fin V is entitled to receive advances
of up to $300,000,000. All amounts outstanding on the Magenta Loan were
transferred to either the Prudential Loan or other borrowing facilities of CFC.
The Company and the Parent were also contingently liable under a performance
guarantee on the Prudential Loan in favor of Fin V.
On November 12, 1998, the option available to convert the CNL Group Inc.
line of credit (see Note 2) to a subordinated debenture lapsed.
F-68
<PAGE>
CNL INCOME FUND, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-70
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-71
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-72
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-73
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-74
Report of Independent Accountants......................................... F-76
Balance Sheets as of December 31, 1997 and 1996........................... F-77
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-78
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-79
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-80
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-81
</TABLE>
F-69
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation
of $2,226,822 and $2,172,913....................... $7,624,993 $8,185,465
Investment in and due from joint ventures........... 896,601 919,476
Cash and cash equivalents........................... 285,367 184,130
Restricted cash..................................... -- 129,257
Receivables, less allowance for doubtful accounts of
$3,092 in 1997..................................... 586 21,331
Prepaid expenses.................................... 5,987 4,989
Lease costs, less accumulated amortization of
$23,750 and $21,875................................ 26,250 28,125
Accrued rental income............................... 29,628 27,305
---------- ----------
$8,869,412 $9,500,078
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 811 $ 2,595
Accrued and escrowed real estate taxes payable...... 7,170 734
Distributions payable............................... 266,982 316,221
Due to related parties.............................. 131,112 115,741
Rents paid in advance and deposits.................. 24,673 35,737
---------- ----------
Total liabilities............................... 430,748 471,028
Partners' capital................................... 8,438,664 9,029,050
---------- ----------
$8,869,412 $9,500,078
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
1998 1997 1998 1997
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases.... $243,612 $253,305 $774,444 $ 780,333
Interest and other income.............. 6,597 6,517 19,053 14,314
-------- -------- -------- ----------
250,209 259,822 793,497 794,647
-------- -------- -------- ----------
Expenses:
General operating and administrative... 20,145 19,477 65,647 63,833
Professional services.................. 2,404 3,227 15,006 9,136
Real estate taxes...................... 1,080 1,101 3,241 3,305
State and other taxes.................. -- -- 4,450 3,538
Depreciation and amortization.......... 51,429 50,958 157,251 156,060
-------- -------- -------- ----------
75,058 74,763 245,595 235,872
-------- -------- -------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Buildings............................... 175,151 185,059 547,902 558,775
Equity in Earnings of Joint Ventures..... 20,937 172,680 62,394 226,035
Gain on Sale of Land and Buildings....... -- 233,183 235,804 233,183
-------- -------- -------- ----------
Net Income............................... $196,088 $590,922 $846,100 $1,017,993
======== ======== ======== ==========
Allocation of Net Income:
General partners....................... $ 1,961 $ 4,999 $ 7,118 $ 9,270
Limited partners....................... 194,127 585,923 838,982 1,008,723
-------- -------- -------- ----------
$196,088 $590,922 $846,100 $1,017,993
======== ======== ======== ==========
Net Income Per Limited Partner Unit...... $ 6.47 $ 19.53 $ 27.97 $ 33.62
======== ======== ======== ==========
Weighted Average Number of Limited
Partner Units Outstanding............... 30,000 30,000 30,000 30,000
======== ======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 321,759 $ 310,182
Net income.................................... 7,118 11,577
---------- ----------
328,877 321,759
---------- ----------
Limited partners:
Beginning balance............................. 8,707,291 8,734,995
Net income.................................... 838,982 1,237,180
Distributions ($47.88 and $42.16 per limited
partner unit, respectively).................. (1,436,486) (1,264,884)
---------- ----------
8,109,787 8,707,291
---------- ----------
Total partners' capital..................... $8,438,664 $9,029,050
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents:
Net Cash Provided by
Operating Activities..... $ 799,653 $1,009,004
---------- ----------
Cash Flows from Investing
Activities:
Proceeds from sale of land
and building............. 661,300 793,009
Return of capital from
joint venture............ -- 472,373
Decrease (increase) in
restricted cash.......... 126,009 (793,009)
---------- ----------
Net cash provided by
investing activities..... 787,309 472,373
---------- ----------
Cash Flows from Financing
Activities:
Proceeds from loan from
corporate general
partner.................. -- 81,000
Repayment of loan from
corporate general
partner.................. -- (81,000)
Distributions to limited
partners................. (1,485,725) (948,663)
---------- ----------
Net cash used in
financing activities... (1,485,725) (948,663)
---------- ----------
Net Increase in Cash and
Cash Equivalents........... 101,237 532,714
Cash and Cash Equivalents at
Beginning of Period........ 184,130 159,379
---------- ----------
Cash and Cash Equivalents at
End of Period.............. $ 285,367 $ 692,093
========== ==========
Supplemental Schedule of
Non-Cash Financing
Activities:
Distributions declared and
unpaid at end of period.. $ 266,982 $ 316,221
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income
Fund, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
During the nine months ended September 30, 1998, the Partnership sold its
property in Kissimmee, Florida, for $680,000 and received net sales proceeds of
$661,300 resulting in a gain of $235,804 for financial reporting purposes. This
property was originally acquired by the Partnership in 1987 and had a cost of
approximately $475,400, excluding acquisition fees and miscellaneous
acquisition expenses; therefore the Partnership sold this property for
approximately $185,900 in excess of its original purchase price. In connection
with the sale, the Partnership incurred a deferred, subordinated, real estate
disposition fee of $20,400 (see Note 4).
3. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a noncumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return on a cumulative basis,
plus the return of their adjusted capital contributions. The general partners
will then receive, to the extent previously subordinated and unpaid, a one
percent interest in all prior distributions of net cash flow and a return of
their capital contributions. Any remaining sales proceeds will be distributed
95 percent to the limited partners and five percent to the general partners.
Any gain from the sale of a property 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.
F-74
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Allocations and Distribution--Continued
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $1,436,486 and $948,663,
respectively ($266,982 and $316,221 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions of $47.88 and $31.62 per
unit for the nine months ended September 30, 1998 and 1997, respectively ($8.90
and $10.54 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $586,300 as a result of the distribution of net sales proceeds from
the sale of the property in Kissimmee, Florida. Of this amount, $216,361 was
applied toward the limited partners' 10% Preferred Return and the balance of
$369,939 was treated as a return of capital for purposes of calculating the
limited partners' 10% Preferred Return. As a result of this return of capital,
the amount of the limited partners' invested capital contributions (which
generally is the limited partners' capital contributions, less distributions
from the sale of a property that are considered to be a return of capital) was
decreased; therefore, the amount of the limited partners' invested capital
contributions on which the 10% Preferred Return is calculated was lowered
accordingly. No distributions have been made to the general partners to date.
4. Related Party Transactions
An affiliate of the Partnership is 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. Payment of the real
estate disposition fee is subordinated to receipt by the limited partners of
the 10% Preferred Return on a cumulative basis, plus their adjusted capital
contributions. For the nine months ended September 30, 1998, the Partnership
incurred $20,400 in a deferred, subordinated, real estate disposition fee as a
result of the sale of a property (see Note 2). No deferred, subordinated, real
estate disposition fees were incurred for the nine months ended September 30,
1997.
F-75
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund, Ltd. (a
Florida limited partnership) as of December 31, 1997 and 1996 and the related
statements of income, partners' capital and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund, Ltd. as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 1, 1998
F-76
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accumulated
depreciation........................................... $8,185,465 $8,091,154
Investment in and due from joint ventures............... 919,476 990,307
Cash and cash equivalents............................... 184,130 159,379
Restricted cash......................................... 129,257 --
Receivables, less allowance for doubtful accounts $3,092
and of $1,413.......................................... 21,331 180,248
Prepaid expenses........................................ 4,989 4,465
Lease costs, less accumulated amortization of $21,875
and $19,375............................................ 28,125 30,625
Accrued rental income................................... 27,305 23,599
---------- ----------
$9,500,078 $9,479,777
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable........................................ $ 2,595 $ 2,131
Escrowed real estate taxes payable...................... 734 525
Distributions payable................................... 316,221 316,221
Due to related parties.................................. 115,741 95,012
Rents paid in advance and deposits...................... 35,737 20,711
---------- ----------
Total liabilities................................... 471,028 434,600
Partners' capital....................................... 9,029,050 9,045,177
---------- ----------
$9,500,078 $9,479,777
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,038,443 $1,115,530 $1,129,406
Contingent rental income................... 22,205 56,409 35,176
Interest and other income.................. 22,210 101,293 13,011
---------- ---------- ----------
1,082,858 1,273,232 1,177,593
---------- ---------- ----------
Expenses:
General operating and administrative....... 86,780 92,462 84,700
Professional services...................... 12,772 13,262 14,465
Real estate taxes.......................... 3,929 4,009 13,746
State and other taxes...................... 5,138 5,260 5,357
Depreciation and amortization.............. 208,807 210,206 210,197
---------- ---------- ----------
317,426 325,199 328,465
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and
Gain on Sale of Land and Building........... 765,432 948,033 849,128
Equity in Earnings of Joint Ventures......... 250,142 116,076 112,974
Gain on Sale of Land and Building............ 233,183 19,000 --
---------- ---------- ----------
Net Income................................... $1,248,757 $1,083,109 $ 962,102
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 11,577 $ 10,641 $ 9,621
Limited partners........................... 1,237,180 1,072,468 952,481
---------- ---------- ----------
$1,248,757 $1,083,109 $ 962,102
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 41.24 $ 35.75 $ 31.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 30,000 30,000 30,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $193,400 $ 96,520 $13,314,525 $(12,164,195) $ 9,752,623 $(1,663,140) $9,529,733
Distributions to limited
partners ($42.16 per
limited partner unit).. -- -- -- (1,264,883) -- -- (1,264,883)
Net income.............. -- 9,621 -- -- 952,481 -- 962,102
-------- -------- ----------- ------------ ----------- ----------- ----------
Balance, December 31,
1995................... 193,400 106,141 13,314,525 (13,429,078) 10,705,104 (1,663,140) 9,226,952
Distributions to limited
partners ($42.16 per
limited partner unit).. -- -- -- (1,264,884) -- -- (1,264,884)
Net income.............. -- 10,641 -- -- 1,072,468 -- 1,083,109
-------- -------- ----------- ------------ ----------- ----------- ----------
Balance, December 31,
1996................... 193,400 116,782 13,314,525 (14,693,962) 11,777,572 (1,663,140) 9,045,177
Distributions to limited
partners ($42.16 per
limited partner unit).. -- -- -- (1,264,884) -- -- (1,264,884)
Net income.............. -- 11,577 -- -- 1,237,180 -- 1,248,757
-------- -------- ----------- ------------ ----------- ----------- ----------
Balance, December 31,
1997................... $193,400 $128,359 $13,314,525 $(15,958,846) $13,014,752 $(1,663,140) $9,029,050
======== ======== =========== ============ =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,227,883 $1,096,290 $1,152,159
Distributions from joint ventures......... 152,019 133,296 129,006
Cash paid for expenses.................... (84,642) (106,546) (110,488)
Interest received......................... 21,556 9,648 11,837
---------- ---------- ----------
Net cash provided by operating activi-
ties.................................... 1,316,816 1,132,688 1,182,514
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building... 793,009 20,000 --
Additions to land and building............ (863,135) -- --
Return of capital from joint venture...... 472,373 -- --
Investment in joint venture............... (303,419) -- --
Increase in restricted cash............... (126,009) -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. (27,181) 20,000 --
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from loan from corporate general
partner.................................. 133,000 83,100 --
Repayment of loan from corporate general
partner.................................. (133,000) (83,100) --
Contributions from general partner -- -- --
Distributions to limited partners......... (1,264,884) (1,264,884) (2,164,568)
---------- ---------- ----------
Net cash used in financing activities.... (1,264,884) (1,264,884) (2,164,568)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 24,751 (112,196) (982,054)
Cash and Cash Equivalents at Beginning of
Year...................................... 159,379 271,575 1,253,629
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 184,130 $ 159,379 $ 271,575
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by
Operating Activities:
Net income................................ $1,248,757 $1,083,109 $ 962,102
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation.............................. 206,307 207,706 207,697
Amortization.............................. 2,500 2,500 2,500
Equity in earnings of joint ventures, net
of distributions......................... (98,123) 17,220 16,032
Gain on sale of land and building......... (233,183) (19,000) --
Decrease (increase) in receivables........ 158,360 (151,105) (16,414)
Increase in prepaid expenses.............. (524) (650) (1,252)
Decrease (increase) in accrued rental in-
come..................................... (3,706) 1,234 (2,081)
Increase (decrease) in accounts payable
and accrued expenses..................... 673 (11,712) 458
Increase in due to related parties........ 20,729 19,873 8,389
Increase (decrease) in rents paid in ad-
vance and deposits....................... 15,026 (16,487) 5,083
---------- ---------- ----------
Total adjustments........................ 68,059 49,579 220,412
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,316,816 $1,132,688 $1,182,514
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at De-
cember 31................................ $ 316,221 $ 316,221 $ 316,221
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund, 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 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 generally 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 the operating method. Under the
operating method, land and building leases 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.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
When the properties are sold, the related cost and accumulated depreciation
plus any accrued rental income, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the 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.
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
the allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Sand Lake
Road Joint Venture, Orange Avenue Joint Venture, Seventh Avenue Joint Venture,
and a property in Vancouver, Washington, held as tenants-in-common with
affiliates, are accounted for 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.
F-81
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
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 and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or three 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>
1997 1996
---------- ----------
<S> <C> <C>
Land................................................. $3,999,700 $3,973,607
Buildings............................................ 6,358,678 6,226,321
---------- ----------
10,358,378 10,199,928
Less accumulated depreciation........................ (2,172,913) (2,108,774)
---------- ----------
$8,185,465 $8,091,154
========== ==========
</TABLE>
In June 1996, the Partnership sold a small, undeveloped portion of the land
relating to its property in Mesquite, Texas. In connection therewith, the
Partnership received net sales proceeds of $20,000, and recognized a gain for
financial reporting purposes, of $19,000.
F-82
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases--Continued
In August 1997, the Partnership sold its property in Casa Grande, Arizona,
to a third party for $840,000 and received net sales proceeds (net of $2,691
which represents prorated rent returned to the tenant) of $793,009, resulting
in a gain of $233,183 for financial reporting purposes. This property was
originally acquired by the Partnership in December 1986 and had a cost of
approximately $667,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $128,400 in excess of its original purchase price. In October
1997, the Partnership reinvested the majority of the net sales proceeds in a
property located in Camp Hill, Pennsylvania.
Certain leases provide for escalating guaranteed minimum rents throughout
the lease terms. 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, 1997 and 1995, the Partnership recognized $3,706 and $2,081, respectively,
of such income. For the year ended December 31, 1996, rental payments received
exceeded the rental income recognized on a straight-line basis by $1,234.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.............................................................. $ 936,961
1999.............................................................. 911,652
2000.............................................................. 911,305
2001.............................................................. 887,428
2002.............................................................. 481,464
Thereafter........................................................ 3,394,672
----------
$7,523,482
==========
</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. Investment in and Due from Joint Ventures
In August 1997, Seventh Avenue Joint Venture, in which the Partnership owned
a 50 percent interest, sold its property to its tenant for $950,000, and
received net sales proceeds (net of $2,678 which represents prorated rent
returned to the tenant) of $944,747, resulting in a gain to the joint venture
of approximately $295,100 for financial reporting purposes. The property was
originally acquired by Seventh Avenue Joint Venture in June 1986 and had a
total cost of approximately $770,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the joint venture sold the
property for approximately $177,400 in excess of its original purchase price.
During 1997, as a result of the sale of the property, the joint venture was
dissolved in accordance with the joint venture agreement. As a result, the
Partnership received approximately $472,400, representing its pro-rata share of
the net sales proceeds received by the joint venture.
In December 1997, the Partnership acquired a property in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1997, the Partnership owned a 12.17% interest in this property.
F-83
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Investment in and Due from Joint Ventures--Continued
As of December 31, 1997, the Partnership had a 50 percent interest in the
profits and losses of Orange Avenue Joint Venture and Sand Lake Road Joint
Venture, and owned a 12.17% interest in a property in Vancouver, Washington, as
tenants-in-common. These joint ventures, and the Partnership and affiliates, as
tenants-in-common, 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 the joint ventures and the property held as
tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $3,338,774 $1,750,065
Cash................................................ 1,636 11,934
Receivables......................................... -- 18,456
Accrued rental income............................... -- 16,620
Liabilities......................................... 1,677 30,232
Partners' capital................................... 3,338,733 1,766,843
Revenues............................................ 246,236 277,652
Gain on sale of land and building................... 295,080 --
Net income.......................................... 500,285 232,152
</TABLE>
The Partnership recognized income totalling $250,142, $116,076 and $112,974
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
The investment in and due from joint ventures included $27,682 at December
31, 1996, which was due from Seventh Avenue Joint Venture as a result of an
underpayment of distributions to the Partnership.
5. Restricted Cash
As of December 31, 1997, the remaining net sales proceeds of $126,009 from
the sale of the property in Casa Grande, Arizona, plus accrued interest of
$3,248, were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional property.
6. Receivables
In March 1996, the Partnership accepted a promissory note from the tenant of
the property in Mesquite, Texas, in the amount of $156,308, for past due rental
and other amounts, and real estate taxes previously paid by the Partnership on
behalf of the tenant. Payments were due in 60 monthly installments of $3,492,
including interest at a rate of 11 percent per annum, and collections commenced
on June 1, 1996. Receivables at December 31, 1996, included $150,787 of such
amounts, including accrued interest of $5,657 and late fees of $1,222. In
January 1997, the Partnership collected the full amount of the promissory note.
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
F-84
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Allocations and Distributions--Continued
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their cumulative 10% Preferred Return, plus the
return of their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners. Any
gain from the sale of a property 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $1,264,884, and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $1,264,883. Distributions for the year ended December 31,
1994, included $861,500 as a result of the distribution of net sales proceeds
from the sale of the property in Fairfield, California, which were treated as a
return of capital for purposes of calculating the limited partners' cumulative
10% Preferred Return. As a result of the return of capital, the amount of the
limited partners' adjusted capital contributions (which generally is the
limited partners' capital contributions, less distributions from the sale of a
property that are considered to be a return of capital) was decreased;
therefore, the amount of the limited partners' adjusted capital contributions
on which the 10% Preferred Return is calculated was lowered accordingly. No
distributions have been made to the general partners to date.
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................ $1,248,757 $1,083,109 $962,102
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes...................... (104,279) (108,995) (109,002)
Gain on sale of land and building for
financial reporting purposes in excess
of gain for tax reporting purposes...... (233,183) -- --
Equity in earnings of joint ventures for
financial reporting purposes in excess
of equity in earnings of joint ventures
for tax reporting purposes.............. (18,410) (17,987) (14,739)
Accrued rental income.................... (3,706) 1,234 (2,081)
Rents paid in advance.................... 15,026 (16,487) 5,083
Allowance for doubtful accounts.......... 1,679 (120,724) 22,392
---------- ---------- --------
Net income for federal income tax
purposes................................ $ 905,884 $ 820,150 $863,755
========== ========== ========
</TABLE>
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and is director, chairman of the
board of directors and chief executive officer of CNL Fund Advisors, Inc. The
other individual general partner, Robert A. Bourne,
F-85
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
is director and president of CNL Securities Corp., is director, vice chairman
of the board of directors and treasurer of CNL Fund Advisors, Inc. and served
as president of CNL Fund Advisors, Inc through October 1997.
9. Related Party Transactions--Continued
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay the Affiliates an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures or competitive fees for comparable
services. In addition, these fees will be incurred and will be payable only
after the limited partners receive their aggregate, noncumulative 10% Preferred
Return. Due to the fact that these fees are noncumulative, if the limited
partners do not receive their 10% Preferred Return in any particular year, no
management fees will be due or payable for such year. As a result of such
threshold, no management fees were incurred during the years ended December 31,
1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, cumulative 10% Preferred
Return, plus their adjusted capital contributions. No deferred, subordinated
real estate disposition fees were incurred for the years ended December 31,
1997, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $57,679, $67,685 and $58,543 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to Affiliates:
Deferred, subordinated real estate disposition fee........ $ 66,750 $66,750
Expenditures incurred on behalf of the Partnership........ 17,902 9,527
Accounting and administrative services.................... 31,089 18,735
-------- -------
$115,741 $95,012
======== =======
</TABLE>
The deferred, subordinated real estate disposition fees are the result of
the Partnership's sale of two properties in prior years. These fees will not be
paid until after the limited partners have received their cumulative 10%
Preferred Return, plus their adjusted capital contributions, as described
above.
10. Concentration of Credit Risk
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnership's total rental
income (including the Partner-ship's share of rental income from
F-86
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
joint ventures and the property held as tenants-in-common with an affiliate),
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $452,653 $452,653 $452,653
Wendy's Inter national, Inc...................... 164,857 212,322 206,805
Restaurant Management Services, Inc.............. 128,737 129,633 124,315
</TABLE>
10. Concentration of Credit Risk--Continued
In addition, the following schedule presents total rental income from
individual restaurant chains, each representing more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from joint ventures and the property held as tenant-in-common with an
affiliate), for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $452,653 $452,653 $452,653
Wendy's Old Fashioned Hamburger Restaurants..... 443,335 507,642 582,315
Popeyes Famous Fried Chicken.................... 128,737 129,633 124,315
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-87
<PAGE>
CNL INCOME FUND II, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-89
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-90
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-91
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-92
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-93
Report of Independent Accountants........................................ F-95
Balance Sheets as of December 31, 1997 and 1996.......................... F-96
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-97
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-98
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-99
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-100
</TABLE>
F-88
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,549,043 and
$3,302,095......................................... $12,917,620 $13,164,568
Investment in joint ventures........................ 4,360,442 3,568,155
Mortgage note receivable............................ 28,731 42,734
Cash and cash equivalents........................... 850,422 470,194
Restricted cash..................................... -- 2,470,175
Receivables, less allowance for doubtful accounts of
$70,868 and $83,254................................ 57,717 80,577
Prepaid expenses.................................... 7,601 5,510
Lease costs, less accumulated amortization of
$14,156 and $11,520................................ 6,407 9,043
Accrued rental income............................... 168,738 148,103
----------- -----------
$18,397,678 $19,959,059
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 18,197 $ 7,170
Accrued and escrowed real estate taxes payable...... 5,417 4,656
Distributions payable............................... 515,625 594,000
Due to related parties.............................. 175,399 126,284
Rents paid in advance and deposits.................. 26,975 25,300
----------- -----------
Total liabilities............................... 741,613 757,410
Partners' capital................................... 17,656,065 19,201,649
----------- -----------
$18,397,678 $19,959,059
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................. $450,831 $522,972 $1,321,975 $1,567,356
Contingent rental income............ 1,445 22,393 1,445 22,393
Interest and other income........... 17,361 17,521 60,100 34,466
-------- -------- ---------- ----------
469,637 562,886 1,383,520 1,624,215
-------- -------- ---------- ----------
Expenses:
General operating and
administrative..................... 65,025 33,496 129,895 93,225
Bad debt expense.................... -- -- -- 18,033
Professional services............... 5,119 3,557 30,759 13,907
Real estate taxes................... -- -- -- 1,259
State and other taxes............... -- -- 14,732 10,403
Depreciation and amortization....... 82,960 101,486 249,584 312,034
-------- -------- ---------- ----------
153,104 138,539 424,970 448,861
-------- -------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures, Gain on Sale of Land
and Buildings and Real Estate
Disposition Fees..................... 316,533 424,347 958,550 1,175,354
Equity in Earnings of Joint Ventures.. 104,979 40,610 319,894 333,517
Gain on Sale of Land and Buildings.... -- 301,901 -- 460,152
Real Estate Disposition Fees.......... -- -- (45,150) --
-------- -------- ---------- ----------
Net Income............................ $421,512 $766,858 $1,233,294 $1,969,023
======== ======== ========== ==========
Allocation of Net Income:
General partners.................... $ 4,214 $ 5,636 $ 12,783 $ 17,583
Limited partners.................... 417,298 761,222 1,220,511 1,951,440
-------- -------- ---------- ----------
$421,512 $766,858 $1,233,294 $1,969,023
======== ======== ========== ==========
Net Income Per Limited Partner Unit... $ 8.35 $ 15.22 $ 24.41 $ 39.03
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding............ 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance........................... $ 373,111 $ 342,375
Net income.................................. 12,783 30,736
----------- -----------
385,894 373,111
----------- -----------
Limited partners:
Beginning balance........................... 18,828,538 17,595,394
Net income.................................. 1,220,511 3,609,144
Distributions ($55.58 and $47.52 per limited
partner unit, respectively)................ (2,778,878) (2,376,000)
----------- -----------
17,270,171 18,828,538
----------- -----------
Total partners' capital....................... $17,656,065 $19,201,649
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-91
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,601,005 $ 1,579,694
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... -- 1,259,417
Additions to land and buildings on operating
leases.......................................... -- (29,526)
Return of capital from joint venture............. -- 124,440
Investment in joint ventures..................... (834,888) --
Collections on mortgage note receivable.......... 13,694 --
Decrease (increase) in restricted cash........... 2,457,670 (1,259,417)
Payment of lease costs........................... -- (4,507)
----------- -----------
Net cash provided by investing activities...... 1,636,476 90,407
----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general part-
ner............................................. -- 721,000
Repayment of loans from corporate general part-
ner............................................. -- (721,000)
Distributions to limited partners................ (2,857,253) (1,782,000)
----------- -----------
Net cash used in financing activities.......... (2,857,253) (1,782,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equiva-
lents............................................... 380,228 (111,899)
Cash and Cash Equivalents at Beginning of Period..... 470,194 318,756
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 850,422 $ 206,857
=========== ===========
Supplemental Schedule of Non-Cash Investing and Fi-
nancing Activities:
Mortgage note accepted in exchange for sale of land
and building...................................... $ -- $ 42,000
=========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ 45,150 $ --
=========== ===========
Distributions declared and unpaid at end of peri-
od................................................ $ 515,625 $ 594,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-92
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
II, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." The adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Investment in Joint Ventures
In January 1998, the Partnership acquired a 39.42% and a 13.38% interest in
a property in Overland Park, Kansas, and a property in Memphis, Tennessee,
respectively, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investments in these properties using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investments are included in investment in joint ventures.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures and properties held as
tenants-in-common at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation...................... $8,457,326 $7,091,781
Net investment in direct financing leases...... 2,123,134 518,399
Cash........................................... 37,273 56,815
Receivables.................................... 84 4,685
Accrued rental income.......................... 183,483 102,913
Other assets................................... 1,056 418
Liabilities.................................... 38,145 31,673
Partners' capital.............................. 10,764,211 7,743,338
Revenues....................................... 938,768 399,579
Gain on sale of land and building.............. -- 360,002
Net income..................................... 780,857 687,021
</TABLE>
The Partnership recognized income totalling $319,894 and $333,517 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $104,979 and $40,610 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively.
F-93
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their cumulative 10% Preferred Return, plus the
return of their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners. Any
gain from the sale of a property 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $2,778,878 and $1,782,000,
respectively ($515,625 and $594,000 for each of the quarters ended September
30, 1998 and 1997, respectively). This represents distributions of $55.58 and
$35.64 per unit for the nine months ended September 30, 1998 and 1997,
respectively ($10.31 and $11.88 per unit for each of the quarters ended
September 30, 1998 and 1997, respectively). Distributions for the nine months
ended September 30, 1998, included $1,232,003 as a result of the distribution
of net sales proceeds from the 1997 sale of the Properties in Avon Park,
Florida and Farmington Hills, Michigan. This amount was applied toward the
limited partners' 10% Preferred Return. No distributions have been made to the
general partners to date.
4. Related Party Transactions
An affiliate of the Partnership is 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. Payment of the real
estate disposition fee is subordinated to receipt by the limited partners of
their aggregate 10% Preferred Return, plus their adjusted capital
contributions. For the nine months ended September 30, 1998, the Partnership
incurred $45,150 in deferred, subordinated, real estate disposition fees as a
result of the 1997 sales of properties in Avon Park, Florida and Farmington
Hills, Michigan. No deferred, subordinated, real estate disposition fees were
incurred for the nine months ended September 30, 1997.
F-94
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund II, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund II, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund II, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 2, 1998
F-95
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $13,164,568 $16,803,789
Investment in joint ventures.......................... 3,568,155 1,314,386
Mortgage note receivable.............................. 42,734 --
Cash and cash equivalents............................. 470,194 318,756
Restricted cash....................................... 2,470,175 --
Receivables, less allowance for doubtful accounts of
$83,254 and $126,036................................. 80,577 99,185
Prepaid expenses...................................... 5,510 4,819
Lease costs, less accumulated amortization of $11,520
and $7,537........................................... 9,043 13,026
Accrued rental income................................. 148,103 117,357
----------- -----------
$19,959,059 $18,671,318
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,170 $ 12,188
Accrued construction costs payable.................... -- 29,526
Accrued and escrowed real estate taxes payable........ 4,656 6,449
Distributions payable................................. 594,000 594,000
Due to related parties................................ 126,284 45,078
Rents paid in advance and deposits.................... 25,300 46,308
----------- -----------
Total liabilities................................. 757,410 733,549
Partners' capital..................................... 19,201,649 17,937,769
----------- -----------
$19,959,059 $18,671,318
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases......... $2,024,119 $2,224,500 $2,207,971
Contingent rental income.................... 68,920 79,313 70,159
Interest and other income................... 64,900 21,075 23,947
---------- ---------- ----------
2,157,939 2,324,888 2,302,077
---------- ---------- ----------
Expenses:
General operating and administrative........ 137,924 131,628 121,317
Professional services....................... 21,576 26,634 25,161
Bad debt expense............................ 27,965 -- 4,745
Real estate taxes........................... 410 4,647 3,588
State and other taxes....................... 10,403 4,255 5,633
Depreciation and amortization............... 399,820 421,759 456,793
---------- ---------- ----------
598,098 588,923 617,237
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and Buildings
and Lease Termination Income................. 1,559,841 1,735,965 1,684,840
Equity in Earnings of Joint Ventures.......... 389,915 130,996 153,677
Gain on Sale of Land and Buildings............ 1,476,124 -- --
Lease Termination Income...................... 214,000 -- --
---------- ---------- ----------
Net Income.................................... $3,639,880 $1,866,961 $1,838,517
========== ========== ==========
Allocation of Net Income:
General partners............................ $ 30,736 $ 18,670 $ 18,385
Limited partners............................ 3,609,144 1,848,291 1,820,132
---------- ---------- ----------
$3,639,880 $1,866,961 $1,838,517
========== ========== ==========
Net Income Per Limited Partner Unit........... $ 72.18 $ 36.97 $ 36.40
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding............................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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, 1994.. $162,000 $143,320 $25,000,000 $(17,941,377) $14,310,170 $(2,689,822) $18,984,291
Distributions to limited
partners ($47.52 per
limited partner unit)..... -- -- -- (2,376,000) -- -- (2,376,000)
Net income................. -- 18,385 -- -- 1,820,132 -- 1,838,517
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31, 1995.. 162,000 161,705 25,000,000 (20,317,377) 16,130,302 (2,689,822) 18,446,808
Distributions to limited
partners ($47.52 per
limited partner unit)..... -- -- -- (2,376,000) -- -- (2,376,000)
Net income................. -- 18,670 -- -- 1,848,291 -- 1,866,961
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31, 1996.. 162,000 180,375 25,000,000 (22,693,377) 17,978,593 (2,689,822) 17,937,769
Distributions to limited
partners ($47.52 per
limited partner unit)..... -- -- -- (2,376,000) -- -- (2,376,000)
Net income................. -- 30,736 -- -- 3,609,144 -- 3,639,880
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31, 1997.. $162,000 $211,111 $25,000,000 $(25,069,377) $21,587,737 $(2,689,822) $19,201,649
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equiv-
alents:
Cash Flows from Operating Activities:
Cash received from tenants............... $2,054,519 $2,295,531 $2,198,821
Distributions from joint ventures........ 147,995 164,718 181,908
Cash paid for expenses................... (80,744) (130,042) (229,879)
Interest received........................ 36,142 17,524 17,517
---------- ---------- ----------
Net cash provided by operating activi-
ties................................... 2,157,912 2,347,731 2,168,367
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and build-
ings.................................... 4,659,078 -- --
Proceeds received from tenant in connec-
tion with termination of leases......... 214,000 -- --
Additions to land and buildings on oper-
ating leases............................ (29,526) (11,107) (4,323)
Investment in joint ventures............. (2,136,289) -- (121)
Return of capital from joint venture..... 124,440 -- --
Decrease (increase) in restricted cash... (2,457,670) 25,000 (25,000)
Payment of lease costs................... (4,507) (1,930) (12,426)
Other.................................... -- (25,000) 25,000
---------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 369,526 (13,037) (16,870)
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate gen-
eral partner............................ 721,000 203,900 --
Repayment of loans from corporate general
partner................................. (721,000) (203,900) --
Distributions to limited partners........ (2,376,000) (2,376,000) (2,376,000)
---------- ---------- ----------
Net cash used in financing activities.... (2,376,000) (2,376,000) (2,376,000)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 151,438 (41,306) (224,503)
Cash and Cash Equivalents at Beginning of
Year...................................... 318,756 360,062 584,565
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 470,194 $ 318,756 $ 360,062
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $3,639,880 $1,866,961 $1,838,517
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 395,837 417,776 417,614
Amortization............................. 3,983 3,983 39,179
Gain on sale of land and buildings....... (1,476,124) -- --
Lease termination income................. (214,000) -- --
Equity in earnings of joint ventures, net
of distributions........................ (241,920) 33,722 28,231
Decrease (increase) in receivables....... 23,799 (8,803) (1,075)
Increase in prepaid expenses............. (691) (1,570) (2,211)
Increase in accrued rental income........ (30,746) (33,234) (34,086)
Decrease in other assets................. -- 1,750 --
Increase (decrease) in accounts payable
and accrued expenses.................... (2,304) 4,014 (21,043)
Increase (decrease) in due to related
parties................................. 81,206 35,824 (65,627)
Increase (decrease) in rents paid in ad-
vance and deposits...................... (21,008) 27,308 (31,132)
---------- ---------- ----------
Total adjustments....................... (1,481,968) 480,770 329,850
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $2,157,912 $2,347,731 $2,168,367
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage note accepted as consideration in
sale of land and building................ $ 42,000 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at De-
cember 31................................ $ 594,000 $ 594,000 $ 594,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund II, 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 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 the operating method. Under the operating
method, land and building leases 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.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
When the properties are sold, the related cost and accumulated depreciation
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 the 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, a loss will be
recorded for the amount by which the carrying value of the asset exceeds its
fair market value.
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 uncollectible accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership's investments in Kirkman Road
Joint Venture, Holland Joint Venture and Show Low Joint Venture, and the
property in Arvada, Colorado, the property in Mesa, Arizona, the property in
Smithfield, North Carolina, and the property in Vancouver, Washington, for
which each property is held as tenants-in-common with affiliates, are accounted
for 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
F-100
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
deposits at commercial banks and money market funds (some of which are backed
by government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Lease Costs--Lease incentive costs and brokerage and legal fees associated
with negotiating new leases are amortized over the terms of the new leases
using the straight-line method. When a property is sold or a lease is
terminated, the related lease cost, if any, net of accumulated amortization is
removed from the accounts and charged against income.
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 restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases have been classified as operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to four 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.
F-101
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 6,608,400 $ 8,052,723
Buildings.......................................... 9,858,263 12,567,157
----------- -----------
16,466,663 20,619,880
Less accumulated depreciation...................... (3,302,095) (3,816,091)
----------- -----------
$13,164,568 $16,803,789
=========== ===========
</TABLE>
In June 1997, the Partnership sold its property in Eagan, Minnesota, to the
tenant, for $668,033 and received net sales proceeds of $665,882, of which
$42,000 were in the form of a promissory note, resulting in a gain of $158,251
for financial reporting purposes. This property was originally acquired by the
Partnership in August 1987 and had a cost of approximately $601,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $64,800 in excess of its
original purchase price. In October 1997, the Partnership used the net sales
proceeds to acquire a property in Mesa, Arizona, as tenants-in-common (see Note
4).
In addition, during 1997, the Partnership sold its properties in
Jacksonville, Plant City and Avon Park, Florida; its property in Mathis, Texas
and two properties in Farmington Hills, Michigan to third parties for aggregate
sales prices of $4,162,006 and received aggregate net sales proceeds (net of
$18,430, which represents amounts due to the former tenant for prorated rent)
of $4,035,196, resulting in aggregate gains of $1,317,873 for financial
reporting purposes. These six properties were originally acquired by the
Partnership during 1987 and had aggregate costs of approximately $3,338,800,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold these six properties for approximately $714,400, in the
aggregate, in excess of their original aggregate purchase prices. During 1997,
the Partnership reinvested approximately $1,512,400 of these net sales proceeds
in a property in Vancouver, Washington, and a property in Smithfield, North
Carolina, as tenants-in-common with affiliates of the General Partners (see
Note 4). In January 1998, the Partnership reinvested a portion of these net
sales proceeds in a property in Overland Park, Kansas, and a property in
Memphis, Tennessee, as tenants-in-common with affiliates of the General
Partners (see Note 12). In connection with the sale of both of the Farmington
Hills, Michigan properties, the Partnership also received $214,000 as a lease
termination fee from the former tenant in consideration of the Partnership's
releasing the tenant from its obligation under the terms of the leases.
Some of the leases provide for escalating guaranteed minimum rents
throughout the lease terms. 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, 1997, 1996 and 1995, the Partnership recognized $30,746,
$33,234 and $34,086, respectively, of such income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,621,842
1999............................................................. 1,609,878
2000............................................................. 1,538,676
2001............................................................. 1,554,429
2002............................................................. 1,387,650
Thereafter....................................................... 6,256,157
-----------
$13,968,632
===========
</TABLE>
F-102
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. Investment in Joint Ventures
The Partnership has a 50 percent interest, a 49 percent interest and a 64
percent interest in the profits and losses of Kirkman Road Joint Venture,
Holland Joint Venture and Show Low Joint Venture, respectively. The remaining
interests in Holland Joint Venture and Show Low Joint Venture are held by
affiliates of the Partnership which have the same general partners. The
Partnership also has a 33.87% interest in a property in Arvada, Colorado, with
an affiliate 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 an affiliate.
Amounts relating to its investment are included in investment in joint
ventures.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 64
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the property for approximately $306,500 in excess of its original purchase
price.
In June 1997, Show Low Joint Venture reinvested $782,413 of the net sales
proceeds in a Darryl's property in Greensboro, North Carolina. As of December
31, 1997, the Partnership had received approximately $124,400 representing a
return of capital for its pro-rata share of the uninvested net sales proceeds.
As of December 31, 1997, the Partnership owned a 64 percent interest in the
profits and losses of the joint venture.
In October 1997, the Partnership used the net sales proceeds from the sale
of the property in Eagan, Minnesota (see Note 3) to acquire a property in Mesa,
Arizona, as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1997, the Partnership owned a 57.77% interest in this property.
In December 1997, the Partnership used the net sales proceeds from the sale
of one of the properties in Farmington Hills, Michigan, to acquire a property
in Smithfield, North Carolina, as tenants-in-common with an affiliate of the
general partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1997, the Partnership owned a 47 percent interest
in this property.
In addition, in December 1997, the Partnership used the net sales proceeds
from the sale of the property in Plant City, Florida, to acquire a property in
Vancouver, Washington, as tenants-in-common with affiliates of the general
partners. 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. As of December 31, 1997, the Partnership owned a 37.01% interest in
this property.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint Venture
and the Partnership and affiliates, as tenants-in-common in four separate
tenancy-in-common arrangements, each own and lease one
F-103
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
property to an operator of national fast-food or family-style restaurants. The
following presents the combined, condensed financial information for the joint
ventures and the four properties held as tenants-in-common with affiliates at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $7,091,781 $2,664,752
Net investment in direct financing lease............ 518,399 --
Cash................................................ 56,815 21,905
Receivables......................................... 4,685 9,980
Accrued rental income............................... 102,913 70,782
Other assets........................................ 418 44,263
Liabilities......................................... 31,673 28,558
Partners' capital................................... 7,743,338 2,783,124
Revenues............................................ 399,579 363,338
Gain on sale of land and building................... 360,002 --
Net income.......................................... 687,021 250,026
</TABLE>
The Partnership recognized income totalling $389,915, $130,996 and $153,677
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
5. Mortgage Note Receivable
In connection with the sale in June 1997 of its property in Eagan,
Minnesota, the Partnership accepted a promissory note in the amount of $42,000.
The promissory note bears interest at a rate of 10.50% per annum, is
collateralized by personal property and is being collected in 18 monthly
installments of interest only and thereafter, the entire principal balance
shall become due. As of December 31, 1997, the mortgage note receivable balance
was $42,734, including accrued interest of $734.
6. Restricted Cash
As of December 31, 1997, remaining net sales proceeds of $2,470,175 from the
sales of several properties (see Note 3) including accrued interest of $12,505,
were being held in interest-bearing escrow accounts pending the release of
funds by the escrow agent to acquire additional properties on behalf of the
Partnership and to distribute net sales proceeds to the limited partners.
7. Receivables
In March 1996, the Partnership accepted a promissory note from the former
tenant of the property in Gainesville, Texas, in the amount of $96,502,
representing past due rental and other amounts, which had been included in
receivables and for which the Partnership had established an allowance for
doubtful accounts, and real estate taxes previously recorded as an expense by
the Partnership. Payments are due in 60 monthly installments of $2,156,
including interest at a rate of 11 percent per annum, commencing on June 1,
1996. Due to the uncertainty of the collectibility of this note, the
Partnership established an allowance for doubtful accounts and is recognizing
income as collected. As of December 31, 1997 and 1996, the balances in the
allowance for doubtful accounts of $74,590 and $92,987, respectively, including
accrued interest of $2,654 and $3,493, respectively, represents the uncollected
amounts under this promissory note.
F-104
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their cumulative 10% Preferred Return, plus the
return of their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners. Any
gain from the sale of a property 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,376,000. No
distributions have been made to the general partners to date.
9. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,639,880 $1,866,961 $1,838,517
Depreciation for financial reporting
purposes in excess of depreciation for
tax reporting purposes................. 19,440 20,922 20,840
Gain on sale of land and buildings for
financial reporting purposes in excess
of gain for tax reporting purposes..... (638,739) -- --
Equity in earnings of joint ventures for
tax reporting purposes less than equity
in earnings of joint ventures for
financial reporting purposes........... (146,161) (1,240) (7,297)
Allowance for doubtful accounts......... (42,782) 25,225 2,449
Accrued rental income................... (30,746) (33,234) (34,086)
Rents paid in advance................... (21,008) 22,508 (34,132)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,779,884 $1,901,142 $1,786,291
========== ========== ==========
</TABLE>
10. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and is director, chairman of the
board of directors and chief executive officer of CNL Fund Advisors, Inc. The
other individual general partner, Robert A. Bourne, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc. through October 1997.
F-105
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's Properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay Affiliates an annual, noncumulative, subordinated
property management fee of one-half of one percent of the Partnership assets
under management (valued at cost) annually. The property management fee is
limited to one percent of the sum of gross operating revenues from properties
wholly owned by the Partnership and the Partnership's allocable share of gross
operating revenues from joint ventures and the property held as tenants-in-
common with an affiliate or competitive fees for comparable services. In
addition, these fees will be incurred and will be payable only after the
limited partners receive their aggregate, noncumulative 10% Preferred Return.
Due to the fact that these fees are noncumulative, if the limited partners do
not receive their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of such
threshold no property management fees were incurred during the years ended
December 31, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, cumulative 10% Preferred
Return, plus their adjusted capital contributions. No deferred, subordinated
real estate disposition fees have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $78,139, $79,624 and $81,023 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership....... $ 59,608 $21,079
Accounting and administrative services................... 66,676 23,999
-------- -------
$126,284 $45,078
======== =======
</TABLE>
During 1997, the Partnership acquired a property in Mesa, Arizona, as
tenants-in-common with an affiliate of the general partners, for a purchase
price of $630,554 from CNL BB Corp., also an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to this property in order
to facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the Partnership's percent of interest
in the costs incurred by CNL BB Corp. to acquire and carry the property,
including closing costs.
F-106
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Concentration of Credit Risk
The following schedule presents total rental income from individual lessees,
each representing more than ten percent of the Partnerships' total rental
income (including the Partnership's share of rental income from joint ventures
and the four properties held as tenants-in-common with affiliates) for at least
one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $408,333 $403,875 $410,226
Restaurant Management Services, Inc.............. 251,480 243,270 243,358
</TABLE>
In addition, the following schedule presents total rental income from
individual restaurant chains, each representing more than ten percent of the
Partnership's total rental income (including the Partnership's share of rental
income from joint ventures and four properties held as tenants-in-common with
affiliates) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $408,333 $403,875 $410,226
Wendy's Old Fashioned Hamburger Restaurants..... 381,567 421,165 412,949
KFC............................................. 278,348 358,463 352,939
Popeyes Famous Fried Chicken Restaurants........ 251,480 243,270 243,358
Denny's......................................... 221,580 388,050 372,639
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership acquired a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $634,100 for a
39.42% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
In addition, in January 1998, the Partnership acquired a property in
Memphis, Tennessee, as tenants-in-common with affiliates of the general
partners. In connection therewith, the Partnership contributed $201,300 for a
13.38% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
F-107
<PAGE>
CNL INCOME FUND III, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-109
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-110
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-111
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-112
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-113
Report of Independent Accountants........................................ F-117
Balance Sheets as of December 31, 1997 and 1996.......................... F-118
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-119
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-120
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-121
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-122
</TABLE>
F-108
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings................................. $11,923,109 $14,635,583
Investment in direct financing leases............... 916,580 926,862
Investment in joint ventures........................ 2,093,452 1,179,762
Mortgage note receivable............................ -- 681,687
Cash and cash equivalents........................... 1,726,345 493,118
Restricted cash..................................... -- 251,879
Receivables, less allowance for doubtful accounts of
$152,230 and $154,469.............................. 40,088 102,420
Prepaid expenses.................................... 8,310 14,361
Lease costs, less accumulated amortization of $2,762
in 1997............................................ -- 9,238
Accrued rental income, less allowance for doubtful
accounts of $14,735 and $15,384.................... 85,729 154,738
Other assets........................................ 29,354 29,354
----------- -----------
$16,822,967 $18,479,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 1,192 $ 5,219
Accrued and escrowed real estate taxes payable...... 11,011 11,897
Distributions payable............................... 500,000 594,000
Due to related parties.............................. 146,825 97,388
Rents paid in advance and deposits.................. 37,763 20,745
----------- -----------
Total liabilities................................. 696,791 729,249
Minority interest................................... 136,402 138,617
Partners' capital................................... 15,989,774 17,611,136
----------- -----------
$16,822,967 $18,479,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases......................... $351,021 $460,694 $1,175,634 $1,490,536
Adjustments to accrued rental
income......................... (29,474) -- (80,800) --
Earned income from direct fi-
nancing leases................. 33,613 34,101 101,222 102,631
Interest and other income....... 22,875 37,122 103,546 82,031
-------- -------- ---------- ----------
378,035 531,917 1,299,602 1,675,198
-------- -------- ---------- ----------
Expenses:
General operating and adminis-
trative........................ 32,218 31,361 102,940 104,699
Professional services........... 6,650 4,583 31,706 19,983
Real estate taxes............... 1,886 4,229 9,421 11,789
State and other taxes........... 530 -- 12,250 9,924
Depreciation and amortization... 72,026 90,917 236,345 278,778
-------- -------- ---------- ----------
113,310 131,090 392,662 425,173
-------- -------- ---------- ----------
Income Before Minority Interest in
Income of Consolidated Joint
Venture, Equity in Losses of
Unconsolidated Joint Ventures,
Gain on Sale of Land and
Buildings and Provision for Loss
on Land and Buildings............ 264,725 400,827 906,940 1,250,025
Minority Interest in Income of
Consolidated Joint Venture....... (4,352) (4,352) (12,933) (12,933)
Equity in Losses of Unconsolidated
Joint Ventures................... (75,617) (9,494) (34,343) (12,496)
Gain on Sale of Land and Build-
ings............................. -- -- 596,586 969,052
Provision for Loss on Land and
Buildings........................ (99,865) -- (99,865) (32,819)
-------- -------- ---------- ----------
Net Income........................ $ 84,891 $386,981 $1,356,385 $2,160,829
======== ======== ========== ==========
Allocation of Net Income:
General partners................ $ (11) $ 3,870 $ 11,479 $ 16,113
Limited partners................ 84,902 383,111 1,344,906 2,144,716
-------- -------- ---------- ----------
$ 84,891 $386,981 $1,356,385 $2,160,829
======== ======== ========== ==========
Net Income Per Limited Partner
Unit............................. $ 1.70 $ 7.66 $ 26.90 $ 42.89
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........ 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-110
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 339,611 $ 321,305
Net income.................................... 11,479 18,306
----------- -----------
351,090 339,611
----------- -----------
Limited partners:
Beginning balance............................. 17,271,525 17,273,996
Net income.................................... 1,344,906 2,373,529
Distributions ($59.55 and $47.52 per limited
partner unit, respectively).................. (2,977,747) (2,376,000)
----------- -----------
15,638,684 17,271,525
----------- -----------
Total partners' capital......................... $15,989,774 $17,611,136
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,376,910 $ 1,500,218
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 3,214,616 2,811,159
Additions to land and buildings on operating
leases.......................................... (150,000) (1,272,960)
Investment in joint ventures..................... (1,045,511) (511,667)
Collections on mortgage note receivable.......... 678,730 3,100
Decrease (increase) in restricted cash........... 245,377 (159,912)
----------- -----------
Net cash provided by investing activities...... 2,943,212 869,720
----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general part-
ner............................................. -- 37,000
Repayment of loans from corporate general part-
ner............................................. -- (37,000)
Distributions to limited partners................ (3,071,747) (1,782,000)
Distributions to holders of minority interest.... (15,148) (15,031)
----------- -----------
Net cash used in financing Activities.......... (3,086,895) (1,797,031)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 1,233,227 572,907
Cash and Cash Equivalents at Beginning of Period..... 493,118 57,751
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,726,345 $ 630,658
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage note accepted in exchange for sale of land
and building...................................... $ -- $ 685,000
=========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ 53,400 $ 15,150
=========== ===========
Distributions declared and unpaid at end of peri-
od................................................ $ 500,000 $ 594,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
III, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 69.07% interest in Tuscawilla Joint Venture
using the consolidation method. Minority interest represents the minority joint
venture partners' proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
2. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $ 6,123,402 $ 7,325,960
Buildings....................................... 8,720,879 10,891,910
----------- -----------
14,844,281 18,217,870
Less accumulated depreciation................... (2,821,307) (3,341,624)
----------- -----------
12,022,974 14,876,246
Less allowance for loss on land and building.... (99,865) (240,663)
----------- -----------
$11,923,109 $14,635,583
=========== ===========
</TABLE>
During the nine months ended September 30, 1998, the Partnership sold its
properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and
Hagerstown, Maryland, for a total of approximately $3,280,000 and received net
sales proceeds of $3,214,616, resulting in a total gain of $596,586 for
financial
F-113
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
reporting purposes. In connection with the sales of the properties in Daytona
Beach and Fernandina Beach, Florida, the Partnership incurred deferred,
subordinated, real estate disposition fees of $53,400 (see Note 6).
In September 1998, the Partnership entered into a new lease agreement for
the Golden Corral property located in Stockbridge, Georgia. In connection
therewith, the Partnership funded $150,000 in renovation costs.
As of December 31, 1997, the Partnership had established an allowance for
loss on land and building of $240,663 for the property in Hagerstown, Maryland.
The allowance represented the difference between the net carrying value at
December 31, 1997 and the estimate of net realizable value of the property. The
Partnership sold this property during the nine months ended September 30, 1998,
as described above.
In addition, during the nine months ended September 30, 1998, the
Partnership established an allowance for loss on land and building of $99,865,
for financial reporting purposes, relating to the property located in Hazard,
Kentucky. The allowance represents the difference between the net carrying
value of the property at September 30, 1998 and the current estimate of net
realizable value for the property.
3. Investment in Joint Ventures
In January 1998, the Partnership acquired a 25.84% interest in a property
located in Overland Park, Kansas, as tenants-in-common with affiliates of the
general partners. 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.
In May 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. As of September 30, 1998, the Partnership had
contributed $629,925 to purchase land and pay for construction relating to the
joint venture. The Partnership has agreed to contribute approximately $36,100
in additional construction costs to the joint venture. When construction is
completed, the Partnership will have an approximate 47 percent interest in the
profits and losses of the joint venture. The Partnership accounts for its
investment in this joint venture under the equity method since the Partnership
shares control with an affiliate.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures and properties held as
tenants-in-common at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land and building..................... $3,580,196 $3,152,962
Net investment in direct financing leases...... 3,406,017 1,003,680
Cash........................................... 18,304 16,481
Accrued rental income.......................... 48,509 11,621
Other assets................................... 3,368 1,480
Liabilities.................................... 123,346 18,722
Partners' capital.............................. 6,933,048 4,167,502
Revenues....................................... 423,873 82,837
Provision for loss on land and building........ (139,266) (147,039)
Net income (loss).............................. 222,725 (157,912)
</TABLE>
F-114
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
The Partnership recognized losses totalling $34,343 and $12,496 for the nine
months ended September 30, 1998 and 1997, respectively, from these joint
ventures, of which losses totaling $75,617 and $9,494 were incurred during the
quarters ended September 30, 1998 and 1997, respectively.
4. Mortgage Note Receivable
In connection with the sale of the property in Roswell, Georgia, in June
1997, the Partnership accepted a promissory note in the principal sum of
$685,000 collateralized by a mortgage on the property. During the nine months
ended September 30, 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance.
The mortgage note receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Principal balance............................... $-- $678,730
Accrued interest receivable..................... -- 2,957
---- --------
$-- $681,687
==== ========
</TABLE>
5. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a noncumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return on a cumulative basis,
plus the return of their adjusted capital contributions. The general partners
will then receive, to the extent previously subordinated and unpaid, a one
percent interest in all prior distributions of net cash flow and a return of
their capital contributions. Any remaining sales proceeds will be distributed
95 percent to the limited partners and five percent to the general partners.
Any gain from the sale of a property 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $2,977,747 and $1,782,000,
respectively ($500,000 and $594,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions of $59.55 and $35.64 per
unit for the nine months ended September 30, 1998 and 1997, respectively
($10.00 and $11.88 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $1,477,747 as a result of the distribution of net sales proceeds from
the sale of the properties in Fernandina Beach and Daytona Beach, Florida. This
amount was applied toward the limited partners' cumulative 10% Preferred
Return. No distributions have been made to the general partners to date.
F-115
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
6. Related Party Transactions
An affiliate of the Partnership is 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. Payment of the real
estate disposition fee is subordinated to receipt by the limited partners of
their aggregate cumulative 10% Preferred Return, plus their adjusted capital
contributions. For the nine months ended September 30, 1998 and 1997, the
Partnership incurred $53,400 and $15,150, respectively, in deferred,
subordinated, real estate disposition fees as a result of the sale of
properties in 1998 and 1997.
F-116
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund III, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund III, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund III, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 31, 1998
F-117
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
ASSETS ----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $14,635,583 $16,483,532
Net investment in direct financing leases.............. 926,862 938,918
Investment in joint ventures........................... 1,179,762 643,912
Mortgage note receivable............................... 681,687 --
Cash and cash equivalents.............................. 493,118 57,751
Restricted cash........................................ 251,879 --
Receivables, less allowance for doubtful accounts of
$154,469 and $70,142.................................. 102,420 321,831
Prepaid expenses....................................... 14,361 6,898
Lease costs, less accumulated amortization of $2,762
and $2,162............................................ 9,238 9,838
Accrued rental income, less allowance for doubtful
accounts of $15,384 in 1997........................... 154,738 114,738
Other assets........................................... 29,354 31,489
----------- -----------
$18,479,002 $18,608,907
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 5,219 $ 14,183
Accrued and escrowed real estate taxes payable......... 11,897 72,827
Distributions payable.................................. 594,000 594,000
Due to related parties................................. 97,388 102,859
Rents paid in advance and deposits..................... 20,745 88,325
Total liabilities...................................... 729,249 872,194
Minority interest...................................... 138,617 141,412
Partners' capital...................................... 17,611,136 17,595,301
----------- -----------
$18,479,002 $18,608,907
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-118
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,859,911 $2,184,460 $2,115,798
Earned income from direct Financing
leases................................. 70,575 89,390 72,202
Contingent rental income................ 157,648 157,993 143,039
Interest and other income............... 100,816 26,496 22,386
---------- ---------- ----------
2,188,950 2,458,339 2,353,425
---------- ---------- ----------
Expenses:
General operating and administrative.... 140,886 147,840 131,071
Professional services................... 27,314 50,064 28,758
Bad debt expense........................ 32,360 924 11,418
Real estate taxes....................... 47,165 1,973 50,815
State and other taxes................... 9,924 11,973 11,322
Depreciation and amortization........... 368,782 425,366 434,492
---------- ---------- ----------
626,431 638,140 667,876
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings (Loss) of Unconsolidated Joint
Ventures, Gain on Sale of Land and
Buildings And Provision for Loss on Land
and Building............................. 1,562,519 1,820,199 1,685,549
Minority Interest in Income of Consoli-
dated Joint Ventures..................... (17,285) (17,282) (17,205)
Equity in Earnings (Loss) of Unconsoli-
dated Joint Venture...................... (148,170) 11,740 22,015
Gain on Sale of Land and Buildings........ 1,027,590 -- --
Provision for Loss on Land and Building... (32,819) -- (207,844)
---------- ---------- ----------
Net Income................................ $2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 18,306 $ 18,147 $ 13,906
Limited partners........................ 2,373,529 1,796,510 1,468,609
---------- ---------- ----------
$2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 47.47 $ 35.93 $ 29.37
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-119
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $161,500 $127,752 $25,000,000 $(16,021,640) $12,647,415 $(2,864,898) $19,050,129
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 13,906 -- -- 1,468,609 -- 1,482,515
Balance, December 31,
1995................... 161,500 141,658 25,000,000 (18,397,640) 14,116,024 (2,864,898) 18,156,644
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,147 -- -- 1,796,510 -- 1,814,657
Balance, December 31,
1996................... 161,500 159,805 25,000,000 (20,773,640) 15,912,534 (2,864,898) 17,595,301
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 18,306 -- -- 2,373,529 -- 2,391,835
Balance, December 31,
1997................... $161,500 $178,111 $25,000,000 $(23,149,640) $18,286,063 $(2,864,898) $17,611,136
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-120
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............. $ 2,268,568 $ 2,226,794 $ 2,340,729
Distributions from unconsolidated joint
ventures.............................. 19,647 31,670 47,499
Cash paid for expenses................. (325,067) (175,148) (198,797)
Interest received...................... 58,541 8,438 14,006
----------- ----------- -----------
Net cash provided by operating
activities........................... 2,021,689 2,091,754 2,203,437
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings............................. 3,023,357 -- --
Deposit received on sale of land
parcel................................ -- 51,400 --
Additions to land and buildings........ (1,272,960) -- --
Investment in joint ventures........... (703,667) -- --
Collections on note receivable......... 6,270 -- --
Increase in restricted cash............ (245,377) -- --
Decrease (increase) in other assets.... 2,135 (2,135) --
----------- ----------- -----------
Net cash provided by investing
activities........................... 809,758 49,265 --
----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from loans from corporate
general partner....................... 117,000 661,400 --
Repayment of loans from corporate
general partner....................... (117,000) (661,400) --
Distributions to holder of minority
interest.............................. (20,080) (20,082) (19,997)
Distributions to limited partners...... (2,376,000) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in Financing
activities........................... (2,396,080) (2,396,082) (2,395,997)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 435,367 (255,063) (192,560)
Cash and Cash Equivalents at Beginning
of Year................................ 57,751 312,814 505,374
Cash and Cash Equivalents at End of
Year................................... $ 493,118 $ 57,751 $ 312,814
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,391,835 $ 1,814,657 $ 1,482,515
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 368,182 424,766 433,892
Amortization........................... 600 600 600
Minority interest in income of
consolidated joint venture............ 17,285 17,282 17,205
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 167,817 19,930 25,484
Gain on sale of land and buildings..... (1,027,590) -- --
Provision for loss on land and
building.............................. 32,819 -- 207,844
Decrease (increase) in receivables..... 214,793 (215,193) 9,339
Decrease in net investment in direct
financing leases...................... 12,056 7,331 5,358
Increase in prepaid expenses........... (7,463) (1,297) (1,778)
Decrease (increase) in accrued rental
income................................ (40,000) (32,667) 7,161
Decrease in accounts payable and
accrued expenses...................... (71,844) (4,732) (21,689)
Increase (decrease) in due to related
parties............................... (20,621) 48,944 51,578
Increase (decrease) in rents paid in
advance and deposits.................. (16,180) 12,133 (14,072)
----------- ----------- -----------
Total adjustments..................... (370,146) 277,097 720,922
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,021,689 $ 2,091,754 $ 2,203,437
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted as consideration
in sale of land and building.......... $ 685,000 $ -- $ --
Deferred real estate disposition fee
incurred and unpaid at December 31.... $ 15,150 $ -- $ --
Distributions declared and unpaid at
December 31........................... $ 594,000 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund III, 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 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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, will be removed from the accounts and gains or
losses from sales will be 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. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' estimate of net cash flows expected to be generated from
its properties and the need for asset impairment write-downs. If an impairment
is indicated, the assets are adjusted to their fair value.
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.
F-122
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Investment in Joint Ventures--The Partnership accounts for its 69.07%
interest in Tuscawilla Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partners' proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
The Partnership's investment in Titusville Joint Venture and a property in
each of Englewood, Colorado and Miami, Florida, held as tenants-in-common with
affiliates, is accounted for 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.
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.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease 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 and buildings primarily to operators of
national and regional fast-food restaurants. The leases are accounted for under
the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." The leases generally are classified as operating
leases, however, a few of the leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the building
portions of the property leases are accounted for as direct financing leases
while the land portion of these leases are operating leases. Substantially all
leases are for 15 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant generally pays all property taxes and assessments,
fully maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire
F-123
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
and extended coverage. The lease options generally allow tenants to renew the
leases for two or four 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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 7,325,960 $ 7,835,279
Buildings....................................... 10,891,910 12,467,020
----------- -----------
18,217,870 20,619,880
Less accumulated depreciation................... (3,341,624) (3,610,923)
----------- -----------
Less allowance for loss on land and building.... (240,663) (207,844)
----------- -----------
$14,635,583 $16,483,532
=========== ===========
</TABLE>
In 1995, the Partnership recorded an allowance for loss on land and building
in the amount of $207,844 for financial reporting purposes for the Po Folks
property in Hagerstown, Maryland. In addition, during 1997, the Partnership
increased the allowance for loss on land and building by an additional $32,819
for such property. The allowance represents the difference between (i) the
property's carrying value at December 31, 1997 and 1995, and (ii) the estimated
net realizable value of the property based on the anticipated sales price
relating to this property as of such dates.
In January 1997, the Partnership sold its property in Chicago, Illinois, to
a third party, for $505,000 and received net sales proceeds of $496,418,
resulting in a gain of $3,827 for financial reporting purposes. The Partnership
used $452,000 of the net sales proceeds to pay liabilities of the Partnership,
including quarterly distributions to the limited partners. The balance of the
funds were used to pay past due real estate taxes relating to this property
incurred by the Partnership as a result of the former tenant declaring
bankruptcy.
In March 1997, the Partnership sold its property in Bradenton, Florida, to
the tenant, for $1,332,154 and received net sales proceeds (net of $4,330 which
represents real estate tax amounts due from tenant) of $1,305,671, resulting in
a gain of $361,368 for financial reporting purposes. This property was
originally acquired by the Partnership in June 1988 and had a cost of
approximately $1,080,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $229,500 in excess of its original purchase price. In June 1997,
the Partnership reinvested approximately $1,276,000 of the net sales proceeds
received in a property in Fayetteville, North Carolina.
In April 1997, the Partnership sold its property in Kissimmee, Florida, to a
third party, for $692,400 and received net sales proceeds of $673,159,
resulting in a gain of $271,929 for financial reporting purposes. This property
was originally acquired by the Partnership in March 1988 and had a cost of
approximately $474,800, excluding acquisition fees and miscellaneous
acquisition expense; therefore, the Partnership sold the property for
approximately $196,400 in excess of its original purchase price. In July 1997,
the Partnership reinvested approximately $511,700 of these net sales proceeds
in a property located in Englewood, Colorado, as tenants-in-common with an
affiliate of the general partners (see Note 5).
In April 1996, the Partnership received $51,400 as partial settlement in a
right of way taking relating to a parcel of land of the property in Plant City,
Florida. In April 1997, the Partnership received the remaining proceeds of
$73,600 finalizing the sale of the land parcel. In connection therewith, the
Partnership recognized a gain of $94,320 for financial reporting purposes.
F-124
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
In addition, in June 1997, the Partnership sold its property in Roswell,
Georgia, to a third party for $985,000 and received net sales proceeds of
$942,981, resulting in a gain of $237,608 for financial reporting purposes.
This property was originally acquired by the Partnership in June 1988 and had a
cost of approximately $775,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $167,800 in excess of its original purchase price. In connection
therewith, the Partnership received $257,981 in cash and accepted the remaining
sales proceeds in the form of a promissory note in the principal sum of
$685,000 (see Note 6). In addition, in December 1997, the Partnership
reinvested approximately $192,000 of the net sales proceeds in a property
located in Miami, Florida, as tenants-in-common, with an affiliate of the
general partners (see Note 5).
In October 1997, the Partnership sold its property in Mason City, Iowa, to
the tenant for $218,790 and received net sales proceeds (net of $511 which
represents prorated rent returned to the tenant) of $216,528, resulting in a
gain of $58,538 for financial reporting purposes. This property was originally
acquired by the Partnership in March 1988 and had a cost of approximately
$190,300, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the property for approximately $26,700 in
excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. 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, 1997, 1996 and 1995, the Partnership recognized $40,000, $32,667 and
$27,669, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,534,701
1999........................................................... 1,547,630
2000........................................................... 1,547,630
2001........................................................... 1,552,155
2002........................................................... 1,529,200
Thereafter..................................................... 8,374,163
-----------
$16,085,479
===========
</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 term. 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 tenants' gross sales.
4. Net Investment in Direct Financing Leases
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $ 2,191,519 $ 2,340,192
Estimated residual value........................... 239,432 239,432
Less unearned income............................... (1,504,089) (1,640,706)
----------- -----------
Net investment in direct financing leases.......... $ 926,682 $ 938,918
=========== ===========
</TABLE>
F-125
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 148,672
1999............................................................ 148,672
2000............................................................ 148,672
2001............................................................ 148,672
2002............................................................ 148,672
Thereafter...................................................... 1,448,159
----------
$2,191,519
==========
</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).
5. Investment in Joint Ventures
The Partnership has a 73.4% interest in the profits and losses of Titusville
Joint Venture which is accounted for using the equity method. The remaining
interest in the Titusville Joint Venture is held by an affiliate of the
Partnership which has the same general partners.
In July 1997, the Partnership acquired a property in Englewood Colorado, as
tenants-in-common with an affiliate of the general partners. The Partnership
accounts for its investment in this property using the equity method since the
Partnership shares control with an affiliate, and amounts relating to its
investment are included in investment in joint ventures. As of December 31,
1997, the Partnership owned a 32.77% interest in this property.
In addition, in December 1997, the Partnership acquired a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. 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. As of
December 31, 1997, the Partnership owned a 9.84% interest in this property.
Titusville Joint Venture and the Partnership and affiliates, as tenants-in-
common in two separate tenancy-in-common arrangements, each own and lease one
property to operators of national fast-food or family-style restaurants. The
following presents the joint venture's condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Land and building on operating leases, less accumulated
depreciation and allowance for loss on land and
building.............................................. $3,152,962 $822,072
Net investment in direct financing leases.............. 1,003,680 --
Cash................................................... 16,481 9,677
Receivables............................................ -- 11,233
Accrued rental income.................................. 11,621 17,700
Other assets........................................... 1,480 29,631
Liabilities............................................ 18,722 9,665
Partners' capital...................................... 4,167,502 880,648
Revenues............................................... 82,837 51,778
Net income (loss)...................................... (157,912) 15,995
</TABLE>
F-126
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The Partnership recognized a loss totalling $148,170 for the year ended
December 31, 1997 and income of $11,740 and $22,015 for the years ended
December 31, 1996 and 1995, respectively, from these joint ventures.
6. Mortgage Note Receivable
In connection with the sale of the property in Roswell, Georgia, in June
1997, the Partnership accepted a promissory note in the principal sum of
$685,000 collateralized by a mortgage on the property. The promissory note
bears interest at a rate of nine percent per annum and is being collected in 36
monthly installments of $6,163, including interest, with a balloon payment of
$642,798 due in July 2000.
The mortgage note receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----
<S> <C> <C>
Principal balance............................................. $ 678,730 $--
Accrued interest receivable................................... 2,957 --
--------- ---
$ 681,687 $--
========= ===
</TABLE>
The general partners believe that the estimated fair value of the mortgage
note receivable at December 31, 1997, approximates the outstanding principal
amount based on estimated current rates at which similar loans would be made to
borrowers with similar credit and for similar maturities.
7. Receivables
During 1996, the Partnership terminated its lease with the former tenant of
its properties in Hagerstown, Maryland. In connection therewith, the
Partnership wrote off approximately $238,300 included in receivables relating
to both the Denny's and Po Folks properties in Hagerstown, Maryland, and the
related allowance for doubtful accounts. In October 1996, the Partnership
entered into a lease agreement with a new tenant to operate the Denny's
restaurant located on the Partnership's property and accepted a promissory note
from the current tenant whereby $25,000, which had been included in receivables
for past due rents from the former tenant, was converted to a loan receivable
held by the Partnership to facilitate the asset purchase agreement between the
former and current tenants. The promissory note bears interest of ten percent
per annum and is being collected in 36 equal monthly installments of $807 and
commenced in October 1996. Receivables at December 31, 1997 and 1996, include
$16,318 and $23,240, respectively, including accrued interest of $164 and $50,
respectively, relating to the promissory note.
8. Restricted Cash
As of December 31, 1997, net sales proceeds of $245,377 from the sale of the
property in Bradenton, Florida and Mason City, Iowa, plus accrued interest of
$6,502, were being held in interest-bearing escrow accounts pending the release
of funds by the escrow agent to acquire additional properties on behalf of the
Partnership.
9. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
F-127
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their cumulative 10% Preferred Return, plus the
return of their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners. Any
gain from the sale of a property 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,376,000. No
distributions have been made to the general partners to date.
10. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting purpos-
es........................................ $2,391,835 $1,814,657 $1,482,515
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes........................ (21,782) (9,754) (628)
Allowance for loss on land and building.... 32,819 -- 207,844
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 12,056 7,330 5,358
Gain on sale of land for tax reporting pur-
poses..................................... -- 20,724 --
Gain on sale of land and buildings for
financial reporting purposes in excess of
gain on sale for tax reporting
purposes.................................. (689,281) -- --
Equity in earnings of joint ventures for
tax reporting purposes in excess of (less
than) equity in earnings of joint ventures
for financial reporting purposes.......... 140,707 (1,329) (1,769)
Allowance for doubtful accounts............ 84,326 (283,135) 42,770
Accrued rental income...................... (40,000) (32,667) 7,161
Rents paid in advance...................... (16,680) 12,133 (14,572)
Minority interest in timing differences of
consolidated joint venture................ (133) (162) (106)
---------- ---------- ----------
Net income for federal income tax purpos-
es........................................ $1,893,867 $1,527,797 $1,728,573
========== ========== ==========
</TABLE>
11. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and is director, chairman of the
board of directors and chief executive officer of CNL Fund Advisors, Inc. The
other individual general partner, Robert A. Bourne, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc. through October 1997.
F-128
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a property
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay Affiliates an annual, noncumulative, subordinated
management fee of one-half of one percent of the Partnership assets under
management (valued at cost) annually. The property management fee is limited to
one percent of the sum of gross operating revenues from properties wholly owned
by the Partnership and the Partnership's allocable share of gross operating
revenues from joint ventures or competitive fees for comparable services. In
addition, these fees will be incurred and will be payable only after the
limited partners receive their aggregate, noncumulative 10% Preferred Return.
Due to the fact that these fees are noncumulative, if the limited partners do
not receive their 10% Preferred Return in any particular year, no property
management fees will be due or payable for such year. As a result of such
threshold, no property management fees were incurred during the years ended
December 31, 1997, 1996 and 1995.
Certain Affiliates are 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-percent of the sales price if the Affiliates provide
a substantial amount of services in connection with the sales. 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 10% Preferred Return, plus their adjusted capital contributions.
During the year ended December 31, 1997, the Partnership incurred $15,150 in
deferred, subordinated real estate disposition fees as a result of the
Partnership's sale of the Property in Chicago, Illinois. No deferred,
subordinated real estate disposition fees were incurred for the years ended
December 31, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,056, $85,906 and $78,597 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership......... $ 38,492 $ 56,942
Accounting and administrative services..................... 43,746 45,917
Deferred, subordinated real estate disposition fee......... 15,150 --
-------- --------
$ 97,388 $102,859
======== ========
</TABLE>
12. Concentration of Credit Risk
For the years ended December 31, 1997, 1996 and 1995, rental income from
Golden Corral Corporation was $474,553, $490,196 and $470,952, respectively,
representing more than ten percent of the Partnership's total rental and earned
income (including the Partnership's share of rental and earned income from the
joint venture and the properties held as tenants-in-common with affiliates).
F-129
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 the joint venture and the properties
held as tenants-in-common with affiliates) for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $474,553 $490,196 $470,952
KFC........................................... 261,415 254,646 279,075
Pizza Hut..................................... 255,055 292,795 289,161
Taco Bell..................................... 250,140 254,395 260,119
Denny's....................................... 229,537 355,123 254,043
Perkins....................................... 154,819 276,114 276,114
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
13. Subsequent Event
In January 1998, the Partnership sold its property in Fernandina Beach,
Florida, to the tenant, for $730,000 and received net sales proceeds (net of
$3,018 which represents prorated rent collected at closing) of $724,672,
resulting in a gain of approximately $264,000 for financial reporting purposes.
In addition, in January 1998, the Partnership sold its property in Daytona
Beach, Florida to the tenant, for $1,050,000 and received net sales proceeds
(net of $1,975 which represents prorated rent returned to the tenant) of
$1,007,001, resulting in a gain of approximately $299,300 for financial
reporting purposes.
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Kissimmee, Florida, to acquire a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $415,600 for a
25.84% interest in such property.
F-130
<PAGE>
CNL INCOME FUND IV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-132
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-133
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-134
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-135
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-136
Report of Independent Accountants........................................ F-139
Balance Sheets as of December 31, 1997 and 1996.......................... F-140
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-141
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-142
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-143
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-144
</TABLE>
F-131
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................. $15,587,830 $18,097,997
Net investment in direct financing leases........... 1,241,326 1,269,389
Investment in joint ventures........................ 2,883,497 2,708,012
Cash and cash equivalents........................... 765,359 876,452
Restricted cash..................................... 533,019 --
Receivables, less allowance for doubtful accounts of
$258,741 and $295,580.............................. 18,718 37,669
Prepaid expenses.................................... 12,197 11,115
Lease costs, less accumulated amortization of
$20,681 and $17,956................................ 18,863 21,588
Accrued rental income............................... 270,472 287,466
Other Assets........................................ -- 200
----------- -----------
$21,331,281 $23,309,888
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 6,687 $ 8,576
Accrued construction costs payable.................. -- 250,000
Accrued and escrowed real estate taxes payable...... 76,311 65,176
Distributions payable............................... 600,000 690,000
Due to related parties.............................. 138,193 93,854
Rents paid in advance and deposits.................. 81,329 49,983
----------- -----------
Total liabilities............................... 902,520 1,157,589
----------- -----------
Commitment (Note 7)
Partners' capital................................... 20,428,761 22,152,299
----------- -----------
$21,331,281 $23,309,888
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-132
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................ $547,853 $508,852 $1,598,854 $1,558,963
Earned income from direct financing
leases............................ 31,630 32,564 95,611 98,344
Contingent rental income........... -- 20,661 37,207 65,265
Interest and other income.......... 24,951 17,509 46,143 28,980
-------- -------- ---------- ----------
604,434 579,586 1,777,815 1,751,552
-------- -------- ---------- ----------
Expenses:
General operating and
Administrative.................... 46,096 33,940 121,811 113,606
Bad debt expense................... -- -- -- 12,794
Professional services.............. 5,999 4,110 38,644 18,200
Real estate taxes.................. 26,225 3,487 46,980 31,514
State and other taxes.............. -- 25 15,747 16,476
Depreciation and amortization...... 104,058 113,230 326,835 339,692
-------- -------- ---------- ----------
182,378 154,792 550,017 532,282
-------- -------- ---------- ----------
Income Before Equity in Earnings
(Loss) of Joint Ventures, Gain on
Sale of Land and Buildings and Real
Estate.............................. 422,056 424,794 1,227,798 1,219,270
Equity in Earnings (Loss) of Joint
Ventures............................ 5,276 52,359 (143,612) 172,340
Gain on Sale of Land and Buildings... 170,281 -- 226,024 --
-------- -------- ---------- ----------
Net Income........................... $597,613 $477,153 $1,310,210 $1,391,610
======== ======== ========== ==========
Allocation of Net Income:
General partners................... $ 5,195 $ 4,772 $ 7,612 $ 13,916
Limited partners................... 592,418 472,381 1,302,598 1,377,694
-------- -------- ---------- ----------
$597,613 $477,153 $1,310,210 $1,391,610
======== ======== ========== ==========
Net Income Per Limited Partner Unit.. $ 9.87 $ 7.87 $ 21.71 $ 22.96
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........... 60,000 60,000 60,000 60,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-133
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 756,354 $ 446,657
Contribution.................................. -- 294,000
Net income.................................... 7,612 15,697
----------- -----------
763,966 756,354
----------- -----------
Limited partners:
Beginning balance............................. 21,395,945 22,450,974
Net income.................................... 1,302,598 1,704,971
Distributions ($50.56 and $46.00 per limited
partner unit, respectively).................. (3,033,748) (2,760,000)
----------- -----------
19,664,795 21,395,945
----------- -----------
Total partners' capital......................... $20,428,761 $22,152,299
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-134
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,794,173 $ 1,746,810
----------- -----------
Cash Flows from Investing Activities:
Additions to land and building on operating
leases.......................................... (275,000) --
Proceeds from sale of land and buildings......... 2,526,354 --
Investment in joint ventures..................... (499,274) --
Increase in restricted cash...................... (533,598) --
Other............................................ -- 7,338
----------- -----------
Net cash provided by investing Activities...... 1,218,482 7,338
----------- -----------
Cash Flows from Financing Activities:
Contributions from general partner................. -- 225,000
Distributions to limited partners.................. (3,123,748) (2,070,000)
----------- -----------
Net cash used in financing Activities.......... (3,123,748) (1,845,000)
----------- -----------
Net Decrease in Cash and Cash Equivalents............ (111,093) (90,852)
Cash and Cash Equivalents at Beginning of Period..... 876,452 554,593
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 765,359 $ 463,741
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ 45,663 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 600,000 $ 690,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-135
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Form 10-K of CNL Income
Fund IV, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $ 7,244,513 $ 8,328,572
Buildings....................................... 11,986,558 13,684,194
----------- -----------
19,231,071 22,012,766
Less accumulated depreciation................... (3,643,241) (3,844,432)
----------- -----------
15,587,830 18,168,334
Less allowance for loss on land and building.... -- (70,337)
----------- -----------
$15,587,830 $18,097,997
=========== ===========
</TABLE>
In March 1998, the Partnership sold its property in Fort Myers, Florida, to
a third party for $842,100 and received net sales proceeds of $794,690,
resulting in a gain of $225,902 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $598,000 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the property for approximately
$196,700 in excess of its original purchase price.
In March 1998, the Partnership sold its property in Union Township, Ohio, to
a third party for $680,000 and received net sales proceeds of $674,135,
resulting in a loss of $104,987 for financial reporting purposes.
In connection with the sale of the properties described above, the
Partnership incurred deferred, subordinated, real estate disposition fees of
$45,663 (see Note 4).
In July 1998, the Partnership sold its property in Leesburg, Florida, for
$565,000 and received net sales proceeds of $523,931, resulting in a total loss
for financial reporting purposes of $135,509. Due to the fact that
F-136
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
at December 31, 1997, the Partnership had recorded a provision for loss on land
and building in the amount of $70,337 for this property, the Partnership
recognized the remaining loss of $65,172 for financial reporting purposes in
July 1998, relating to the sale.
In September 1998, the Partnership sold its property in Naples, Florida, to
a third party for $563,000 and received net sales proceeds of $533,598,
resulting in a gain of $170,281 for financial reporting purposes. This property
was originally acquired by the Partnership in December 1988 and had a cost of
approximately $410,500 excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the property for approximately
$123,100 in excess of its original purchase price.
3. Investment in Joint Ventures
In September 1998, the Partnership entered into a joint venture arrangement,
Warren Joint Venture, with an affiliate of the general partners to hold one
restaurant property. As of September 30, 1998, the Partnership had contributed
$498,953 to the joint venture to acquire the restaurant property. As of
September 30, 1998, the Partnership owned approximately a 36 percent interest
in the profits and losses of the joint venture. The Partnership accounts for
its investment in this joint venture under the equity method since the
Partnership shares control with the affiliate.
The following presents the combined, condensed financial information for all
of the Partnership's investments in joint ventures and properties held as
tenants-in-common at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land and building..................... $4,418,423 $3,338,372
Net investment in direct financing lease, less
allowance for loss on building................ 631,673 842,633
Cash........................................... 21,864 12,331
Receivables.................................... 20,713 40,456
Accrued rental income.......................... 162,507 177,567
Other assets................................... 2,513 2,029
Liabilities.................................... 37,488 16,283
Partners' capital.............................. 5,220,205 4,397,105
Revenues....................................... 236,627 434,177
Provision for loss on land and buildings....... (455,379) (147,039)
Net income (loss).............................. (306,969) 126,271
</TABLE>
The Partnership recognized a loss totalling $143,612 and income totalling
$172,340 for the nine months ended September 30, 1998 and 1997, respectively,
from these joint ventures, and recognized income totalling $5,276 and $52,359
during the quarters ended September 30, 1998 and 1997, respectively.
4. Restricted Cash
As of September 30, 1998, the net sales proceeds of $533,598 from the sale
of the property in Naples, Florida, plus accrued interest of $1,371, less
escrow fees of $1,950, were being held in an interest-bearing escrow account
pending the release of funds by the escrow agent to acquire an additional
property on behalf of the Partnership.
F-137
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
5. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of property, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners. Any gain from
the sale of a property 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,033,748 and $2,070,000,
respectively ($600,000 and $690,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions for the nine months
ended September 30, 1998 and 1997, of $50.56 and $34.50 per unit, respectively
($10.00 and $11.50 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $1,233,748 as a result of the distribution of net sales proceeds from
the sale of the properties in Fort Myers, Florida and Union Township, Ohio.
This amount was applied toward the limited partners' 10% Preferred Return. No
distributions have been made to the general partners to date.
6. Related Party Transactions
An affiliate of the Partnership is 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. Payment of the real
estate disposition fee is subordinated to receipt by the limited partners of
their aggregate 10% Preferred Return, plus their adjusted capital
contributions. For the nine months ended September 30, 1998, the Partnership
incurred $45,663 in deferred, subordinated, real estate disposition fees as a
result of the sales of properties. No deferred, subordinated, real estate
disposition fees were incurred for the nine months ended September 30, 1997.
7. Commitment
During August 1998, the Partnership entered into an agreement with an
unrelated third party to sell the Taco Bell property in Edgewood, Maryland. The
general partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the property; however, as of November 6,
1998, the sale had not occurred.
F-138
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund IV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund IV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund IV, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 26, 1998
F-139
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................... $18,097,997 $18,737,516
Net investment in direct financing leases............. 1,269,389 1,303,604
Investment in joint ventures.......................... 2,708,012 2,783,738
Cash and cash equivalents............................. 876,452 554,593
Receivables, less allowance for doubtful accounts of
$295,580 and $156,933................................ 37,669 62,561
Prepaid expenses...................................... 11,115 10,935
Lease costs, less accumulated amortization of $17,956
and $15,458.......................................... 21,588 8,486
Accrued rental income................................. 287,466 269,359
Other assets.......................................... 200 100
----------- -----------
$23,309,888 $23,730,892
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,576 $ 10,831
Accrued construction costs payable.................... 250,000 --
Accrued and escrowed real estate taxes payable........ 65,176 32,729
Distributions payable................................. 690,000 690,000
Due to related parties................................ 93,854 67,153
Rents paid in advance and deposits.................... 49,983 32,548
----------- -----------
Total liabilities................................... 1,157,589 833,261
----------- -----------
Partners' capital..................................... 22,152,299 22,897,631
----------- -----------
$23,309,888 $23,730,892
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,058,703 $2,263,677 $2,373,386
Earned income from direct financing
leases.................................... 130,683 134,014 137,020
Contingent rental income................... 117,031 97,318 94,101
Interest and other income.................. 35,221 47,855 21,287
---------- ---------- ----------
2,341,638 2,542,864 2,625,794
---------- ---------- ----------
Expenses:
General operating and administrative....... 149,808 161,714 140,374
Professional services...................... 33,439 29,289 31,287
Bad debt expense........................... 12,794 -- 102,431
Real estate taxes.......................... 65,316 37,589 37,745
State and other taxes...................... 16,476 21,694 19,006
Depreciation and amortization.............. 455,895 444,232 458,937
---------- ---------- ----------
733,728 694,518 789,780
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Provision for Loss on Land and
Building.................................... 1,607,910 1,848,346 1,836,014
Equity in Earnings of Joint Ventures......... 189,747 277,431 245,778
Gain (Loss) on Sale of Land and Buildings.... (6,652) 221,390 128,547
Provision for Loss on Land and Building...... (70,337) -- --
---------- ---------- ----------
Net Income................................... $1,720,668 $2,347,167 $2,210,339
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 15,697 $ 22,219 $ 21,590
Limited partners........................... 1,704,971 2,324,948 2,188,749
---------- ---------- ----------
$1,720,668 $2,347,167 $2,210,339
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 28.42 $ 38.75 $ 36.48
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 60,000 60,000 60,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $241,504 $139,044 $30,000,000 $(16,927,963) $13,825,240 $(3,440,000) $23,837,825
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 21,590 -- -- 2,188,749 -- 2,210,339
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 241,504 160,634 30,000,000 (19,687,963) 16,013,989 (3,440,000) 23,288,164
Contributions from
general partners...... 22,300 -- -- -- -- -- 22,300
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 22,219 -- -- 2,324,948 -- 2,347,167
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 263,804 182,853 30,000,000 (22,447,963) 18,338,937 (3,440,000) 22,897,631
Contributions from
general partners...... 294,000 -- -- -- -- -- 294,000
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 15,697 -- -- 1,704,971 -- 1,720,668
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $557,804 $198,550 $30,000,000 $(25,207,963) $20,043,908 $(3,440,000) $22,152,299
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,345,612 $ 2,588,248 $ 2,586,716
Distributions from joint ventures.... 265,473 305,866 271,006
Cash paid for expenses............... (211,213) (206,059) (205,759)
Interest received.................... 18,100 25,909 18,430
----------- ----------- -----------
Net cash provided by operating
activities........................ 2,417,972 2,713,964 2,670,393
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................ 378,149 1,049,550 518,650
Additions to land and buildings on
operating leases.................... -- (1,035,516) (1,628)
Investment in joint venture.......... -- (437,489) --
Decrease (increase) in restricted
cash................................ -- 518,150 (518,150)
Payment of lease costs............... (17,384) (2,230) (1,800)
Other................................ 9,122 -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. 369,887 92,465 (2,928)
----------- ----------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf of
the Partnership..................... -- -- (1,175)
Contributions from General Partners.. 294,000 22,300 --
Distributions to limited partners.... (2,760,000) (2,760,000) (2,760,000)
----------- ----------- -----------
Net cash used in financing
activities........................ (2,466,000) (2,737,700) (2,761,175)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 321,859 68,729 (93,710)
Cash and Cash Equivalents at Beginning
of Year............................... 554,593 485,864 579,574
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 876,452 $ 554,593 $ 485,864
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................. $ 1,720,668 $ 2,347,167 $ 2,210,339
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 453,397 442,065 455,543
Amortization......................... 2,498 2,167 3,394
Equity in earnings of joint ventures,
net of distributions................ 75,726 28,435 25,228
Loss (gain) on sale of land and
buildings........................... 6,652 (221,390) (128,547)
Provision for loss on land and
building............................ 70,337 -- --
Decrease in receivables.............. 18,216 41,531 93,451
Increase in prepaid expenses......... (180) (1,202) (1,747)
Decrease in net investment in direct
financing leases.................... 34,215 30,885 27,879
Increase in accrued rental income.... (39,669) (21,520) (22,921)
Increase (decrease) in accounts
payable and accrued expenses........ 31,976 11,162 (3,532)
Increase in due to related parties... 26,701 39,987 27,166
Increase (decrease) in rents paid in
advance and deposits................ 17,435 14,677 (15,860)
----------- ----------- -----------
Total adjustments.................. 697,304 366,797 460,054
----------- ----------- -----------
Net Cash Provided by Operating
Activities........................ $ 2,417,972 $ 2,713,964 $ 2,670,393
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31......................... $ 690,000 $ 690,000 $ 690,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-143
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund IV, 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
When the properties are sold, the related cost and accumulated
depreciation for operating leases and the net investment for direct
financing leases, plus any accrued rental income, are removed from the
accounts and gains or losses from sales are reflected in income. The
general partners of the Partnership review properties for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations. The general
partners determine whether an impairment in value has occurred by comparing
the estimated future undiscounted cash flows, including the residual value
of the property, with the carrying cost of the individual property. If an
impairment is indicated, the assets are adjusted to their fair value.
Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general
partners' 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.
F-144
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Investment in Joint Ventures--The Partnership's investments in Holland
Joint Venture, Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint
Venture, Kingsville Real Estate Joint Venture and a property in Clinton,
North Carolina, held as tenants-in-common, are accounted for using the
equity method since the Partnership shares control with affiliates which
have the same general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits
at commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts. The Partnership limits investment of temporary cash investments
to financial institutions with high credit standing; therefore, the
Partnership believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Lease Costs--Brokerage fees associated with negotiating new leases are
amortized over the terms of the new leases 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." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portion of one of these leases is an operating lease.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant generally pays all property taxes
and assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two or four 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.
F-145
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 8,328,572 $ 8,694,357
Buildings.......................................... 13,684,194 13,434,194
----------- -----------
22,012,766 22,128,551
Less accumulated depreciation...................... (3,844,432) (3,391,035)
----------- -----------
18,168,334 18,737,516
Less allowance for loss on land and building....... (70,337) --
----------- -----------
$18,097,997 $18,737,516
=========== ===========
</TABLE>
In September 1996, the Partnership sold its Property in Tampa, Florida, for
1,090,000 and received net sales proceeds of $1,049,550, resulting in a gain of
$221,390 for financial reporting purposes. This Property was originally
acquired by the Partnership in December 1988 and had a cost of approximately
$832,800, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the Property for approximately $216,800 in
excess of its original purchase price. In December 1996, the Partnership
reinvested approximately $1,026,200 in a Boston Market property located in
Richmond, Virginia.
In July 1997, the Partnership entered into new leases for the properties in
Portland and Winchester, Indiana, with a new tenant to operate the properties
as Arby's restaurants. In connection therewith, the Partnership incurred
$125,000 in renovation costs for each property.
In November 1997, the Partnership sold its property in Douglasville, Georgia
to an unrelated third party for $402,000 and received net sales proceeds of
$378,149 (net of $2,546 which represents amounts due to the former tenant for
prorated rent). This property was originally acquired by the Partnership in
December 1994 and had a cost of approximately $363,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold
the property for approximately $16,900 in excess of its original purchase
price. Due to the fact that the Partnership had recognized accrued rental
income since the inception of the lease relating to the straight-lining of
future scheduled rent increases in accordance with generally accepted
accounting principles, the Partnership wrote off the cumulative balance of such
accrued rental income at the time of the sale of this property, resulting in a
loss of $6,652 for financial reporting purposes. Due to the fact that the
straight-lining of future rent increases over the term of the lease is a non-
cash accounting adjustment, the write off of these amounts is a loss for
financial statement purposes only.
At December 31, 1997, the Partnership established an allowance for loss on
land and building in the amount of $70,337 for financial reporting purposes for
the property in Leesburg, Florida. The allowance represents the difference
between the property's carrying value at December 31, 1997 and the estimated
net realizable value of this property based on an anticipated sales price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. 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, 1997, 1996 and 1995, the Partnership recognized $39,669, $21,520 and
$22,921, respectively, of such rental income.
F-146
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................. $ 1,996,330
1999............................. 2,007,362
2000............................. 2,009,453
2001............................. 1,979,003
2002............................. 1,983,101
Thereafter....................... 12,867,319
-----------
$22,842,568
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $ 1,825,690 $ 1,990,589
Estimated residual values........................ 527,829 527,829
Less unearned income............................. (1,084,130) (1,214,814)
----------- -----------
Net investment in direct financing leases........ $ 1,269,389 $ 1,303,604
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.............................. $ 164,899
1999.............................. 164,899
2000.............................. 164,899
2001.............................. 164,899
2002.............................. 164,899
Thereafter........................ 1,001,195
----------
$1,825,690
==========
</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).
5. Investment in Joint Ventures
The Partnership has a 51 percent, a 26.6%, a 57 percent, a 96.1% and a
68.87% interest in the profits and losses of Holland Joint Venture, Titusville
Joint Venture, Cocoa Joint Venture, Auburn Joint Venture and Kingsville Real
Estate Joint Venture, respectively.
F-147
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, as tenants-in-common with affiliates of the general partners. 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. As of
December 31, 1997, the Partnership owned a 53.68% interest in this property.
The remaining interests in these joint ventures are held by affiliates of
the Partnership which have the same general partners. Holland Joint Venture,
Titusville Joint Venture, Cocoa Joint Venture, Auburn Joint Venture,
Kingsville Real Estate Joint Venture and the Partnership and affiliates, as
tenants-in-common, each own and lease one property to an operator of national
fast-food or family-style restaurants.
The following presents the joint ventures' combined, condensed financial
information at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................. $3,338,372 $3,565,440
Net investment in direct financing leases........... 842,633 859,667
Cash................................................ 12,331 11,001
Receivables......................................... 40,456 34,308
Accrued rental income............................... 177,567 168,784
Other assets........................................ 2,029 30,143
Liabilities......................................... 16,283 10,724
Partners' capital................................... 4,397,105 4,658,619
Revenues............................................ 434,177 511,606
Net income.......................................... 126,271 411,884
</TABLE>
The Partnership recognized income totalling $189,747, $277,431 and $245,778
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Receivables
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Portland and Winchester, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $32,343 for
amounts relating to past due real estate taxes the Partnership had accrued as
a result of the former tenant's financial difficulties. The promissory note,
which is uncollateralized, bears interest at a rate of ten percent per annum,
and is being collected in 36 monthly installments. Receivables at December 31,
1997 included $7,106 of such amounts.
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of property, are allocated 99 percent to the
limited partners and one percent to the general partners. Distributions of net
cash flow are made 99 percent to the limited partners and one percent to the
general partners; provided, however, that the one percent of net cash flow to
be distributed to the general partners is subordinated to receipt by the
limited partners of an aggregate, ten percent, cumulative, noncompounded
annual return on their adjusted capital contributions (the "10% Preferred
Return").
F-148
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners. Any gain from
the sale of a property 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,760,000. No
distributions have been made to the general partners to date.
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,720,668 $2,347,167 $2,210,339
Depreciation for tax reporting purposes
in excess of depreciation financial
reporting purposes..................... (9,203) (17,764) (16,933)
Allowance for loss on land and
building............................... 70,337 -- --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 34,215 30,885 27,879
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... 44,918 (140,228) (128,547)
Equity in earnings of joint ventures for
financial reporting purposes in excess
of equity in earnings of joint ventures
for tax reporting purposes............. 51,115 (25,853) (22,624)
Allowance for doubtful accounts......... 138,647 (9,933) 122,022
Accrued rental income................... (39,669) (21,520) (22,921)
Rents paid in advance................... 7,435 14,677 (15,860)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,018,463 $2,177,431 $2,153,355
========== ========== ==========
</TABLE>
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
F-149
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates an annual, noncumulative, subordinated 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, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $81,838, $85,899 and $79,776 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership........ $48,126 $39,279
Accounting and administrative services.................... 40,728 27,874
Other..................................................... 5,000 --
------- -------
$93,854 $67,153
======= =======
</TABLE>
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc. ................................... $427,238 $425,390 $423,124
Tampa Foods, L.P.................................. 215,265 291,347 320,883
</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
F-150
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
the Partnership's share of total rental and earned income from joint ventures)
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's......................................... $557,303 $557,841 $559,710
Wendy's Old Fashioned Hamburger Restaurants...... 432,585 499,305 525,948
Denny's.......................................... 345,749 360,080 358,467
Taco Bell........................................ 262,909 251,314 251,273
</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 of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-151
<PAGE>
CNL INCOME FUND V, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-153
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-154
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-155
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-156
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-157
Report of Independent Accountants........................................ F-161
Balance Sheets as of December 31, 1997 and 1996.......................... F-162
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-163
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-164
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-165
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-166
</TABLE>
F-152
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings................................. $10,855,678 $12,421,143
Net investment in direct financing leases........... 1,717,763 2,277,481
Investment in joint ventures........................ 2,231,902 1,558,709
Mortgage note receivable, less deferred gain of
$320,536 and $323,157.............................. 1,742,233 1,758,167
Cash and cash equivalents........................... 481,185 1,361,290
Receivables, less allowance for doubtful accounts of
$150,102 and $137,892.............................. 61,221 108,261
Prepaid expenses.................................... 8,458 9,307
Accrued rental income............................... 221,988 169,726
Other assets........................................ 54,346 54,346
----------- -----------
$17,374,774 $19,718,430
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 2,315 $ 24,229
Accrued construction costs payable.................. -- 125,000
Accrued and escrowed real estate taxes payable...... 17,217 93,392
Distributions payable............................... 500,000 575,000
Due to related parties.............................. 216,395 143,867
Rents paid in advance............................... 35,485 13,479
----------- -----------
Total liabilities............................... 771,412 974,967
Minority interest................................... 209,524 222,929
Partners' capital................................... 16,393,838 18,520,534
----------- -----------
$17,374,774 $19,718,430
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-153
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 287,742 $344,772 $ 875,920 $1,042,771
Earned income from direct
financing leases................ 50,326 33,396 152,669 117,863
Contingent rental income......... 10,084 15,404 33,412 68,056
Interest and other income........ 58,791 93,169 223,647 227,320
--------- -------- ---------- ----------
406,943 486,741 1,285,648 1,456,010
--------- -------- ---------- ----------
Expenses:
General operating and
administrative.................. 35,693 52,181 113,010 128,730
Bad debt expense................. -- -- 5,882 9,007
Professional services............ 3,235 4,866 13,314 17,695
Real estate taxes................ 10,138 10,776 26,558 32,298
State and other taxes............ -- -- 9,658 11,897
Depreciation..................... 71,743 82,425 201,720 249,225
--------- -------- ---------- ----------
120,809 150,248 370,142 448,852
--------- -------- ---------- ----------
Income Before Minority Interest in
Loss of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures,
Gain on Sale of Land and Buildings
and Provision for Loss on Land and
Buildings......................... 286,134 336,493 915,506 1,007,158
Minority Interest in Loss of
Consolidated Joint Venture........ 3,955 6,092 13,405 16,124
Equity in Earnings of
Unconsolidated Joint Ventures..... 40,315 11,144 112,418 33,549
Gain on Sale of Land and
Buildings......................... 838 267,076 443,443 369,570
Provision for Loss on Land and
Buildings......................... (120,508) -- (273,141) (142,990)
--------- -------- ---------- ----------
Net Income......................... $ 210,734 $620,805 $1,211,631 $1,283,411
--------- -------- ---------- ----------
Allocation of Net Income:
General partners................. $ 179 $ 6,060 $ 6,534 $ 10,548
Limited partners................. 210,555 614,745 1,205,097 1,272,863
--------- -------- ---------- ----------
$ 210,734 $620,805 $1,211,631 $1,283,411
========= ======== ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 4.21 $ 12.29 $ 24.10 $ 25.46
========= ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 50,000 50,000 50,000 50,000
========= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-154
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 493,982 $ 376,173
Contributions................................. -- 106,000
Net income.................................... 6,534 11,809
----------- -----------
500,516 493,982
----------- -----------
Limited partners:
Beginning balance............................. 18,026,552 18,606,446
Net income.................................... 1,205,097 1,720,106
Distributions ($66.77 and $46.00 per limited
partner unit, respectively).................. (3,338,327) (2,300,000)
----------- -----------
15,893,322 18,026,552
----------- -----------
Total partners' capital......................... $16,393,838 $18,520,534
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-155
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 1,230,725 $ 1,297,828
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ 2,125,220 4,082,166
Additions to land and buildings on operating
leases............................................ (125,000) (120,365)
Investment in joint ventures....................... (713,480) --
Collections on mortgage notes receivable........... 15,757 5,503
Increase in restricted cash........................ -- (2,487,115)
----------- -----------
Net cash provided by investing activities......... 1,302,497 1,480,189
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (3,413,327) (1,725,000)
----------- -----------
Net cash used in financing activities............. (3,413,327) (1,725,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (880,105) 1,053,017
Cash and Cash Equivalents at Beginning of Period..... 1,361,290 362,922
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 481,185 $ 1,415,939
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Net investment in direct financing lease
reclassified to land and building on operating
lease as a result of lease termination............. $ 530,498 $ --
=========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of period............................ $ 65,400 $ --
=========== ===========
Distributions declared and unpaid at end of period.. $ 500,000 $ 575,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-156
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
V, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 66.5% interest in CNL/Longacre Joint
Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $ 5,340,524 $ 6,069,665
Buildings....................................... 7,869,209 8,546,530
----------- -----------
13,209,733 14,616,195
Less accumulated depreciation................... (1,830,220) (1,944,358)
----------- -----------
11,379,513 12,671,837
Less allowance for loss on land and buildings... (523,835) (250,694)
----------- -----------
$10,855,678 $12,421,143
=========== ===========
</TABLE>
During the nine months ended September 30, 1998, the Partnership sold its
properties in Port Orange, Florida, and Tyler, Texas to the tenants for a total
of $2,180,000 and received net sales proceeds of $2,125,220, resulting in a
total gain of $440,822 for financial reporting purposes. These properties were
originally acquired by the Partnership in 1988 and 1989 and had costs totaling
approximately $1,791,300, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold these properties for a
total of approximately $333,900 in excess of their original purchase prices. In
connection with the sale of the properties, the Partnership incurred deferred,
subordinated, real estate disposition fees of $65,400 (see Note 6).
F-157
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
As of December 31, 1997, the Partnership had established an allowance for
loss on land and buildings of $250,694, for financial reporting purposes,
relating to the properties in Belding, Michigan and Lebanon, New Hampshire.
During the nine months ended September 30, 1998, the Partnership increased the
allowance by $152,633 for the property in Belding, Michigan. In addition,
during the nine months ended September 30, 1998, the Partnership established an
allowance for loss on land and building of $120,508, relating to the property
located in Daleville, Indiana. The allowances represent the difference between
the net carrying values of the properties at September 30, 1998 and current
estimates of net realizable values for these properties.
3. Net Investment in Direct Financing Leases
During the nine months ended September 30, 1998, the Partnership terminated
its lease with the tenant of the property in Daleville, Indiana. As a result,
the Partnership reclassified these assets from net investment in direct
financing lease to land and building on operating lease. In accordance with
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 value. No loss on termination of direct
financing lease was recorded for financial reporting purposes.
4. Investment in Joint Ventures
In May 1998, the Partnership entered into a joint venture arrangement, RTO
Joint Venture, with an affiliate of the general partners, to construct and hold
one restaurant property. As of September 30, 1998, the Partnership had
contributed $713,480 to purchase land and pay for construction relating to the
joint venture. As of September 30, 1998, the Partnership has agreed to
contribute approximately $40,900 in additional construction costs to the joint
venture. When construction is completed, the Partnership will have an
approximate 53 percent interest in the profits and losses of the joint venture.
The Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with an affiliate.
The following presents the combined, condensed financial information for all
of the Partnership's joint ventures and properties held as tenants-in-common
at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation...................... $4,817,939 $4,277,972
Net investment in direct financing leases...... 802,097 --
Cash........................................... 14,653 24,994
Receivables.................................... 527 4,417
Prepaid expenses............................... 458 270
Accrued rental income.......................... 97,074 68,819
Liabilities.................................... 105,316 1,250
Partners' capital.............................. 5,627,432 4,375,222
Revenues....................................... 386,391 151,242
Net income..................................... 305,686 121,605
</TABLE>
The Partnership recognized income totaling $112,418 and $33,549 for the nine
months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $40,315 and $11,144 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-158
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
5. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a cumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return, on a cumulative
basis, plus the return of their adjusted capital contributions. The general
partners will then receive, to the extent previously subordinated and unpaid, a
one percent interest in all prior distributions of net cash flow and a return
of their capital contributions. Any remaining sales proceeds will be
distributed 95 percent to the limited partners and five percent to the general
partners.
Any gain from the sale of a property 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,338,327 and $1,725,000,
respectively, ($500,000 and $575,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions for the nine months
ended September 30, 1998 and 1997, of $66.77 and $34.50 per unit, respectively
($10.00 and $11.50 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $1,838,327 as a result of the distribution of net sales proceeds from
the 1997 and 1998 sales of the properties in Tampa and Port Orange, Florida.
This amount was applied toward the limited partners' cumulative 10% Preferred
Return. No distributions have been made to the general partners to date.
6. Related Party Transactions
An affiliate of the Partnership is 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. Payment of the real
estate disposition fee is subordinated to receipt by the limited partners of
their aggregate cumulative 10% Preferred Return, plus their adjusted capital
contributions. For the nine months ended September 30, 1998, the Partnership
incurred $65,400 in deferred, subordinated, real estate disposition fees as a
result of the sale of properties (see Note 2). No deferred, subordinated, real
estate disposition fees were incurred for the nine months ended September 30,
1997.
7. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental, earned and interest income (including the
Partnership's
F-159
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common), for at least one of the nine months ended September
30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation................................. $146,633 $146,633
Slaymaker Group, Inc...................................... 139,005 --
DenAmerica, Inc........................................... 95,713 127,484
Shoney's, Inc............................................. 83,051 180,044
Tampa Foods, L.P.......................................... 70,219 133,923
</TABLE>
In addition, the following schedule presents total rental, earned and
interest income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental, earned income and interest
income from its properties (including the Partnership's share of total rental
and earned income from joint ventures and the properties held as tenants-in-
common) and mortgage notes for at least one of the nine months ended September
30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Family Steakhouse Restaurants............... $146,633 $146,633
Tony Roma's Famous for Ribs............................... 139,005 --
Wendy's Old Fashioned Hamburger Restaurants............... 128,616 193,319
Denny's................................................... 103,736 228,498
Perkins................................................... 77,728 280,805
</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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the on-going operations of the lessees.
F-160
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund V, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund V, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund V, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 29, 1998
F-161
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings.................................... $12,421,143 $15,190,278
Net investment in direct financing leases.............. 2,277,481 1,941,406
Investment in joint ventures........................... 1,558,709 465,808
Mortgage notes receivable, less deferred gain.......... 1,758,167 1,772,858
Cash and cash equivalents.............................. 1,361,290 362,922
Receivables, less allowance for doubtful accounts of
$137,892 and $37,743.................................. 108,261 57,934
Prepaid expenses....................................... 9,307 10,416
Accrued rental income.................................. 169,726 277,034
Other.................................................. 54,346 54,346
----------- -----------
$19,718,430 $20,133,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 24,229 $ 25,366
Accrued construction costs payable..................... 125,000 --
Accrued real estate taxes payable...................... 93,392 104,764
Distributions payable.................................. 575,000 575,000
Due to related parties................................. 143,867 155,964
Rents paid in advance.................................. 13,479 11,738
----------- -----------
Total liabilities................................ 974,967 872,832
Minority interest...................................... 222,929 277,551
Partners' capital...................................... 18,520,534 18,982,619
----------- -----------
$19,718,430 $20,133,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-162
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $1,343,833 $1,746,021 $1,878,584
Earned income from direct financing
leases................................... 157,134 185,552 189,758
Contingent rental income.................. 233,663 130,167 104,455
Interest income........................... 288,637 137,385 55,785
Other income.............................. 13,866 10,419 27,395
---------- ---------- ----------
2,037,133 2,209,544 2,255,977
---------- ---------- ----------
Expenses:
General operating and administrative...... 166,346 178,991 157,741
Professional services..................... 23,172 22,605 20,741
Bad debt expense.......................... 9,007 -- 1,541
Real estate taxes......................... 39,619 40,711 47,182
State and other taxes..................... 11,897 12,492 15,982
Depreciation and amortization............. 324,431 376,766 397,735
---------- ---------- ----------
574,472 631,565 640,922
---------- ---------- ----------
Income Before Minority Interest in Loss of
Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint Ventures,
Gain on Sale of Land and Buildings and
Provision for Loss on Land and Buildings... 1,462,661 1,577,979 1,615,055
Minority Interest in Loss of Consolidated
Joint Venture.............................. 54,622 23,884 11,823
Equity in Earnings of Unconsolidated Joint
Ventures................................... 56,015 46,452 47,018
Gain on Sale of Land and Buildings.......... 409,311 19,369 5,924
Provision for Loss on Land and Buildings.... (250,694) (239,525) --
---------- ---------- ----------
Net Income.................................. $1,731,915 $1,428,159 $1,679,820
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 11,809 $ 12,513 $ 16,754
Limited partners.......................... 1,720,106 1,415,646 1,663,066
---------- ---------- ----------
$1,731,915 $1,428,159 $1,679,820
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 34.40 $ 28.31 $ 33.26
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-163
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
-------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $ 46,000 $109,706 $25,000,000 $(12,868,240) $10,860,974 $(2,865,000) $20,283,440
Contributions from
general partner........ 31,500 -- -- -- -- -- 31,500
Distributions to limited
partners ($46 per
limited partner unit).. -- -- -- (2,300,000) -- -- (2,300,000)
Net income.............. -- 16,754 -- -- 1,663,066 -- 1,679,820
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 77,500 126,460 25,000,000 (15,168,240) 12,524,040 (2,865,000) 19,694,760
Contributions from
general partner........ 159,700 -- -- -- -- -- 159,700
Distributions to limited
partners ($46 per
limited partner unit).. -- -- -- (2,300,000) -- -- (2,300,000)
Net income.............. -- 12,513 -- -- 1,415,646 -- 1,428,159
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 237,200 138,973 25,000,000 (17,468,240) 13,939,686 (2,865,000) 18,982,619
Contributions from
general partner........ 106,000 -- -- -- -- -- 106,000
Distributions to limited
partners ($46 per
limited partner unit).. -- -- -- (2,300,000) -- -- (2,300,000)
Net income.............. -- 11,809 -- -- 1,720,106 -- 1,731,915
-------- -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $343,200 $150,782 $25,000,000 $(19,768,240) $15,659,792 $(2,865,000) $18,520,534
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-164
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,771,467 $2,083,722 $2,216,111
Distributions from unconsolidated joint
ventures................................. 53,176 53,782 53,405
Cash paid for expenses.................... (305,341) (161,730) (173,597)
Interest received......................... 293,929 127,971 46,999
---------- ---------- ----------
Net cash provided by operating
activities.............................. 1,813,231 2,103,745 2,142,918
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings.. 5,271,796 100,000 --
Proceeds from sale of portion of land for
right of way purposes.................... -- -- 7,625
Collections on mortgage note receivable... 9,265 6,712 11,409
Additions to land and buildings on
operating leases......................... (1,900,790) -- --
Investment in direct financing lease...... (911,072) -- --
Investment in joint venture............... (1,090,062) -- --
Other..................................... -- (26,287) --
---------- ---------- ----------
Net cash provided by investing
activities.............................. 1,379,137 80,425 19,034
---------- ---------- ----------
Cash Flows from Financing Activities:
Contributions from general partner........ 106,000 159,700 31,500
Distributions to limited partners......... (2,300,000) (2,300,000) (2,300,000)
---------- ---------- ----------
Net cash used in financing activities.... (2,194,000) (2,140,300) (2,268,500)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 998,368 43,870 (106,548)
Cash and Cash Equivalents at Beginning of
Year...................................... 362,922 319,052 425,600
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,361,290 $ 362,922 $ 319,052
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,731,915 $1,428,159 $1,679,820
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 324,431 376,766 397,735
Minority interest in loss of consolidated
joint venture............................ (54,622) (23,884) (11,823)
Equity in earnings of unconsolidated joint
ventures, net of distributions........... (2,839) 7,330 6,387
Gain on sale of land and buildings........ (409,311) (19,369) (5,924)
Provisions for loss on land and
buildings................................ 250,694 239,525 --
Decrease (increase) in accrued interest on
mortgage note receivable................. 6,788 (9,414) (8,786)
Decrease (increase) in receivables........ (33,999) 10,270 13,527
Decrease (increase) in prepaid expenses... 1,109 1,505 (534)
Decrease in net investment in direct
financing leases......................... 42,682 46,387 42,180
Increase in accrued rental income......... (19,527) (27,875) (30,484)
Increase (decrease) in accounts payable
and accrued expenses..................... (12,509) 32,032 9,730
Increase (decrease) in due to related
parties.................................. (13,322) 59,945 41,585
Increase (decrease) in rents paid in
advance.................................. 1,741 (17,632) 9,505
---------- ---------- ----------
Total adjustments........................ 81,316 675,586 463,098
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,813,231 $2,103,745 $2,142,918
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage note accepted in connection with
sale of land and buildings............... $ -- $1,057,299 $1,040,000
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 575,000 $ 575,000 $ 575,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-165
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund V, 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs. If an impairment is indicated, the
assets are adjusted to their fair value.
When the collection of amounts recorded as rental or other income are
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.
F-166
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Investment in Joint Ventures--The Partnership accounts for its 66.5%
interest in CNL/Longacre Joint Venture, a Florida general partnership, using
the consolidation method. Minority interest represents the minority joint
venture partner's proportionate share of the equity in the Partnership's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
The Partnership accounts for its interest in Cocoa Joint Venture, Halls
Joint Venture and a property in each of Mesa, Arizona and Vancouver,
Washington, 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.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and properties.
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 estimates relate to
the allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1997 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases
The Partnership leases its 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." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. Substantially all leases are for 15 to 20 years and provide
for minimum and contingent rentals. In addition, the tenant generally pays all
property taxes and assessments, fully maintains the interior and exterior of
the building and carries insurance coverage for public liability, property
damage, fire and extended coverage. The lease options generally allow tenants
to
F-167
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
renew the leases for two to four 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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 6,069,665 $ 7,284,070
Buildings.......................................... 8,546,530 10,431,908
----------- -----------
14,616,195 17,715,978
Less accumulated depreciation...................... (1,944,358) (2,346,374)
----------- -----------
12,671,837 15,369,604
Less allowance for loss on land and buildings...... (250,694) (179,326)
----------- -----------
$12,421,143 $15,190,278
=========== ===========
</TABLE>
In August 1995, the Partnership sold its property in Myrtle Beach, South
Carolina, to the tenant for $1,040,000 and accepted the sales proceeds in the
form of a promissory note (Note 6). The total carrying value of the property
was $896,788, including acquisition fees and miscellaneous acquisition expenses
and net of accumulated depreciation. As a result of this sale being accounted
for using the installment sales method for financial reporting purposes as
required by Statement of Financial Accounting Standards No. 66, "Accounting for
Sales of Real Estate," the Partnership recognized a gain of $1,024 and $924 for
the years ended December 31, 1997 and 1996, respectively, and had a deferred
gain in the amount of $139,693 and $140,717 at December 31, 1997 and 1996,
respectively (Note 6).
In October 1996, the Partnership sold its property in St. Cloud, Florida, to
the tenant for $1,150,000. In connection therewith, the Partnership received
$100,000 in cash and accepted the remaining sales proceeds in the form of a
promissory note (Note 6). The total carrying value of the property was
$894,265, including acquisition fees and miscellaneous acquisition expenses and
net of accumulated depreciation. As a result of this sale being accounted for
under the installment sales method for financial reporting purposes, as
described above, the Partnership recognized a gain of $338 and $18,445 for the
years ended December 31, 1997 and 1996, respectively, and had a deferred gain
in the amount of $183,464 and $183,802 at December 31, 1997 and 1996,
respectively (Note 6).
In 1996, the Partnership established an allowance for loss on land and
building in the amount of $109,264 and wrote off accrued rental income of
$60,199 for financial reporting purposes for the property in Franklin,
Tennessee. The allowance represented the difference between (i) the property's
carrying value at December 31, 1996, plus the accrued rental income that the
Partnership had recognized since the inception of the lease relating to the
straight-lining of future scheduled rent increases minus (ii) the net
realizable value based on sales proceeds received in January 1997 from the sale
of this Property. The Partnership sold the property in January 1997, to the
tenant for $980,000 and received net sales proceeds of $960,741. Since the
Partnership had previously established an allowance for loss on land and
building as of December 31, 1996, no loss was recognized during 1997 as a
result of the sale. The Partnership used $360,000 of the net sales proceeds to
pay liabilities of the Partnership, including quarterly distributions to the
limited partners. In June 1997, the
F-168
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Partnership entered into an operating agreement for the property located in
South Haven, Michigan, with an operator to operate the property as an Arby's
restaurant. In connection therewith, the Partnership used approximately
$120,400 of the net sales proceeds from the sale of the property in Franklin,
Tennessee, for conversion costs associated with the Arby's property.
In December 1997, the Partnership reinvested approximately $244,800 of the
net sales proceeds from the sale of the Property in Franklin, Tennessee, in a
property located in Sandy, Utah, as described below, and approximately $150,000
of the net sales proceeds in a property located in Vancouver, Washington, as
tenants-in-common with affiliates of the general partners (see Note 5).
In September 1997, the Partnership sold its property in Salem, New
Hampshire, to the tenant for $1,295,172 and received net sales proceeds (net of
$1,773 which represents prorated rent returned to the tenant) of $1,270,365,
resulting in a gain of $141,508 for financial reporting purposes. This property
was originally acquired by the Partnership in May 1989 and had a cost of
approximately $1,085,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $187,000 in excess of its original purchase price. In December
1997, the Partnership reinvested the net sales proceeds in a property located
in Sandy, Utah, as described below.
In addition, in September 1997, the Partnership sold its property in Port
St. Lucie, Florida, to the tenant for $1,220,000 and received net sales
proceeds of $1,216,750, resulting in a gain of $125,309 for financial reporting
purposes. This property was originally acquired by the Partnership in November
1989 and had a cost of approximately $1,176,100, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $40,700 in excess of its original purchase price. In
November 1997, the Partnership reinvested the majority of the net sales
proceeds in a property located in Houston, Texas.
In 1996, the Partnership established an allowance for loss on land for the
property in Richmond, Indiana, in the amount of $70,062, which represented the
difference between the property's carrying value at December 31, 1996, and the
property manager's estimate of the net realizable value of the property based
on an anticipated sales price. In November 1997, the Partnership sold this
property to a third party for $400,000 and received net sales proceeds of
$385,179. As a result of this transaction, the Partnership recognized a loss of
$141,567 for financial reporting purposes. In December 1997, the Partnership
reinvested the net sales proceeds in a property located in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners (see
Note 5).
Also, in December 1997, the Partnership sold its property in Tampa, Florida,
to a third party for $850,000 and received net sales proceeds (net of $724
which represents prorated rent returned to the tenant) of $804,451 resulting in
a gain of $180,704 for financial reporting purposes. This property was
originally acquired by the Partnership in February 1989 and had a cost of
approximately $673,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore the Partnership sold the property for
approximately $132,000 in excess of its original purchase price.
At December 31, 1997, the Partnership established an allowance for loss on
land and building of $151,671, for financial reporting purposes, relating to
the property in Belding, Michigan. The allowance represents the difference
between the property's carrying value at December 31, 1997 and the estimated
net realizable value for this property. In addition, at December 31, 1997, an
allowance was established for loss on land and building of $99,023, for
financial reporting purposes, relating to the property in Lebanon, New
Hampshire, owned by the Partnership's consolidated joint venture, CNL/Longacre
Joint Venture. The
F-169
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
allowance represents the difference between the property's carrying value at
December 31, 1997 and the estimated new realizable value based on an
anticipated sales price for this property.
As described above, in December 1997, the Partnership used the majority of
the net sales proceeds from the sale of the Properties in Franklin, Tennessee
and Salem, New Hampshire, in a Property located in Sandy, Utah.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. 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, 1997, 1996 and 1995, the Partnership recognized $19,526, $27,875 and
$30,484, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,049,074
1999............................................................. 1,052,663
2000............................................................. 1,063,699
2001............................................................. 1,028,379
2002............................................................. 939,819
Thereafter....................................................... 8,440,061
-----------
$13,573,695
===========
</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 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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $ 4,213,033 $ 2,811,323
Estimated residual values.......................... 806,792 828,783
Less unearned income............................... (2,742,344) (1,698,700)
----------- -----------
Net investment in direct financing leases.......... $ 2,277,481 $ 1,941,406
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.............................................................. $ 286,518
1999.............................................................. 286,518
2000.............................................................. 286,518
2001.............................................................. 286,518
2002.............................................................. 286,518
Thereafter........................................................ 2,780,443
----------
$4,213,033
==========
</TABLE>
F-170
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
In May 1997, the Partnership sold its property in Smyrna, Tennessee, to a
third party for $655,000 and received net sales proceeds of $634,310, resulting
in a gain of $101,995 for financial reporting purposes. This property was
originally acquired by the Partnership in March 1989 and had a cost of
approximately $569,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $64,800 in excess of its original purchase price. The Partnership
used approximately $82,500 of the net sales proceeds to pay liabilities of the
Partnership, including quarterly distributions to the limited partners. In
addition, in October 1997, the Partnership reinvested approximately $460,900 of
the net sales proceeds in a property in Mesa, Arizona, as tenants-in-common
with an affiliate of the general partners. In December 1997, the Partnership
reinvested the remaining net sales proceeds in a property located in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners (Note
5).
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures
The Partnership has a 43 percent and a 49 percent interest in the profits
and losses of Cocoa Joint Venture and Halls Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In October 1997, the Partnership used a portion of the net sales proceeds
from the sale of the Property in Smyrna, Tennessee (see Note 4) to acquire a
property in Mesa, Arizona, as tenants-in-common with an affiliate of the
general partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1997, the Partnership owned a 42.23% interest in
this property.
In addition, in December 1997, the Partnership used some or all of the net
sales proceeds from the sales of the Properties in Franklin, Tennessee; and
Richmond, Indiana (see Note 3), and Smyrna, Tennessee (see Note 4) to acquire a
property in Vancouver, Washington, as tenants-in-common with affiliates of the
general partners. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1997, the Partnership owned a 27.78% interest in
this property.
Cocoa Joint Venture, Halls Joint Venture, and 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.
F-171
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following presents the combined condensed financial information for the
joint ventures and the two properties held as two separate tenants-in-common
with affiliates at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $4,277,972 $ 946,406
Cash................................................ 24,994 561
Receivables......................................... 4,417 --
Prepaid expenses.................................... 270 251
Accrued rental income............................... 68,819 63,806
Liabilities......................................... 1,250 880
Partners' capital................................... 4,375,222 1,010,144
Revenues............................................ 151,242 123,689
Net income.......................................... 121,605 98,949
</TABLE>
The Partnership recognized income totalling $56,015, $46,452 and $47,018 for
the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Mortgage Note Receivable
In connection with the sale in 1995 of its property in Myrtle Beach, South
Carolina, the Partnership accepted a promissory note in the principal sum of
$1,040,000, collateralized by a mortgage on the property. The promissory note
bears interest at 10.25% per annum and is being collected in 59 equal monthly
installments of $9,319, including interest, with a balloon payment of
$1,006,004 due in July 2000.
In addition, in connection with the sale in 1996 of its property in St.
Cloud, Florida, the Partnership accepted a promissory note in the principal sum
of $1,057,299, representing the balance of the sales price of $1,050,000 plus
tenant closing costs in the amount of $7,299 that the Partnership financed on
behalf of the tenant. The note is collateralized by a mortgage on the property.
The promissory note bears interest at a rate of 10.75% per annum and is being
collected in 12 monthly installments of interest only, and thereafter in 168
equal monthly installments of principal and interest.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance................................... $2,069,912 $2,079,177
Accrued interest receivable......................... 11,412 18,200
Less deferred gains on sale of land and buildings... (323,157) (324,519)
---------- ----------
$1,758,167 $1,772,858
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1997 and 1996, approximate the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
F-172
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
7. Receivables
In June 1997, the Partnership terminated the leases with the tenant of the
properties in Connorsville and Richmond, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $35,297 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note is
uncollateralized, bears interest at a rate of ten percent per annum, and is
being collected in 36 monthly installments. Receivables at December 31, 1997,
included $37,099 of such amounts, including accrued interest of $1,802.
8. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners.
Any gain from the sale of a property 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,300,000. No
distributions have been made to the general partners to date.
F-173
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
9. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,731,915 $1,428,159 $1,679,820
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (23,618) (28,058) (26,980)
Gain on disposition of land and
buildings for financial reporting
purposes in excess of gain for tax
reporting purposes.................... (354,648) (1,606) (69)
Allowance for loss on land and
buildings............................. 250,694 239,525 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 42,682 46,387 42,180
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes less than equity in earnings
of unconsolidated joint ventures for
financial reporting purposes.......... (1,914) (1,900) (2,926)
Allowance for doubtful accounts........ 100,149 33,254 (150,480)
Accrued rental income.................. (19,527) (27,875) (30,484)
Rents paid in advance.................. 1,241 (17,632) 9,505
Minority interest in timing differences
of consolidated joint venture......... (41,515) (343) (370)
Disallowed real estate tax deduction... 36,721 -- --
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $1,722,180 $1,669,911 $1,520,196
========== ========== ==========
</TABLE>
10. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates an annual, noncumulative, subordinated 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, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 1997, 1996 and 1995.
F-174
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Certain Affiliates are 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 Affiliates provide 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 10% Preferred Return,
plus their adjusted capital contributions. During the year ended December 31,
1996, the Partnership incurred a deferred, subordinated real estate disposition
fee of $34,500 as the result of the sale of the Property in St. Cloud, Florida.
No deferred, subordinated real estate disposition fees were incurred for the
years ended December 31, 1997 and 1995 due to the reinvestment of net sales
proceeds in additional Properties.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $80,145, $83,563 and $83,882 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $ 67,106 $ 78,407
Accounting and administrative services................. 42,261 43,057
Deferred, subordinated real estate disposition fee..... 34,500 34,500
-------- --------
$143,867 $155,964
======== ========
</TABLE>
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Mesa, Arizona, as tenants-in-common for a purchase price
of $1,084,111 (of which the Partnership contributed $460,911 or 42.23%) from
CNL BB Corp., also an affiliate of the general partners. CNL BB Corp. had
purchased and temporarily held title to this property in order to facilitate
the acquisition of the property by the Partnership. The purchase price paid by
the Partnership represented the Partnership's percent of interest in the costs
incurred by CNL BB Corp. to acquire and carry the property, including closing
costs.
11. 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 share of total rental and earned income from unconsolidated
joint ventures and the properties held as tenants-in-common with affiliates),
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc.................................... $229,795 $241,119 $247,353
Golden Corral Corporation........................ 195,511 195,511 195,511
</TABLE>
In addition, the following schedule presents total rental and earned income
(including mortgage interest income) from individual restaurant chains, each
representing more than ten percent of the Partnership's total rental and earned
income and mortgage interest income (including the Partnership's share of total
rental and
F-175
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
earned income from joint ventures and the properties held as tenants-in-common
with affiliates) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Denny's.......................................... $312,510 $310,021 $314,057
Wendy's Old Fashioned Hamburger Restaurant....... 302,253 293,817 278,127
Perkins.......................................... 228,492 268,939 226,898
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership sold its property in Port Orange, Florida
to the tenant, for $1,330,000 and received net sales proceeds (net of $2,909
which represents prorated rent returned to the tenant) of $1,283,096, resulting
in a gain of approximately $350,300 for financial reporting purposes.
F-176
<PAGE>
CNL INCOME FUND VI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-178
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-179
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-180
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-181
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-182
Report of Independent Accountants........................................ F-185
Balance Sheets as of December 31, 1997 and 1996.......................... F-186
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-187
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-188
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-189
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-191
</TABLE>
F-177
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,472,247 and
$3,327,334......................................... $18,673,683 $20,785,684
Net investment in direct financing leases........... 3,944,272 4,708,841
Investment in joint ventures........................ 4,848,127 1,130,139
Cash and cash equivalents........................... 1,353,864 1,614,759
Restricted cash..................................... -- 709,227
Receivables, less allowance for doubtful accounts of
$341,604 and $363,410.............................. 31,765 157,989
Prepaid expenses.................................... 4,463 4,235
Lease costs, less accumulated amortization of $6,768
and $5,581......................................... 10,932 12,119
Accrued rental income, less allowance for doubtful
accounts of $9,697 in 1998 and 1997................ 762,705 843,345
Other assets........................................ 26,731 26,731
----------- -----------
$29,656,542 $29,993,069
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 9,130 $ 14,138
Accrued construction costs payable.................. -- 125,000
Accrued and escrowed real estate taxes payable...... 18,117 38,025
Due to related parties.............................. 5,250 32,019
Distributions payable............................... 787,500 787,500
Rents paid in advance............................... 27,598 57,663
----------- -----------
Total liabilities............................... 847,595 1,054,345
Minority interest................................... 143,546 144,475
Partners' capital................................... 28,665,401 28,794,249
----------- -----------
$29,656,542 $29,993,069
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-178
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases......................... $601,109 $ 603,263 $1,884,112 $1,889,623
Adjustments to accrued rental
income......................... -- -- (155,528) --
Earned income from direct
financing leases............... 106,936 98,328 363,720 369,865
Contingent rental income........ 4,882 7,946 39,361 34,554
Interest and other income....... 25,316 43,483 92,998 76,748
-------- ---------- ---------- ----------
738,243 753,020 2,224,663 2,370,790
-------- ---------- ---------- ----------
Expenses:
General operating and
administrative................. 42,989 41,177 129,031 113,543
Bad debt expense................ -- -- 12,854 13,102
Professional services........... 6,494 6,030 23,285 17,569
Real estate taxes............... -- 1,790 -- 11,754
State and other taxes........... -- -- 10,392 8,968
Depreciation and amortization... 114,253 117,383 344,306 359,714
-------- ---------- ---------- ----------
163,736 166,380 519,868 524,650
-------- ---------- ---------- ----------
Income Before Minority Interest in
Loss (Income) of Consolidated
Joint Venture, Equity in Earnings
of Unconsolidated Joint Ventures
and Gain on Sale of Land and
Buildings........................ 574,507 586,640 1,704,795 1,846,140
Minority Interest in Loss (Income)
of Consolidated Joint Venture.... (4,133) 1,715 (28,673) 5,783
Equity in Earnings of
Unconsolidated Joint Ventures.... 94,509 24,723 212,408 194,079
Gain on Sale of Land and
Buildings........................ -- 626,804 345,122 547,027
-------- ---------- ---------- ----------
Net Income........................ $664,883 $1,239,882 $2,233,652 $2,593,029
======== ========== ========== ==========
Allocation of Net Income:
General partners.................. $ 6,649 $ 7,692 $ 20,455 $ 21,492
Limited partners.................. 658,234 1,232,190 2,213,197 2,571,537
-------- ---------- ---------- ----------
$664,883 $1,239,882 $2,233,652 $2,593,029
======== ========== ========== ==========
Net Income Per Limited Partner
Unit............................. $ 9.40 $ 17.60 $ 31.62 $ 36.74
======== ========== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........ 70,000 70,000 70,000 70,000
======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-179
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 229,363 $ 204,010
Net income......................................... 20,455 25,353
----------- -----------
249,818 229,363
----------- -----------
Limited partners:
Beginning balance.................................. 28,564,886 28,840,357
Net income......................................... 2,213,197 2,874,529
Distributions ($33.75 and $45.00 per limited
partner unit, respectively)....................... (2,362,500) (3,150,000)
----------- -----------
28,415,583 28,564,886
----------- -----------
Total partners' capital.............................. $28,665,401 $28,794,249
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-180
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities........ $ 2,445,813 $ 2,375,171
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings....... 2,832,253 4,003,985
Additions to land and buildings on operating
leases........................................ (125,000) (1,112,647)
Investment in joint ventures................... (3,716,209) --
Return of capital from joint venture........... -- 69,997
Decrease (increase) in restricted cash......... 697,650 (2,400,061)
Payment of lease costs......................... (3,300) (3,300)
----------- -----------
Net cash provided by (used in) investing
activities.................................. (314,606) 557,974
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.............. (2,362,500) (2,432,500)
Distributions to holder of minority interest... (29,602) (8,832)
----------- -----------
Net cash used in financing activities........ (2,392,102) (2,441,332)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (260,895) 491,813
Cash and Cash Equivalents at Beginning of Period..... 1,614,759 1,127,930
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,353,864 $ 1,619,743
----------- -----------
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period............................................ $ 787,500 $ 787,500
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-181
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VI, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 66 percent interest in the accounts of Caro
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings
In January 1998, the Partnership sold its property in Deland, Florida, to
the tenant for $1,250,000 and received net sales proceeds of $1,234,122,
resulting in a gain of $345,122 for financial reporting purposes. This property
was originally acquired by the Partnership in October 1989 and had a cost of
approximately $1,000,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $234,100 in excess of its original purchase price.
In February 1998, the Partnership sold its property in Melbourne, Florida,
for $590,000 and received net sales proceeds of $552,910. Due to the fact that
during 1997, the Partnership recorded an allowance for loss of $158,239 for
this property, no gain or loss was recognized for financial reporting purposes
in February 1998, relating to the sale.
In February 1998, the Partnership sold its property in Liverpool, New York,
for $157,500 and received net sales proceeds of $145,221. Due to the fact that
in prior years the Partnership recorded an allowance for loss of $181,970 for
this property, no gain or loss was recognized for financial reporting purposes
in February 1998, relating to the sale.
In June 1998, the Partnership sold its property in Bellevue, Nebraska, and
received sales proceeds of $900,000. Due to the fact that during 1998, the
Partnership wrote off $155,528 in accrued rental income, representing a portion
of the accrued rental income that the Partnership had recognized since the
inception of the lease relating to the straight-lining of future scheduled rent
increases in accordance with generally accepted accounting principles, no gain
or loss was recorded for financial reporting purposes in June 1998 relating to
this sale. This property was originally acquired by the Partnership in December
1989 and had a cost of approximately $899,500, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $500 in excess of its original purchase price.
F-182
<PAGE>
3. Net Investment in Direct Financing Leases
In February and June 1998, the Partnership sold its properties in Melbourne,
Florida and Bellevue, Nebraska, respectively, for which the building portions
had been classified as direct financing leases. In connection therewith, the
gross investments (minimum lease payments receivable and estimated residual
values) and unearned income relating to these properties were removed from the
accounts (see Note 2).
4. Investment in Joint Ventures
In January 1998, the Partnership contributed $558,064 and $694,806 to
acquire a 34.74% interest and a 46.2% interest, respectively, in a property in
Overland Park, Kansas, and a property in Memphis, Tennessee, respectively, as
tenants-in-common with affiliates of the general partners. In June 1998, the
Partnership contributed $1,250,350 to acquire an 85.07% interest in a property
in Fort Myers, Florida, as tenants-in-common with an affiliate of the general
partners. The Partnership accounts for its investments in these properties
using the equity method since the Partnership shares control with affiliates,
and amounts relating to its investments are included in investment in joint
ventures.
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. As of September 30, 1998, the
Partnership had contributed $314,011 to purchase land and pay construction
costs relating to the property owned by the joint venture. The Partnership has
agreed to contribute approximately $212,300 in additional construction costs to
the joint venture. The Partnership will have an approximate 50 percent interest
in the profits and losses of the joint venture. The Partnership accounts for
its investment in this joint venture under the equity method since the
Partnership shares control with the affiliate.
In September 1998, the Partnership entered into a joint venture arrangement,
Warren Joint Venture, with an affiliate of the general partners to hold one
restaurant property. As of September 30, 1998, the Partnership had contributed
$898,092 to the joint venture to acquire the restaurant property. As of
September 30, 1998, the Partnership owned approximately a 64 percent interest
in the profits and losses of the joint venture. The Partnership accounts for
its investment in this joint venture under the equity method since the
Partnership shares control with the affiliate.
Auburn Joint Venture, Show Low Joint Venture, Asheville Joint Venture,
Melbourne Joint Venture, Warren Joint Venture and the Partnership and
affiliates as tenants-in-common in five separate tenancy-in-common
arrangements, each own and lease one property to an operator of national fast-
food and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the five properties
held as tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation................... $8,793,422 $4,568,842
Net investment in direct financing leases... 3,338,134 911,559
Cash........................................ 31,598 7,991
Receivables................................. 20,370 22,230
Accrued rental income....................... 215,813 160,197
Other assets................................ 1,178 414
Liabilities................................. 181,530 7,557
Partners' capital........................... 12,218,985 5,663,676
Revenues.................................... 771,965 471,627
Gain on sale of land and building........... -- 488,372
Net income.................................. 672,525 889,883
</TABLE>
The Partnership recognized income totalling $212,048 and $194,079 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $94,509 and $24,723 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-183
<PAGE>
5. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates), for at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation.............................. $515,995 $513,408
Mid-America Corporation................................ 329,639 329,639
IHOP Properties, Inc................................... 325,863 --
Restaurant Management Services, Inc.................... 312,956 376,597
</TABLE>
The following schedule presents total rental and earned income from
individual restaurant chains, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates), for at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Family Steakhouse Restaurants............. $515,995 $513,408
Burger King............................................. 341,006 382,532
IHOP.................................................... 325,863 --
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-184
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund VI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund VI, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 24, 1998, except as to Notes 3 and 12
for which the date is February 9, 1998.
F-185
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $20,785,684 $21,105,355
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 4,708,841 4,659,024
Investment in joint ventures........................... 1,130,139 997,016
Cash and cash equivalents.............................. 1,614,759 1,127,930
Restricted cash........................................ 709,227 977,756
Receivables, less allowance for doubtful accounts of
$363,410 and $115,892................................. 157,989 174,983
Prepaid expenses....................................... 4,235 1,163
Lease costs, less accumulated amortization of $5,581
and $3,691............................................ 12,119 14,009
Accrued rental income, less allowance for doubtful
accounts of $9,697 in 1997 and 1996................... 843,345 1,045,319
Other assets........................................... 26,731 26,731
----------- -----------
$29,993,069 $30,129,286
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 14,138 $ 18,161
Accrued construction costs payable..................... 125,000 --
Accrued and escrowed real estate taxes payable......... 38,025 11,338
Due to related parties................................. 32,019 2,633
Distributions payable.................................. 787,500 857,500
Rents paid in advance.................................. 57,663 30,705
----------- -----------
Total liabilities.................................. 1,054,345 920,337
Minority interest...................................... 144,475 164,582
Partners' capital...................................... 28,794,249 29,044,367
----------- -----------
$29,993,069 $30,129,286
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-186
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,448,269 $2,776,239 $2,738,218
Earned income from direct financing
leases................................. 449,133 557,426 469,642
Contingent rental income................ 147,437 110,073 115,946
Interest and other income............... 119,961 49,056 51,130
---------- ---------- ----------
3,164,800 3,492,794 3,374,936
---------- ---------- ----------
Expenses:
General operating and administrative.... 156,847 159,388 147,902
Professional services................... 25,861 32,272 27,741
Bad debt expense........................ 131,184 -- --
Real estate taxes....................... 43,676 -- --
State and other taxes................... 8,969 7,930 6,789
Depreciation and amortization........... 473,828 483,573 490,386
---------- ---------- ----------
840,365 683,163 672,818
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture; Equity in
Earnings of Unconsolidated Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Net Investment in Direct
Financing Leases and Provision for Loss
on Land and Buildings.................... 2,324,435 2,809,631 2,702,118
Minority Interest in Income of
Consolidated Joint Venture............... 11,275 (24,682) (20,133)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 280,331 97,381 83,483
Gain (Loss) on Sale of Land and Buildings
and Net Investment in Direct Financing
Leases................................... 547,027 (1,706) 95,913
Provision for Loss on Land and Building
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (263,186) (77,023) --
---------- ---------- ----------
Net Income................................ $2,899,882 $2,803,601 $2,861,381
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 25,353 $ 28,337 $ 28,411
Limited partners........................ 2,874,529 2,775,264 2,832,970
---------- ---------- ----------
$2,899,882 $2,803,601 $2,861,381
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 41.06 $ 39.65 $ 40.47
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 70,000 70,000 70,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-187
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------- --------------------------------------------------
Contri- Accumulated Contri- Accumulated Syndication
butions Earnings butions Distributions Earnings Costs Total
------- ----------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $146,262 $35,000,000 $(16,064,226) $14,681,349 $(4,015,000) $29,749,385
Distributions to
limited partners
($45.00 per limited
partner unit)......... -- -- -- (3,150,000) -- -- (3,150,000)
Net income............. -- 28,411 -- -- 2,832,970 -- 2,861,381
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 174,673 35,000,000 (19,214,226) 17,514,319 (4,015,000) 29,460,766
Distributions to
limited partners
($46.00 per limited
partner unit)......... -- -- -- (3,220,000) -- -- (3,220,000)
Net income............. -- 28,337 -- -- 2,775,264 -- 2,803,601
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 203,010 35,000,000 (22,434,226) 20,289,583 (4,015,000) 29,044,367
Distributions to
limited partners
($45.00 per limited
partner unit)......... -- -- -- (3,150,000) -- -- (3,150,000)
Net income............. -- 25,353 -- -- 2,874,529 -- 2,899,882
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $228,363 $35,000,000 $(25,584,226) $23,164,112 $(4,015,000) $28,794,249
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-188
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants.......... $ 3,097,751 $ 3,363,188 $ 3,264,527
Distributions from unconsolidated
joint ventures..................... 144,016 114,163 95,931
Cash paid for expenses.............. (180,530) (203,432) (181,153)
Interest received................... 94,804 36,843 43,125
----------- ----------- -----------
Net cash provided by operating
activities....................... 3,156,041 3,310,762 3,222,430
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings.......................... 4,003,985 982,980 899,503
Additions to land and buildings on
operating leases................... (2,666,258) -- (25,646)
Investment in direct financing
leases............................. (1,057,282) -- (723,237)
Investment in joint ventures........ (521,867) (146,090) --
Return of capital from joint
ventures........................... 524,975 -- --
Collections on mortgage note
receivable......................... -- 3,033 2,967
Decrease (increase) in restricted
cash............................... 279,367 (977,017) --
Payment of lease costs.............. (3,300) (3,300) (3,300)
----------- ----------- -----------
Net cash provided by (used in)
investing activities............. 559,620 (140,394) 150,287
----------- ----------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf
of the Partnership................. -- -- (1,375)
Distributions to limited partners... (3,220,000) (3,150,000) (3,150,000)
Distributions to holder of minority
interest........................... (8,832) (13,437) (26,824)
----------- ----------- -----------
Net cash used in financing
activities....................... (3,228,832) (3,163,437) (3,178,199)
----------- ----------- -----------
Net Increase in Cash and Cash
Equivalents............................ 486,829 6,931 194,518
Cash and Cash Equivalents at Beginning
of Year................................ 1,127,930 1,120,999 926,481
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,614,759 $ 1,127,930 $ 1,120,999
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-189
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $2,899,882 $2,803,601 $2,861,381
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 471,938 481,683 489,480
Amortization........................... 1,890 1,890 906
Minority interest in income of
consolidated joint venture............ (11,275) 24,682 20,133
Equity in earnings of unconsolidated
joint ventures, net of distributions.. (136,315) 16,782 12,448
Loss (gain) on sale of land and
building.............................. (547,027) 1,706 (95,913)
Provision for loss on land and building
and impairment in carrying value of
net investment in direct financing
lease................................. 263,186 77,023 --
Decrease (increase) in receivables..... 25,880 (90,360) 44,096
Decrease (increase) in prepaid
expenses.............................. (3,072) 4,087 (2,042)
Decrease in net investment in direct
financing leases...................... 67,389 68,177 53,944
Decrease (increase) in accrued rental
income................................ 41,173 (103,935) (131,428)
Increase in accounts payable and
accrued expenses...................... 25,964 2,529 215
Increase (decrease) in due to related
parties............................... 29,470 (3,391) 5,909
Increase (decrease) in rents paid in
advance and deposits.................. 26,958 26,288 (36,699)
---------- ---------- ----------
Total adjustments.................... 256,159 507,161 361,049
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,156,041 $3,310,762 $3,222,430
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Acquisition costs paid by affiliates on
behalf of the Partnership............... $ -- $ -- $ 1,375
========== ========== ==========
Mortgage note accepted in connection with
sale of land............................ $ -- $ -- $ 6,000
========== ========== ==========
Distributions declared and unpaid at
December 31............................. $ 787,500 $ 857,500 $ 787,500
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-190
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund VI, 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
method. 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 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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 the 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. Although the general partners have made their
best estimate of these factors based on current conditions, it is reasonably
possible that changes could occur in the near term which could adversely affect
the general partners' best estimate of net cash flows expected to be generated
from its properties and the need for asset impairment write-downs. If an
impairment is indicated, the assets are adjusted to their fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and accrued rental
income, and to decrease rental or other income or increase bad debt expense for
the current period, although the Partnership continues to pursue collection of
such amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
F-191
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--The Partnership accounts for its 66 percent
interest in Caro Joint Venture, a Florida general partnership, using the
consolidation method. Minority interest represents the minority joint venture
partner's proportionate share of equity in the Partnership's consolidated joint
venture. All significant intercompany accounts and transactions have been
eliminated.
The Partnership's investments in Auburn Joint Venture, Show Low Joint
Venture and Asheville Joint Venture, and a property in Yuma, Arizona, a
property in Clinton, North Carolina, and a property in Vancouver, Washington,
for which each property is held as tenants-in-common with affiliates, are
accounted for 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.
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.
Lease Costs--Brokerage fees and lease incentive costs incurred in finding
new tenants and negotiating new leases for the Partnership's properties are
amortized over the terms of the new leases 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 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." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of some of these leases are operating leases.
Substantially all leases are for 10 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully
F-192
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to four
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>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $10,046,309 $10,364,275
Buildings...................................... 14,344,114 13,983,253
----------- -----------
24,390,423 24,347,528
Less accumulated depreciation.................. (3,327,334) (3,165,150)
----------- -----------
21,063,089 21,182,378
Less allowance for loss on land and building... (277,405) (77,023)
----------- -----------
$20,785,684 $21,105,355
=========== ===========
</TABLE>
In December 1996, the Partnership sold its property in Dallas, Texas, to a
third party for $1,016,000 and received net sales proceeds of $982,980. This
property was originally acquired by the Partnership in June 1994 and had a cost
of approximately $980,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $2,100 in excess of its original purchase price. Due to the fact
that the Partnership had recognized accrued rental income since the inception
of the lease relating to the straight-lining of future scheduled rent increases
in accordance with generally accepted accounting principles, the Partnership
wrote-off the cumulative balance of such accrued rental income at the time of
the sale of this property, resulting in a loss on land and building of $1,706
for financial reporting purposes. Due to the fact that the straight-lining of
future rent increases over the term of the lease is a non-cash accounting
adjustment, the write off of these amounts is a loss for financial statement
purposes only. In February 1997, the Partnership reinvested the net sales
proceeds from the sale of the property in Dallas, Texas, along with additional
funds, in a Bertucci's property in Marietta, Georgia, for a total cost of
approximately $1,112,600.
In July 1997, the Partnership sold the property in Whitehall, Michigan, to a
third party, for $665,000 and received net sales proceeds (net of $2,981 which
represents amounts due to the former tenant for prorated rent) of $626,907,
resulting in a loss of $79,777 for financial reporting purposes.
In addition, in July 1997, the Partnership sold its property in Naples,
Florida, to a third party, for $1,530,000 and received net sales proceeds (net
of $9,945 which represents amounts due to the former tenant for prorated rent)
of $1,477,780, resulting in a gain of $186,550 for financial reporting
purposes. This property was originally acquired by the Partnership in December
1989 and had a cost of approximately $1,083,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the partnership sold the
property for approximately $403,800 in excess of its original purchase price.
In December 1997, the Partnership reinvested the net sales proceeds in an IHOP
property in Elgin, Illinois, for a total cost of approximately $1,484,100.
In July 1997, the Partnership entered into a new lease for the property in
Greensburg, Indiana, with a new tenant to operate the property as an Arby's
restaurant. In connection therewith, the Partnership incurred $125,000 in
renovation costs.
F-193
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 1997, the Partnership sold its property in Venice, Florida, to
a third party, for $1,245,000 and received net sales proceeds (net of $5,048
which represents amounts due to the former tenant for prorated rent) of
$1,201,648, resulting in a gain of $283,853 for financial reporting purposes.
This property was originally acquired by the Partnership in August 1989 and had
a cost of approximately $1,032,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $174,300 in excess of its original purchase price.
In December 1997, the Partnership reinvested the net sales proceeds in an IHOP
property in Manassas, Virginia, for a total cost of approximately $1,126,800.
In 1996 and 1997, the Partnership recorded provisions for losses on land and
building in the amounts of $77,023 and $104,947, respectively, for financial
reporting purposes for the property in Liverpool, New York. The allowance at
December 31, 1996, represented the difference between the property's carrying
value at December 31, 1996 and the estimated net realizable value for this
property based on an anticipated sales price to an interested third party. The
allowance at December 31, 1997, represents the difference between (i) the
property's carrying value at December 31, 1997, and (ii) the net realizable
value of the property based on the net sales proceeds received in February 1998
from the sale of the property (see Note 12).
At December 31, 1997, the Partnership established an allowance for loss on
land in the amount of $95,435 for its property in Melbourne, Florida. The
allowance represents the difference between the property's carrying value for
the land at December 31, 1997, and the net realizable value of the land based
on the net sales proceeds received in February 1998 from the sale of the
property (see Note 12).
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. 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, 1997, 1996 and 1995, the Partnership recognized $87,094, $103,935 and
$131,428, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,393,528
1999.......................................................... 2,396,060
2000.......................................................... 2,487,704
2001.......................................................... 2,538,767
2002.......................................................... 2,541,122
Thereafter.................................................... 14,362,769
-----------
$26,719,950
===========
</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.
F-194
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
---------- ----------
<S> <C> <C>
Minimum lease payments
receivable............. $9,313,752 $8,955,426
Estimated residual
values................. 1,655,911 1,704,299
Less unearned income.... (6,198,018) (6,000,701)
---------- ----------
4,771,645 4,659,024
Less allowance for
impairment in carrying
value.................. (62,804) --
---------- ----------
Net investment in direct
financing leases....... $4,708,841 $4,659,024
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 622,540
1999........................................................... 622,540
2000........................................................... 624,680
2001........................................................... 637,400
2002........................................................... 637,400
Thereafter..................................................... 6,169,192
----------
$9,313,752
==========
</TABLE>
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(See Note 3).
In July 1997, the Partnership sold its property in Naples, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual values) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to this
property was reflected in income (Note 3).
In addition, in July 1997, the Partnership sold its property in Plattsmouth,
Nebraska, to the tenant, for $700,000 and received net sales proceeds (net of
escrow fees paid of $1,750) of $697,650, resulting in a gain of $156,401 for
financial reporting purposes. This property was originally acquired by the
Partnership in January 1990 and had a cost of approximately $561,000, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $138,400 in excess of its
original purchase price.
At December 31, 1997, the Partnership had established an allowance for
impairment in carrying value in the amount of $62,804 for its property in
Melbourne, Florida. The allowance represents the difference between the (i)
carrying value of the net investment in the direct financing lease at December
31, 1997, and (ii) the net realizable value of the net investment in the direct
financing lease based on the net sales proceeds received in February 1998 from
the sale of the property (see Note 12).
5. Investment in Joint Ventures
The Partnership has a 3.9%, a 36 percent and a 14 percent interest in the
profits and losses of Auburn Joint Venture, Show Low Joint Venture and
Asheville Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
F-195
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed $146,090 for a 17.93%
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.
In January 1997, Show Low Joint Venture, in which the Partnership owns a 36
percent interest, sold its property to the tenant for $970,000, resulting in a
gain to the joint venture of approximately $360,000 for financial reporting
purposes. The property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the property for approximately $306,500 in excess of its original purchase
price. In June 1997, Show Low Joint Venture reinvested $782,413 of net sales
proceeds in a property in Greensboro, North Carolina. During 1997, the
Partnership received approximately $70,000 representing a return of capital,
for its pro-rata share of the uninvested net sales proceeds. As of December 31,
1997, the Partnership owned a 36 percent interest in the profits and losses of
the joint venture.
As of December 31, 1996, the Partnership had a 51.67% interest in a property
in Yuma, Arizona, with an affiliate of the Partnership that has the same
general partners, as tenants-in-common. In October 1997, the Partnership and
the affiliate, as tenants-in-common, sold the property in Yuma, Arizona, for a
total sales price of $1,010,000 and received net sales proceeds of $982,025,
resulting in a gain, to the tenancy-in-common, of approximately $128,400 for
financial reporting purposes. The property was originally acquired in July 1994
and had a total cost of approximately $861,700, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the property was sold for
approximately $120,300 in excess of its original purchase price. The
Partnership received approximately $455,000 representing a return of capital
for its pro-rata share of the net sales proceeds. In December 1997, the
Partnership reinvested the amounts received as a return of capital from the
sale of the Yuma, Arizona property, in a property in Vancouver, Washington, as
tenants-in-common with affiliates of the general partners. The Partnership
accounts for its investment in the property in Vancouver, Washington, using the
equity method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1997, the Partnership owned a 23.04% interest in the Vancouver,
Washington, property owned with affiliates as tenants-in-common.
Auburn Joint Venture, Show Low Joint Venture, Asheville Joint Venture, and
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 and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures and the two properties
held as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $4,568,842 $3,463,093
Net investment in direct financing leases........ 911,559 401,650
Cash............................................. 7,991 11,177
Receivables...................................... 22,230 21,826
Accrued rental income............................ 160,197 191,594
Other assets..................................... 414 44,380
Liabilities...................................... 7,557 10,221
Partners' capital................................ 5,663,676 4,123,499
Revenues......................................... 471,627 528,092
Gain on sale of land and building................ 488,372 --
Net income....................................... 889,883 436,981
</TABLE>
F-196
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership recognized income totalling $280,331, $97,381, and $83,483
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
As of December 31, 1996, net sales proceeds of $977,017 from the sale of the
property in Dallas, Texas, plus accrued interest of $739, were being held in an
interest-bearing escrow account pending the release of funds by the escrow
agent to acquire an additional property. In February 1997, the escrow agent
released these funds to acquire the property in Marietta, Georgia (see Note 3).
As of December 31, 1997, net sales proceeds of $697,650 from the sale of the
property in Plattsmouth, Nebraska, plus accrued interest of $11,577, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property.
7. Receivables
In June 1997, the Partnership terminated the lease with the tenant of the
property in Greensburg, Indiana. In connection therewith, the Partnership
accepted a promissory note from this former tenant for $13,077 for amounts
relating to past due real estate taxes the Partnership had incurred as a result
of the former tenant's financial difficulties. The promissory note, which is
uncollateralized, bears interest at a rate of ten percent per annum, and is
being collected in 36 monthly installments. Receivables at December 31, 1997,
included $13,631 of such amounts, including accrued interest of $554.
8. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners. Any gain from
the sale of a property 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.
During the years ended December 31, 1997, 1996 and 1995 the Partnership
declared distributions to the limited partners of $3,150,000, $3,220,000 and
$3,150,000, respectively. No distributions have been made to the general
partners to date.
F-197
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $2,899,882 $2,803,601 $2,861,381
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (92,303) (104,412) (94,987)
Allowance for loss on land and
building.............................. 263,186 77,023 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 67,392 68,177 53,944
Gain and loss on sale of land and
buildings for financial reporting
purposes in excess of gain and loss on
sale for tax reporting purposes....... (335,658) 1,706 (2,914)
Equity in earnings of unconsolidated
joint ventures for financial reporting
purposes in excess of equity in
earnings of unconsolidated joint
ventures for tax reporting purposes... (147,256) (49) (5,299)
Allowance for doubtful accounts........ 369,935 (78,517) 16,154
Accrued rental income.................. (81,244) (103,935) (131,428)
Rents paid in advance.................. 26,458 26,288 (36,699)
Minority interest in timing differences
of consolidated joint venture......... (30,778) 1,781 (200)
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,939,614 $2,691,663 $2,659,952
========== ========== ==========
</TABLE>
10. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates 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 and the property held as tenants-
in-common with an affiliate, but not in excess of competitive fees for
comparable services. These fees are payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide a substantial amount
of services in connection with
F-198
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
the sale. However, if the sales proceeds are reinvested in a replacement
property, no such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are distributed. The
payment of the real estate disposition fee is subordinated to receipt by the
limited partners of their aggregate 10% Preferred Return, plus their adjusted
capital contributions. No deferred, subordinated real estate disposition fees
have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $85,714, $95,420 and $81,847 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $32,019
and $2,633, respectively.
11. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures and the two properties
held as tenants-in-common with affiliates), for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation..................... $751,866 $758,348 $725,908
Restaurant Management Services, Inc........... 478,750 511,040 440,987
Mid-America Corporation....................... 439,519 439,519 439,519
</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 total rental and earned income from joint ventures and the two
properties held as tenants-in-common with affiliates), for at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse
Restaurants................................ $751,866 $758,348 $725,908
Burger King................................. 496,487 455,764 455,820
Denny's..................................... 317,041 336,269 276,547
Hardee's.................................... 270,129 410,951 431,465
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Whitehall, Michigan, to acquire a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $558,900 for a
34.74% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Plattsmouth, Nebraska, to acquire a property in Memphis,
Tennessee, as tenants-in-common with affiliates of the general
F-199
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
partners. In connection therewith, the Partnership contributed approximately
$694,800 for a 46.2% interest in such property. The Partnership will account
for its investment in this property using the equity method since the
Partnership will share control with affiliates.
In addition, in January 1998, the Partnership sold its property in Deland,
Florida, to the tenant, for $1,250,000 and received net sales proceeds of
$1,234,617, resulting in a gain of approximately $345,100 for financial
reporting purposes.
In February 1998, the Partnership sold its property in Melbourne, Florida,
for $590,000 and received net sales proceeds of $542,477, resulting in a loss
of $158,239 for financial reporting purposes which the Partnership recorded in
1997 (See Notes 3 and 4).
In February 1998, the Partnership sold its property in Liverpool, New York,
for $157,500 and received net sales proceeds of approximately $150,700,
resulting in a loss of $181,970 for financial reporting purposes which the
Partnership recorded in 1996 and in 1997 (See Note 3).
F-200
<PAGE>
CNL INCOME FUND VII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-202
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-203
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-204
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-205
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-206
Report of Independent Accountants........................................ F-207
Balance Sheets as of December 31, 1997 and 1996.......................... F-208
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-209
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-210
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-211
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-213
</TABLE>
F-201
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,397,837 and
$2,169,570......................................... $15,154,596 $15,382,863
Net investment in direct financing leases........... 3,386,764 3,447,152
Investment in joint ventures........................ 3,340,189 3,393,932
Mortgage note receivable, less deferred gain of
$125,545 and $126,303.............................. 1,243,284 1,250,597
Cash and cash equivalents........................... 828,551 761,317
Receivables, less allowance for doubtful accounts of
$28,936 and $32,959................................ 6,576 64,092
Prepaid expenses.................................... 7,291 4,755
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1998 and 1997................ 1,183,770 1,114,632
Other assets........................................ 60,422 60,422
----------- -----------
$25,211,443 $25,479,762
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 2,327 $ 6,131
Escrowed real estate taxes payable.................. 4,727 7,785
Distributions payable............................... 675,000 675,000
Due to related parties.............................. 11,443 34,883
Rents paid in advance............................... 44,359 60,671
----------- -----------
Total liabilities............................... 737,856 784,470
Minority interest................................... 146,865 147,514
Partners' capital................................... 24,326,722 24,547,778
----------- -----------
$25,211,443 $25,479,762
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-202
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 492,759 $ 493,318 $1,483,950 $1,473,347
Earned income from direct
financing leases........... 103,164 122,508 311,318 369,268
Contingent rental income.... 4,829 2,602 17,207 5,685
Interest and other income... 42,300 46,474 127,438 131,517
---------- ---------- ---------- ----------
643,052 664,902 1,939,913 1,979,817
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative............. 37,062 31,784 104,724 101,277
Bad debt expense............ -- -- -- 4,613
Professional services....... 3,973 4,277 16,567 14,683
Real estate taxes........... -- -- -- 2,979
State and other taxes....... -- -- 2,728 4,560
Depreciation and
amortization............... 76,089 76,089 228,267 228,267
---------- ---------- ---------- ----------
117,124 112,150 352,286 356,379
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture,
Equity in Earnings of
Unconsolidated Joint
Ventures, and Gain (Loss) on
Sale of Land and Buildings... 525,928 552,752 1,587,627 1,623,438
Minority Interest in Income of
Consolidated Joint Ventures.. (4,665) (4,698) (13,921) (13,998)
Equity in Earnings of
Unconsolidated Joint
Ventures..................... 78,287 55,939 229,480 151,930
Gain (Loss) on Sale of Land
and Buildings................ 259 234 758 (19,054)
---------- ---------- ---------- ----------
Net Income.................... $ 599,809 $ 604,227 $1,803,944 $1,742,316
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 5,998 $ 6,036 $ 18,039 $ 17,495
Limited partners............ 593,811 598,191 1,785,905 1,724,821
---------- ---------- ---------- ----------
$ 599,809 $ 604,227 $1,803,944 $1,742,316
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.020 $ 0.020 $ 0.060 $ 0.057
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 30,000,000 30,000,000 30,000,000 30,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-203
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................ $ 181,085 $ 156,785
Net income................................... 18,039 24,300
------------ ------------
199,124 181,085
------------ ------------
Limited partners:
Beginning balance............................ 24,366,693 24,484,985
Net income................................... 1,785,905 2,581,708
Distributions ($0.068 and $0.090 per limited
partner unit, respectively)................. (2,025,000) (2,700,000)
------------ ------------
24,127,598 24,366,693
------------ ------------
Total partners' capital........................ $ 24,326,722 $ 24,547,778
============ ============
</TABLE>
See accompanying notes to financial statements.
F-204
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $2,085,545 $2,099,452
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land......................... -- 223,589
Investment in joint ventures....................... -- (616,245)
Collections on mortgage note receivable............ 8,004 7,230
Other.............................................. 13,255 --
---------- ----------
Net cash provided by (used in) investing
activities...................................... 21,259 (385,426)
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,025,000) (2,025,000)
Distributions to holder of minority interest....... (14,570) (14,781)
---------- ----------
Net cash used in financing activities............ (2,039,570) (2,039,781)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... 67,234 (325,755)
Cash and Cash Equivalents at Beginning of Period....... 761,317 1,305,429
---------- ----------
Cash and Cash Equivalents at End of Period............. $ 828,551 $ 979,674
---------- ----------
Supplemental Schedule of Non-Cash Financing Activities
Distributions declared and unpaid at end of
period............................................ $ 675,000 $ 675,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-205
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
VII, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 83 percent interest in San Antonio #849
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates) for at least one of
the nine month periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation.............................. $509,751 $445,267
Restaurant Management Services, Inc. .................. 327,103 327,855
Waving Leaves, Inc..................................... 225,889 112,948
Flagstar Enterprises, Inc.............................. 113,294 231,196
</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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the on-going operations of the lessees.
F-206
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund VII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VII, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund VII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
Orlando, Florida
January 15, 1998
F-207
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $15,382,863 $15,930,547
Net investment in direct financing leases............. 3,447,152 4,098,192
Investment in joint ventures.......................... 3,393,932 1,789,238
Mortgage notes receivable, less deferred gain......... 1,250,597 1,259,495
Cash and cash equivalents............................. 761,317 1,305,429
Receivables, less allowance for doubtful accounts of
$32,959 and $43,234.................................. 64,092 63,386
Prepaid expenses...................................... 4,755 4,654
Accrued rental income, less allowance for doubtful
accounts of $9,845 and $10,786....................... 1,114,632 1,012,490
Other assets.......................................... 60,422 60,422
----------- -----------
$25,479,762 $25,523,853
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 6,131 $ 6,502
Escrowed real estate taxes payable.................... 7,785 4,192
Distributions payable................................. 675,000 675,000
Due to related parties................................ 34,883 9,067
Rents paid in advance................................. 60,671 38,705
Total liabilities................................. 784,470 733,466
Minority interest..................................... 147,514 148,617
Partners' capital..................................... 24,547,778 24,641,770
$25,479,762 $25,523,853
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-208
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,960,724 $1,954,033 $1,888,830
Earned income from direct financing
leases................................. 475,498 505,061 538,634
Contingent rental income................ 51,345 44,973 68,820
Interest and other income............... 183,579 240,079 84,390
---------- ---------- ----------
2,671,146 2,744,146 2,580,674
---------- ---------- ----------
Expenses:
General operating and administrative.... 138,560 159,001 146,747
Professional services................... 23,546 27,640 27,379
Bad debt expense........................ 4,613 -- 2,584
Real estate taxes....................... 2,979 9,010 46,512
State and other taxes................... 4,560 2,448 2,562
Depreciation and amortization........... 304,356 317,957 329,350
---------- ---------- ----------
478,614 516,056 555,134
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Loss on Demolition of
Building................................. 2,192,532 2,228,090 2,025,540
Minority Interest in Income of
Consolidated Joint Venture............... (18,663) (18,691) (18,728)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 267,251 157,254 154,937
Gain (Loss) on Sale of Land and
Buildings................................ 164,888 (39,790) (5,135)
Loss on Demolition of Building............ -- -- (174,466)
---------- ---------- ----------
Net Income................................ $2,606,008 $2,326,863 $1,982,148
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 24,300 $ 23,586 $ 20,784
Limited partners........................ 2,581,708 2,303,277 1,961,364
---------- ---------- ----------
$2,606,008 $2,326,863 $1,982,148
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.086 $ 0.077 $ 0.065
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 30,000,000 30,000,000 30,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-209
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $111,415 $30,000,000 $(12,077,621) $11,137,967 $(3,440,000) $25,732,761
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,002) -- -- (2,700,002)
Net income............. -- 20,784 -- -- 1,961,364 -- 1,982,148
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 132,199 30,000,000 (14,777,623) 13,099,331 (3,440,000) 25,014,907
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,000) -- -- (2,700,000)
Net income............. -- 23,586 -- -- 2,303,277 -- 2,326,863
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 155,785 30,000,000 (17,477,623) 15,402,608 (3,440,000) 24,641,770
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,000) -- -- (2,700,000)
Net income............. -- 24,300 -- -- 2,581,708 -- 2,606,008
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $180,085 $30,000,000 $(20,177,623) $17,984,316 $(3,440,000) $24,547,778
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-210
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants.......... $ 2,500,189 $ 2,549,406 $ 2,399,249
Distributions from unconsolidated
joint ventures..................... 300,696 191,174 190,398
Cash paid for expenses.............. (140,819) (248,523) (174,993)
Interest received................... 180,393 178,812 69,884
----------- ----------- -----------
Net cash provided by operating
activities....................... 2,840,459 2,670,869 2,484,538
----------- ----------- -----------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases................... -- (1,041,555) --
Proceeds from sale of land and
buildings.......................... 976,334 1,661,943 --
Investment in joint ventures........ (1,650,905) -- --
Collections on mortgage notes
receivable......................... 9,766 8,821 12,725
----------- ----------- -----------
Net cash provided by (used in)
investing activities............. (664,805) 629,209 12,725
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners... (2,700,000) (2,700,000) (2,760,002)
Distributions to holder of minority
interest........................... (19,766) (19,723) (17,240)
----------- ----------- -----------
Net cash used in financing
activities....................... (2,719,766) (2,719,723) (2,777,242)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (544,112) 580,355 (279,979)
Cash and Cash Equivalents at Beginning
of Year................................ 1,305,429 725,074 1,005,053
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 761,317 $ 1,305,429 $ 725,074
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-211
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $2,606,008 $2,326,863 $1,982,148
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 304,356 317,957 328,982
Amortization........................... -- -- 368
Minority interest in income of
consolidated joint venture............ 18,663 18,691 18,728
Loss (gain) on sale of land and
buildings............................. (164,888) 39,790 5,135
Loss on demolition of building......... -- -- 174,466
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 33,445 33,920 35,461
Decrease (increase) in receivables..... 17,173 (14,827) 799
Decrease (increase) in prepaid
expenses.............................. (101) 379 (3,320)
Decrease in net investment in direct
financing leases...................... 76,941 70,329 70,872
Increase in accrued rental income...... (102,142) (104,639) (169,520)
Increase (decrease) in accounts payable
and accrued expenses.................. 3,222 (40,072) 46,367
Increase (decrease) in due to related
parties............................... 25,816 (4,244) 6,111
Increase (decrease) in rents paid in
advance............................... 21,966 26,722 (12,059)
---------- ---------- ----------
Total adjustments.................... 234,451 344,006 502,390
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $2,840,459 $2,670,869 $2,484,538
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings.............. $ -- $ -- $1,400,000
========== ========== ==========
Distributions declared and unpaid at
December 31............................. $ 675,000 $ 675,000 $ 675,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-212
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund VII, 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs. If an impairment is indicated, the
assets are adjusted to their fair value.
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.
F-213
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--The Partnership accounts for its 83 percent
interest in San Antonio #849 Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's proportionate
share of the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been eliminated.
The Partnership's investments in Halls Joint Venture, CNL Restaurant
Investments II, Des Moines Real Estate Joint Venture and CNL Mansfield Joint
Venture, and a property in Smithfield, North Carolina, and a property in Miami,
Florida, for which each of the two properties is held as tenants-in-common with
affiliates, are accounted for 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.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. 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." The leases generally are classified
as operating leases; however, some leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are operating
leases. Substantially all leases are for 13 to 20 years and provide for minimum
and contingent rentals. In addition, the tenant generally pays all property
taxes and assessments, fully maintains the interior and exterior of the
building and carries insurance coverage for public
F-214
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
liability, property damage, fire and extended coverage. The lease options
generally allow tenants to renew the leases for two to four 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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 8,430,465 $ 8,673,793
Buildings....................................... 9,121,968 9,121,968
17,552,433 17,795,761
Less accumulated depreciation................... (2,169,570) (1,865,214)
----------- -----------
$15,382,863 $15,930,547
=========== ===========
</TABLE>
In July 1996, the Partnership sold its property in Colorado Springs,
Colorado, for $1,075,000 and received net sales proceeds of $1,044,909,
resulting in a gain of $194,839 for financial reporting purposes. This property
was originally acquired by the Partnership in July 1990 and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $144,000 in excess of its original purchase price. In October
1996, the Partnership reinvested the net sales proceeds along with additional
funds, in a Boston Market property located in Marietta, Georgia.
In addition, in October 1996, the Partnership sold its property in Hartland,
Michigan, for $625,000 and received net sales proceeds of $617,035, resulting
in a loss of approximately $235,465 for financial reporting purposes.
In May 1997, the Partnership sold its property in Columbus, Indiana, for
$240,000 and received net sales proceeds of $223,589, resulting in a loss of
$19,739 for financial reporting purposes.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. 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, 1997, 1996 and 1995, the Partnership recognized $102,142, $104,639 and
$169,520, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,879,999
1999.......................................................... 1,891,776
2000.......................................................... 1,925,741
2001.......................................................... 2,022,708
2002.......................................................... 2,034,710
Thereafter.................................................... 12,545,975
-----------
$22,300,909
===========
</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.
F-215
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $ 6,411,161 $ 7,824,101
Estimated residual values....................... 1,008,935 1,266,893
Less unearned income............................ (3,972,944) (4,992,802)
----------- -----------
Net investment in direct financing leases....... $ 3,447,152 $ 4,098,192
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 495,609
1999........................................................... 495,609
2000........................................................... 495,609
2001........................................................... 496,766
2002........................................................... 496,766
Thereafter..................................................... 3,930,802
----------
$6,411,161
==========
</TABLE>
In October 1997, the Partnership sold its property in Dunnellon, Florida,
for $800,000 and received net sales proceeds (net of $5,055 which represents
amounts due to the former tenant for prepaid rent) of $752,745, resulting in a
gain of $183,701 for financial reporting purposes. This property was originally
acquired by the Partnership in August 1990 and had a cost of approximately
$546,300, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the property for approximately $211,500 in
excess of its original purchase price.
The above table does not include future minimum lease payments for renewal
periods or for contingent rental payments that may become due in future periods
(see Note 3).
5. Investment in Joint Ventures
The Partnership has a 51 percent interest, an 18 percent interest and a
4.79% interest in the profits and losses of Halls Joint Venture, CNL Restaurant
Investments II and Des Moines Real Estate Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In February 1997, the Partnership entered into a joint venture arrangement,
CNL Mansfield Joint Venture, with an affiliate of the Partnership which has the
same general partners, to hold one restaurant property in Mansfield, Texas. As
of December 31, 1997, the Partnership and its co-venture partner had
contributed $616,245 and $163,964, respectively, to the joint venture to
acquire the restaurant property. As of December 31, 1997, the Partnership and
its co-venture partner owned a 79 percent and 21 percent interest,
respectively, in the profits and losses of the joint venture. The Partnership
accounts for its investment in this joint venture under the equity method since
the Partnership shares control with the affiliate.
F-216
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1996, the Partnership had a 48.33% interest in a property
in Yuma, Arizona, with an affiliate of the Partnership that has the same
general partners, as tenants-in-common. In October 1997, the Partnership and
the affiliate, as tenants-in-common, sold the property in Yuma, Arizona, for a
total sales price of $1,010,000 and received net sales proceeds of $982,025
resulting in a gain of approximately $128,400 for financial reporting purposes.
The property was originally acquired in July 1994 and had a total cost of
approximately $861,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the property was sold for approximately
$120,300 in excess of its original purchase price. In December 1997, the
Partnership reinvested its portion of the net sales proceeds from the sale of
the Yuma, Arizona, property, along with funds from the sale of a wholly-owned
Property in Columbus, Indiana, in a property in Miami, Florida, as tenants-in-
common with affiliates of the general partners. The Partnership accounts for
its investment in the property in Miami, Florida, using the equity method since
the Partnership shares control with affiliates, and amounts relating to its
investment are included in investment in joint ventures. As of December 31,
1997, the Partnership owned a 35.64% interest in the Miami, Florida property
owned with affiliates as tenants-in-common.
In December 1997, the Partnership acquired a property in Smithfield, North
Carolina as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with an affiliate, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1997, the Partnership owned a 53 percent interest in this
property.
CNL Restaurant Investments II owns and leases six properties to an operator
of national fast-food or family-style restaurants, and Halls Joint Venture, Des
Moines Real Estate Joint Venture and 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 the
joint ventures and the two properties held as tenants-in-common with affiliates
at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation....................... $10,892,405 $7,778,815
Cash............................................ 750 1,106
Receivables..................................... 18,819 14,495
Accrued rental income........................... 147,685 154,782
Other assets.................................... 1,079 1,115
Liabilities..................................... 8,625 1,216
Partners' capital............................... 11,052,113 7,949,097
Revenues........................................ 1,012,624 911,833
Net income...................................... 905,117 689,075
</TABLE>
The Partnership recognized income totalling $267,251, $157,254 and $154,937
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures and the two properties held as tenants-in-common with
affiliates.
6. Mortgage Notes Receivable
In connection with the sale of its property in Florence, South Carolina, the
Partnership accepted a promissory note in the principal sum of $1,160,000,
collateralized by a mortgage on the property. The promissory note bears
interest at a rate of 10.25% per annum and is being collected in 59 equal
monthly installments of $10,395, with a balloon payment of $1,106,657 due in
July 2000.
F-217
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition, the Partnership accepted a promissory note in the principal sum
of $240,000 in connection with the sale of its property in Jacksonville,
Florida. The note is collateralized by a mortgage on the property. The
promissory note bears interest at a rate of ten percent per annum and is being
collected in 119 equal monthly installments of $2,106, with a balloon payment
of $218,252 due in December 2005.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance....... $1,368,688 $1,378,454
Accrued interest
receivable............. 8,212 8,270
Less deferred gain on
sale of land and
building............... (126,303) (127,229)
---------- ----------
$1,250,597 $1,259,495
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1997 and 1996, approximate the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners. Any gain from
the sale of a property 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $2,700,000, and during the
year ended December 31, 1995, the partnership declared distributions to the
limited partners of $2,700,002. No distributions have been made to the general
partners to date.
F-218
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,606,008 $2,326,863 $1,982,148
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (25,552) (24,753) (36,960)
Gain or loss on sale of land and
buildings for financial reporting
purposes in excess of gain or loss for
tax reporting purposes................. (178,348) (163,152) 174,513
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 76,941 70,329 70,872
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial reporting
purposes............................... (55,911) 1,420 (68)
Accrued rental income................... (102,142) (104,639) (169,520)
Rents paid in advance................... 21,966 26,722 (12,059)
Minority interest in timing differences
of consolidated joint venture.......... 981 981 3,525
Other................................... (10,275) -- (20,722)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,333,668 $2,133,771 $1,991,729
========== ========== ==========
</TABLE>
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors Inc. and
CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates an annual, noncumulative, subordinated 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 and the property held as tenants-in-common with an affiliate, but not
in excess of competitive fees for comparable services. These fees will be
incurred and will be payable only after the limited partners receive their 10%
Preferred Return. Due to the fact that these fees are noncumulative, if the
limited partners do not receive their 10% Preferred Return in any particular
year, no management fee will be due or payable for such year. As a result of
such threshold, no management fees were incurred during the years ended
December 31, 1997, 1996 and 1995.
F-219
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Certain Affiliates are 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 Affiliates provide 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 10% Preferred Return,
plus their adjusted capital contributions. During the year ended December 31,
1995, the Partnership incurred $7,200 in deferred, subordinated real estate
disposition fees as a result of the Partnership's sale of its Property in
Jacksonville, Florida. No deferred, subordinated real estate disposition fees
were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $77,078, $92,985 and $81,259 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $20,321 $ 63
Accounting and administrative services................. 7,362 1,804
Deferred, subordinated real estate Disposition fee..... 7,200 7,200
------- ------
$34,883 $9,067
======= ======
</TABLE>
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures and
the two properties held as tenants-in-common with affiliates), for at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation..................... $625,724 $608,852 $618,413
Restaurant Management Services, Inc........... 444,069 446,867 446,279
Flagstar Enterprises, Inc..................... 307,738 464,042 469,374
</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 total rental and earned income from the unconsolidated joint ventures
and the two properties held as tenants-in-common with affiliates) for at least
one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse
Restaurants................................ $625,724 $608,852 $618,413
Hardees..................................... 447,074 524,625 548,221
Burger King................................. 466,626 478,901 486,944
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-220
<PAGE>
CNL INCOME FUND VIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-222
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-223
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-224
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-225
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-226
Report of Independent Accountants........................................ F-227
Balance Sheets as of December 31, 1997 and 1996.......................... F-228
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-229
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-230
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-231
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-232
</TABLE>
F-221
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,610,464 and
$1,438,534........................................... $15,844,324 $13,960,232
Net investment in direct financing leases............. 7,841,439 10,044,975
Investment in joint ventures.......................... 2,824,170 2,877,717
Mortgage notes receivable............................. 1,822,560 1,853,386
Cash and cash equivalents............................. 1,724,745 1,602,236
Receivables, less allowance for doubtful accounts of
$22,160 and $19,228.................................. 16,023 51,393
Prepaid expenses...................................... 7,558 4,357
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1997........................... 1,896,493 1,811,329
Other assets.......................................... 52,671 52,671
----------- -----------
$32,029,983 $32,258,296
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,857 $ 8,359
Escrowed real estate taxes payable.................... 23,100 24,459
Distributions payable................................. 787,501 787,501
Due to related parties................................ 60,005 59,649
Rents paid in advance................................. 73,452 53,556
----------- -----------
Total liabilities................................... 951,915 933,524
Minority interest..................................... 108,565 108,374
Partners' capital..................................... 30,969,503 31,216,398
----------- -----------
$32,029,983 $32,258,296
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-222
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases .................... $ 478,742 $ 452,867 $1,389,490 $1,354,475
Earned income from direct
financing leases .......... 258,348 302,203 855,788 910,525
Contingent rental income.... -- 2,547 21,033 34,487
Interest and other income... 66,175 60,005 201,501 181,801
---------- ---------- ---------- ----------
803,265 817,622 2,467,812 2,481,288
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative ............ 40,683 33,808 116,775 103,897
Professional services....... 4,248 4,632 16,611 15,042
State and other taxes....... -- -- 5,372 5,081
Depreciation and
amortization............... 67,445 52,243 171,930 156,728
---------- ---------- ---------- ----------
112,376 90,683 310,688 280,748
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture,
Equity in Earnings of
Unconsolidated Joint Ventures
and Gain on Sale of Land..... 690,889 726,939 2,157,124 2,200,540
Minority Interest in Income of
Consolidated Joint Venture... (3,412) (3,436) (10,123) (10,266)
Equity in Earnings of
Unconsolidated Joint
Ventures..................... 71,177 74,581 210,430 214,372
Gain on Sale of Land.......... 108,176 -- 108,176 --
---------- ---------- ---------- ----------
Net Income.................... $ 866,830 $ 798,084 $2,465,607 $2,404,646
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 7,586 $ 7,981 $ 23,574 $ 24,046
Limited partners............ 859,244 790,103 2,442,033 2,380,600
========== ========== ========== ==========
$ 866,830 $ 798,084 $2,465,607 $2,404,646
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.025 $ 0.023 $ 0.070 $ 0.068
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 35,000,000 35,000,000 35,000,000 35,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-223
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 226,441 $ 194,025
Net income......................................... 23,574 32,416
----------- -----------
250,015 226,441
----------- -----------
Limited partners:
Beginning balance.................................. 30,989,957 30,930,809
Net income......................................... 2,442,033 3,209,151
Distributions ($0.078 and $0.090 per limited
partner unit, respectively)....................... (2,712,502) (3,150,003)
----------- -----------
30,719,488 30,989,957
----------- -----------
Total partners' capital.............................. $30,969,503 $31,216,398
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-224
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........ $ 2,697,992 $ 2,694,116
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land......................... 116,397 --
Collections on mortgage notes receivable........... 30,554 2,092
----------- -----------
Net cash provided by investing activities........ 146,951 2,092
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,712,502) (2,625,001)
Distributions to holder of minority interest....... (9,932) (10,028)
----------- -----------
Net cash used in financing activities............ (2,722,434) (2,635,029)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 122,509 61,179
Cash and Cash Equivalents at Beginning of Period..... 1,602,236 1,476,274
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,724,745 $ 1,537,453
----------- -----------
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases as a result of lease amendments............ $ 2,064,243 $ --
----------- -----------
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-225
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in CNL Income Fund VIII, Ltd.'s
Form 10-K for the year ended December 31, 1997.
CNL Income Fund VIII, Ltd. (the "Partnership") accounts for its 88 percent
interest in Woodway Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
In July 1998, the Partnership received $116,397 as a settlement from the
Florida Department of Transportation for a right of way taking relating to a
parcel of land on its property in Brooksville, Florida. In connection
therewith, the Partnership recognized a gain of $108,176 for financial
reporting purposes.
3. Net Investment in Direct Financing Leases
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified these leases from direct financing leases to
operating leases. In accordance with the Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded each of the
reclassified leases 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.
F-226
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund VIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund VIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 12, 1998
F-227
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $13,960,232 $14,169,203
Net investment in direct financing leases............. 10,044,975 10,223,225
Investment in joint ventures.......................... 2,877,717 2,940,826
Mortgage notes receivable............................. 1,853,386 1,862,262
Cash and cash equivalents............................. 1,602,236 1,476,274
Receivables, less allowance for doubtful accounts of
$19,228 and $4,775................................... 51,393 25,675
Prepaid expenses...................................... 4,357 4,377
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1997........................... 1,811,329 1,682,593
Other assets.......................................... 52,671 52,671
----------- -----------
$32,258,296 $32,437,106
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,359 $ 7,693
Escrowed real estate taxes payable.................... 24,459 15,138
Distributions payable................................. 787,501 1,050,000
Due to related parties................................ 59,649 56,880
Rents paid in advance................................. 53,556 74,502
----------- -----------
Total liabilities................................. 933,524 1,204,213
Minority interest..................................... 108,374 108,059
Partners' capital..................................... 31,216,398 31,124,834
----------- -----------
$32,258,296 $32,437,106
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-228
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,804,273 $1,867,968 $1,951,189
Earned income from direct financing
leases................................. 1,211,369 1,314,090 1,349,627
Contingent rental income................ 85,735 31,712 59,085
Interest and other income............... 238,338 127,246 76,445
---------- ---------- ----------
3,339,715 3,341,016 3,436,346
---------- ---------- ----------
Expenses:
General operating and administrative.... 140,586 156,177 140,009
Professional services................... 23,284 27,682 25,927
State and other taxes................... 5,081 4,757 6,796
Depreciation and amortization........... 208,971 208,971 217,576
---------- ---------- ----------
377,922 397,587 390,308
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain (Loss) on Sale of Land and
Buildings................................ 2,961,793 2,943,429 3,046,038
Minority Interest in Income of
Consolidated Joint Venture............... (13,706) (13,906) (14,142)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 293,480 266,500 244,933
Gain (Loss) on Sale of Land and
Buildings................................ -- (99,031) 59,926
---------- ---------- ----------
Net Income................................ $3,241,567 $3,096,992 $3,336,755
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 32,416 $ 31,413 $ 32,714
Limited partners........................ 3,209,151 3,065,579 3,304,041
---------- ---------- ----------
$3,241,567 $3,096,992 $3,336,755
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.092 $ 0.088 $ 0.094
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 35,000,000 35,000,000 35,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-229
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $128,898 $35,000,000 $(12,447,136) $12,760,827 $(4,015,000) $31,428,589
Distributions to
limited partners
($0.095 per limited
partner unit)......... -- -- -- (3,325,002) -- -- (3,325,002)
Net income............. -- 32,714 -- -- 3,304,041 -- 3,336,755
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 161,612 35,000,000 (15,772,138) 16,064,868 (4,015,000) 31,440,342
Distributions to
limited partners
($0.098 per limited
partner unit)......... -- -- -- (3,412,500) -- -- (3,412,500)
Net income............. -- 31,413 -- -- 3,065,579 -- 3,096,992
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 193,025 35,000,000 (19,184,638) 19,130,447 (4,015,000) 31,124,834
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (3,150,003) -- -- (3,150,003)
Net income............. -- 32,416 -- -- 3,209,151 -- 3,241,567
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $225,441 $35,000,000 $(22,334,641) $22,339,598 $(4,015,000) $31,216,398
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-230
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,114,439 $ 3,222,903 $ 3,074,333
Distributions from unconsolidated joint
ventures.............................. 356,589 323,531 295,114
Cash paid for expenses................. (163,215) (194,218) (170,074)
Interest received...................... 235,243 110,452 64,312
----------- ----------- -----------
Net cash provided by operating
activities............................ 3,543,056 3,462,668 3,263,685
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. -- -- 1,184,865
Additions to land and buildings on
operating leases...................... -- (1,135) (397,291)
Investment in direct financing leases.. -- (1,326) (550,911)
Investment in joint venture............ -- (234,059) --
Collections on mortgage notes
receivable............................ 8,799 2,557 --
Other.................................. -- (34,793) --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.................. 8,799 (268,756) 236,663
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,412,502) (3,325,000) (3,307,502)
Distributions to holder of minority
interest.............................. (13,391) (13,503) (11,526)
----------- ----------- -----------
Net cash used in financing activities.. (3,425,893) (3,338,503) (3,319,028)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 125,962 (144,591) 181,320
Cash and Cash Equivalents at Beginning
of Year................................ 1,476,274 1,620,865 1,439,545
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,602,236 $ 1,476,274 $ 1,620,865
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,241,567 $ 3,096,992 $ 3,336,755
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 208,971 208,971 216,295
Amortization........................... -- -- 1,281
Minority interest in income of
consolidated joint venture............ 13,706 13,906 14,142
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 63,109 57,031 50,181
Loss (gain) on sale of land and
buildings............................. -- 99,031 (59,926)
Decrease (increase) in receivables..... (25,641) 429 16,572
Decrease (increase) in prepaid
expenses.............................. 20 (1,465) (2,912)
Decrease in net investment in direct
financing leases...................... 178,250 157,194 122,052
Increase in accrued rental income...... (128,736) (219,757) (342,862)
Increase (decrease) in accounts payable
and accrued expenses.................. 9,987 12,203 (15,650)
Increase (decrease) in due to related
parties............................... 2,769 (4,505) 6,335
Increase (decrease) in rents paid in
advance............................... (20,946) 42,638 (78,578)
----------- ----------- -----------
Total adjustments..................... 301,489 365,676 (73,070)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,543,056 $ 3,462,668 $ 3,263,685
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings............ $ -- $ 1,375,000 $ 460,000
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 787,501 $ 1,050,000 $ 962,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-231
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund VIII, 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
method. 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 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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 the 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 undercounted
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.
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 uncorrectable, the corresponding receivable and
the allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 88 percent
interest in Woodway Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's
F-232
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
proportionate share of the equity in the Partnership's consolidated joint
venture. All significant intercompany accounts and transactions have been
eliminated.
The Partnership's investments in Asheville Joint Venture, CNL Restaurant
Investments II and Middleburg Joint Venture are accounted for 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.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partner's 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 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 have been
classified as operating leases and some of the leases have been classified as
direct financing leases. For property leases classified as direct financing
leases, the building portions of the majority of property leases are accounted
for as direct financing leases while the land portions of these leases are
accounted for as operating leases. Substantially all leases are for 15 to 20
years and provide for minimum and contingent rentals. In addition, the tenant
pays all property taxes and assessments, fully maintains the interior and
exterior of the building and carries insurance coverage for public liability,
property damage, fire and extended coverage. The lease options generally allow
tenants to renew the leases for two to four successive five-year periods
subject to the same terms and conditions of 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.
F-233
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 9,167,336 $ 9,167,336
Buildings.......................................... 6,231,430 6,231,430
----------- -----------
15,398,766 15,398,766
Less accumulated depreciation...................... (1,438,534) (1,229,563)
----------- -----------
$13,960,232 $14,169,203
=========== ===========
</TABLE>
In October 1996, the Partnership sold its property in Orlando, Florida, to
the tenant for $1,375,000 and accepted the sales proceeds in the form of a
promissory note (Note 6). This property was originally acquired by the
Partnership in December 1990 and had a cost of approximately $1,177,000,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $198,000 in excess of its
original purchase price. Due to the fact that the Partnership had recognized
accrued rental income since the inception of the lease relating to the straight
lining of future scheduled rent increases in accordance with generally accepted
accounting principles, the Partnership wrote off the cumulative balance of such
accrued rental income at the time of the sale of this property, resulting in a
loss of $99,031 for financial reporting purposes. Due to the fact that the
straight lining of future rent increases over the term of the lease is a non-
cash accounting adjustment, the write off of these amounts is a loss for
financial statement purposes only.
Some leases provide for escalating guaranteed minimum rents throughout the
lease terms. 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, 1997, 1996 and 1995, the Partnership recognized $128,736, $219,757 and
$342,862, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,704,859
1999............................................................. 1,704,859
2000............................................................. 1,735,498
2001............................................................. 1,825,526
2002............................................................. 1,871,537
Thereafter....................................................... 12,996,507
-----------
$21,838,786
===========
</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.
F-234
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable................ $ 18,939,788 $ 20,329,407
Estimated residual values........................ 3,040,615 3,040,615
Less unearned income............................. (11,935,428) (13,146,797)
------------ ------------
Net investment in direct financing leases........ $ 10,044,975 $ 10,223,225
============ ============
</TABLE>
In October 1996, the Partnership sold its property in Orlando, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and estimated residual values) and unearned income relating to this property
was removed from the accounts and the loss from the sale relating to the land
portion of the property was reflected in income (Note 3).
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,389,622
1999............................................................. 1,389,622
2000............................................................. 1,389,622
2001............................................................. 1,413,128
2002............................................................. 1,424,842
Thereafter....................................................... 11,932,952
-----------
$18,939,788
===========
</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).
5. Investment in Joint Ventures
The Partnership has an 86 percent and a 37 percent interest in the profits
and losses of Asheville Joint Venture and CNL Restaurant Investments II,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
In May 1996, the Partnership entered into a joint venture arrangement,
Middleburg Joint Venture, with an affiliate of the Partnership which has the
same general partners to hold one restaurant property. In connection therewith,
the Partnership contributed $234,059 to the joint venture and has a 12 percent
interest in the profits and losses of the joint venture.
F-235
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Asheville Joint Venture and Middleburg Joint Venture each own and lease one
property, and CNL Restaurant Investments II owns and leases six properties to
an operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $6,487,210 $6,654,361
Net investment in direct financing lease............ 1,335,223 1,349,611
Cash................................................ 596 9,859
Receivables......................................... 14,169 13,840
Prepaid expenses.................................... 1,017 888
Accrued rental income............................... 128,993 91,074
Liabilities......................................... 864 9,992
Partners' capital................................... 7,966,344 8,109,641
Revenues............................................ 1,001,284 862,821
Net income.......................................... 824,576 688,253
</TABLE>
The Partnership recognized income totaling $293,480, $266,500 and $244,933
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Mortgage Notes Receivable
As of December 31, 1995, the Partnership had accepted two promissory notes
in the principal sum totaling $460,000, in connection with the sale of two of
its properties in Jacksonville, Florida. The promissory notes, which are
collateralized by mortgages on the properties, bear interest at a rate of ten
percent per annum, and are being collected in 119 equal monthly installments of
$2,106 and $1,931, with balloon payments of $218,252 and $200,324,
respectively, due in December 2005.
In addition, in connection with the sale in 1996 of its property in Orlando,
Florida, the Partnership accepted a promissory note in the principal sum of
$1,388,568, representing the gross sales price of $1,375,000 plus tenant
closing costs of $13,568 that the Partnership financed on behalf of the tenant.
The promissory note bears interest at a rate of 10.75% per annum, is
collateralized by a mortgage on the property and is being collected in 12
monthly installments of interest only, in 24 monthly installments of $15,413
consisting of principal and interest, and thereafter in 144 monthly
installments of $16,220 consisting of principal and interest.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance..................................... $1,837,212 $1,846,011
Accrued interest receivable........................... 16,174 16,251
---------- ----------
$1,853,386 $1,862,262
========== ==========
</TABLE>
The general partners believe that the estimated fair value of mortgage notes
receivable at December 31, 1997 and 1996, approximated the outstanding
principal amount based on estimated current rates at which similar loans would
be made to borrowers with similar credit and for similar maturities.
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions
F-236
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
of net cash flow are made 99 percent to the limited partners and one percent to
the general partners; provided, however, that the one percent of net cash flow
to be distributed to the general partners is subordinated to receipt by the
limited partners of an aggregate, ten percent, cumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners.
Any gain from the sale of a property 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; thereafter, 95 percent to the
limited partners and five percent to the general partners.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,150,003, $3,412,500 and
$3,325,002, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,241,567 $3,096,992 $3,336,755
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (204,419) (219,372) (219,653)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 178,250 157,197 122,052
Allowance for doubtful accounts........ 18,954 (23,716) 8,067
Accrued rental income.................. (133,237) (219,757) (342,862)
Rents paid in advance.................. (21,446) 42,637 (70,010)
Gain or loss on sale of land and
buildings for tax reporting purposes
in excess of gain or loss for
financial reporting purposes.......... 670 99,031 161,548
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes in excess of (less than)
equity in earnings of unconsolidated
joint ventures for financial reporting
purposes.............................. (2,987) 13,320 (4,016)
Minority interest in timing differences
of consolidated joint venture......... 1,571 1,677 2,783
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,078,923 $2,948,009 $2,994,664
========== ========== ==========
</TABLE>
F-237
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates an annual, noncumulative, subordinated 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, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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 10% Preferred Return,
plus their adjusted capital contributions. During the years ended December 31,
1996 and 1995, the Partnership incurred $41,250 and $13,800, respectively, in
deferred, subordinated real estate disposition fees as the result of the sales
of the property in Orlando, Florida, and two properties in Jacksonville,
Florida. No deferred, subordinated real estate disposition fees were incurred
for the year ended December 1997.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $80,461, $89,317 and $73,365 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Due to Affiliates:
Accounting and administrative services...................... $ 4,599 $ 1,830
Deferred, subordinated real estate disposition fee.......... 55,050 55,050
------- -------
$59,649 $56,880
======= =======
</TABLE>
F-238
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the unconsolidated joint ventures) for
at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation....................... $706,839 $663,889 $663,943
Restaurant Management Services, Inc. ........... 531,110 533,990 525,260
Carrols Corporation............................. 523,517 526,034 532,990
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc. .............................. 232,876 356,720 363,335
</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 total rental and earned income from the unconsolidated joint
ventures), for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Burger King.................................... $1,003,419 $989,480 $987,871
Golden Corral Family Steakhouse Restaurants.... 735,949 681,042 663,943
Shoney's....................................... 607,054 609,072 526,649
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these Properties for the on-going operations
of the lessees.
F-239
<PAGE>
CNL INCOME FUND IX, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-241
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-242
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-243
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-244
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-245
Report of Independent Accountants........................................ F-246
Balance Sheets as of December 31, 1997 and 1996.......................... F-247
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-248
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-249
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-250
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-251
</TABLE>
F-240
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,694,248 and
$1,497,770......................................... $15,043,968 $14,163,111
Net investment in direct financing leases........... 6,311,643 7,482,757
Investment in joint ventures........................ 6,497,278 6,619,364
Cash and cash equivalents........................... 1,279,526 1,250,388
Receivables, less allowance for doubtful accounts of
$261,045 and $108,316.............................. 10,491 96,134
Prepaid expenses.................................... 6,854 3,924
Lease costs, less accumulated amortization of $1,202
and $77............................................ 13,798 14,923
Accrued rental income............................... 1,241,786 1,465,820
----------- -----------
$30,405,344 $31,096,421
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 888 $ 4,490
Accrued and escrowed real estate taxes payable...... 28,221 45,591
Distributions payable............................... 787,501 787,501
Due to related parties.............................. 4,463 4,619
Rents paid in advance and deposits.................. 120,771 106,996
----------- -----------
Total liabilities................................. 941,844 949,197
----------- -----------
Partners' capital................................... 29,463,500 30,147,224
----------- -----------
$30,405,344 $31,096,421
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-241
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 455,811 $ 426,942 $1,308,630 $1,306,829
Adjustments to accrued rental
income.......................... (4,600) -- (272,200) --
Earned income from direct
financing leases................ 209,650 188,483 551,913 611,594
Contingent rental income......... 943 20,436 42,604 50,263
Interest and other income........ 11,871 9,045 39,539 38,638
--------- --------- ---------- ----------
673,675 644,906 1,670,486 2,007,324
Expenses:
General operating and
administrative.................. 41,132 40,746 112,211 111,993
Bad debt expense................. 4,148 -- 9,281 21,000
Professional services............ 6,141 5,359 20,883 16,490
Real estate taxes................ -- 4,063 -- 23,191
State and other taxes............ -- -- 14,337 11,127
Depreciation and amortization.... 71,113 62,870 197,603 188,612
--------- --------- ---------- ----------
122,534 113,038 354,315 372,413
Income Before Equity in Earnings of
Joint Ventures and Gain on Sale of
Land and Building................. 551,141 531,868 1,316,171 1,634,911
Equity in Earnings of Joint
Ventures.......................... 155,940 148,487 432,608 373,525
Gain on Sale of Land and Building.. -- -- -- 199,643
--------- --------- ---------- ----------
Net Income......................... $ 707,081 $ 680,355 $1,748,779 $2,208,079
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 7,071 $ 6,803 $ 17,488 $ 20,084
Limited partners................. 700,010 673,552 1,731,291 2,187,995
--------- --------- ---------- ----------
$ 707,081 $ 680,355 $1,748,779 $2,208,079
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.20 $ 0.19 $ 0.49 $ 0.63
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 3,500,000 3,500,000 3,500,000 3,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-242
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 190,772 $ 163,392
Net income.................................... 17,488 27,380
----------- -----------
208,260 190,772
----------- -----------
Limited partners:
Beginning balance............................. 29,956,452 30,196,204
Net income.................................... 1,731,291 2,910,252
Distributions ($0.70 and $0.90 per limited
partner unit, respectively).................. (2,432,503) (3,150,004)
----------- -----------
29,255,240 29,956,452
----------- -----------
Total partners' capital......................... $29,463,500 $30,147,224
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-243
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,461,641 $ 2,363,892
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... -- 1,053,571
Investment in joint venture...................... -- (1,049,762)
----------- -----------
Net cash provided by investing activities...... -- 3,809
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (2,432,503) (2,397,502)
----------- -----------
Net cash used in financing activities.......... (2,432,503) (2,397,502)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... 29,138 (29,801)
Cash and Cash Equivalents at Beginning of Period..... 1,250,388 1,288,618
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,279,526 $ 1,258,817
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases due to lease amendments.................... $ 1,077,335 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-244
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
IX, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
In August 1998, four of the Partnership's leases were amended. As a result,
the Partnership reclassified the direct financing leases to operating leases.
In accordance with Statement of Financial Accounting Standards #13, "Accounting
for Leases," the Partnership recorded each of the reclassified leases at the
lower of original cost, present fair value, or present carrying amount. No loss
on termination of direct financing lease was recorded for financial reporting
purposes.
F-245
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund IX, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund IX, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits pro-vide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund IX, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 12, 1998
F-246
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $14,163,111 $14,797,549
Net investment in direct financing leases............. 7,482,757 7,964,985
Investment in joint ventures.......................... 6,619,364 5,708,555
Cash and cash equivalents............................. 1,250,388 1,288,618
Receivables, less allowance for doubtful accounts of
$108,316 and $28,983................................. 96,134 75,256
Prepaid expenses...................................... 3,924 3,845
Lease costs, less accumulated amortization of $77 in
1997................................................. 14,923 --
Accrued rental income................................. 1,465,820 1,505,039
----------- -----------
$31,096,421 $31,343,847
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,490 $ 4,987
Accrued and escrowed real estate taxes payable........ 45,591 61,618
Distributions payable................................. 787,501 822,500
Due to related parties................................ 4,619 1,405
Rents paid in advance and deposits.................... 106,996 93,741
----------- -----------
Total liabilities................................... 949,197 984,251
Partners' capital..................................... 30,147,224 30,359,596
----------- -----------
$31,096,421 $31,343,847
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-247
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,742,351 $1,854,245 $1,880,854
Earned income from direct financing
leases.................................... 830,603 917,074 926,254
Contingent rental income................... 74,867 120,999 110,036
Interest and other income.................. 44,669 51,348 57,209
---------- ---------- ----------
2,692,490 2,943,666 2,974,353
---------- ---------- ----------
Expenses:
General operating and administrative....... 153,175 152,437 130,167
Professional services...................... 24,658 26,610 20,566
Bad debt expense........................... 21,000 -- --
Real estate taxes.......................... 30,835 9,906 24,837
State and other taxes...................... 11,126 2,775 11,123
Depreciation and amortization.............. 251,560 252,039 253,483
---------- ---------- ----------
492,354 443,767 440,176
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Building.................................... 2,200,136 2,499,899 2,534,177
Equity in Earnings of Joint Ventures......... 537,853 460,400 453,794
Gain on Sale of Land and Building............ 199,643 -- --
---------- ---------- ----------
Net Income................................... $2,937,632 $2,960,299 $2,987,971
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 27,380 $ 29,603 $ 29,880
Limited partners........................... 2,910,252 2,930,696 2,958,091
---------- ---------- ----------
$2,937,632 $2,960,299 $2,987,971
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.83 $ 0.84 $ 0.85
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 3,500,000 3,500,000 3,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-248
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $102,909 $35,000,000 $(10,320,575) $10,188,000 $(4,190,000) $30,781,334
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,185,004) -- -- (3,185,004)
Net income............. -- 29,880 -- -- 2,958,091 -- 2,987,971
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 132,789 35,000,000 (13,505,579) 13,146,091 (4,190,000) 30,584,301
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,185,004) -- -- (3,185,004)
Net income............. -- 29,603 -- -- 2,930,696 -- 2,960,299
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 162,392 35,000,000 (16,690,583) 16,076,787 (4,190,000) 30,359,596
Distributions to
limited partners
($0.90 per limited
partner unit)......... -- -- -- (3,150,004) -- -- (3,150,004)
Net income............. -- 27,380 -- -- 2,910,252 -- 2,937,632
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $189,772 $35,000,000 $(19,840,587) $18,987,039 $(4,190,000) $30,147,224
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-249
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,666,373 $ 2,900,048 $ 2,608,733
Distributions from joint ventures.... 676,806 603,833 602,845
Cash paid for expenses............... (229,884) (186,126) (157,127)
Interest received.................... 44,669 38,485 43,825
----------- ----------- -----------
Net cash provided by operating
activities........................ 3,157,964 3,356,240 3,098,276
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................ 1,053,571 -- --
Investment in joint venture.......... (1,049,762) -- --
Payment of lease costs............... (15,000) -- --
----------- ----------- -----------
Net cash used in investing
activities........................ (11,191) -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners.... (3,185,003) (3,185,004) (3,150,004)
----------- ----------- -----------
Net cash used in financing
activities........................ (3,185,003) (3,185,004) (3,150,004)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (38,230) 171,236 (51,728)
Cash and Cash Equivalents at Beginning
of Year................................ 1,288,618 1,117,382 1,169,110
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,250,388 $ 1,288,618 $ 1,117,382
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,937,632 $ 2,960,299 $ 2,987,971
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 251,483 251,483 251,483
Amortization......................... 77 556 2,000
Equity in earnings of joint ventures,
net of distributions................ 138,953 143,433 149,051
Gain on sale of land and building.... (199,643) -- --
Decrease (increase) in receivables... (20,878) 87,823 (21,714)
Increase in prepaid expenses......... (79) (2,913) (932)
Decrease in net investment in direct
financing leases.................... 121,311 89,696 73,784
Increase in accrued rental income.... (70,837) (225,434) (287,264)
Increase (decrease) in accounts
payable and accrued expenses........ (16,524) 12,111 32,889
Increase (decrease) in due to related
parties............................. 3,214 (4,639) 6,044
Increase (decrease) in rents paid in
advance and deposits................ 13,255 43,825 (95,036)
----------- ----------- -----------
Total adjustments.................. 220,332 395,941 110,305
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,157,964 $ 3,356,240 $ 3,098,276
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 787,501 $ 822,500 $ 822,500
=========== =========== ===========
Land and building under operating
lease simultaneously exchanged for
land and building under operating
lease................................ $ -- $ 406,768 $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-250
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund IX, 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
method. 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) (see
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 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review the 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.
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 continued 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.
F-251
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies--(Continued)
Investment in Joint Ventures--The Partnership's investments in three joint
ventures and a property in Englewood, Colorado, for which the property is held
as tenants-in-common with an affiliate, are accounted for 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.
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.
Lease costs--Lease costs associated with negotiating a new lease are
amortized over the term of the new lease 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. 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 and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while a
majority of the land portion of these leases are operating leases.
Substantially all leases are for 15 to 20 years and provide for minimum and
contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability,
F-252
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
2. Leases--(Continued)
property damage, fire and extended coverage. The lease options generally allow
tenants to renew the leases for two to four 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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 8,207,939 $ 8,590,894
Buildings.......................................... 7,452,942 7,452,942
----------- -----------
15,660,881 16,043,836
Less accumulated depreciation...................... (1,497,770) (1,246,287)
----------- -----------
$14,163,111 $14,797,549
=========== ===========
</TABLE>
In December 1996, the tenant of the property in Woodmere, Ohio, exercised
its option under the terms of its lease agreement, to substitute the existing
property for a replacement property. In conjunction therewith, the Partnership
simultaneously exchanged the Burger King property in Woodmere, Ohio, with a
Burger King property in Carrboro, North Carolina. The lease for the property in
Woodmere, Ohio, was amended to allow the property in Carrboro, North Carolina,
to continue under the terms of the original lease. All closing costs were paid
by the tenant. The Partnership accounted for this as a non-monetary exchange of
similar assets and recorded the acquisition of the property in Carrboro, North
Carolina, at the net book value of the property in Woodmere, Ohio. No gain or
loss was recognized due to this being accounted for as a non-monetary exchange
of similar assets.
In June 1997, the Partnership sold its property in Alpharetta, Georgia, and
received net sales proceeds of $1,053,571, resulting in a gain of $199,643 for
financial reporting purposes. This property was originally acquired by the
Partnership in September 1991 and had a cost of approximately $711,200,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $342,400 in excess of its
original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1997, 1996 and 1995, the Partnership recognized $70,837, $225,434 and
$287,264, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,766,123
1999............................................................. 1,766,123
2000............................................................. 1,766,123
2001............................................................. 1,802,660
2002............................................................. 1,933,986
Thereafter....................................................... 12,647,153
-----------
$21,682,168
===========
</TABLE>
F-253
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases--(Continued)
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>
1997 1996
----------- ------------
<S> <C> <C>
Minimum lease payments receivable................. $13,764,606 $ 15,621,897
Estimated residual values......................... 2,495,379 2,590,434
Less unearned income.............................. (8,777,228) (10,247,346)
----------- ------------
Net investment in direct financing leases......... $ 7,482,757 $ 7,964,985
=========== ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $968,047
1999............................................................. 968,047
2000............................................................. 968,047
2001............................................................. 975,586
2002............................................................. 999,905
Thereafter....................................................... 8,884,974
-----------
$13,764,606
===========
</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).
5. Investment in Joint Ventures
The Partnership has a 45.2%, a 50 percent and a 27.33% interest in the
profits and losses of CNL Restaurant Investments II, CNL Restaurant Investments
III and Ashland Joint Venture, respectively. The remaining interests in these
joint ventures are held by affiliates of the Partnership which have the same
general partners.
In July 1997, the Partnership used the net sales proceeds from the sale of
the property in Alpharetta, Georgia, to acquire a 67.23% interest in an IHOP
property located in Englewood, Colorado, as tenants-in-common with an affiliate
of the general partners. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate, and amounts relating to its investment are included in investment in
joint ventures.
CNL Restaurant Investments II and CNL Restaurant Investments III each own
and lease six properties to an operator of national fast-food restaurants and
Ashland Joint Venture owns and leases one property to an operator of national
fast-food restaurants. The Partnership and an affiliate, as tenants in common
own and lease
F-254
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
5. Investment in Joint Ventures--(Continued)
one property to an operator of a national family-style restaurant. The
following presents the joint ventures' combined, condensed financial
information at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $12,582,754 $12,359,586
Net investment in direct financing lease.......... 1,003,680 --
Cash.............................................. 15,124 1,497
Receivables....................................... 35,773 13,840
Prepaid expenses.................................. 23,544 22,543
Accrued rental income............................. 11,620 --
Liabilities....................................... 14,280 1,198
Partners' capital................................. 13,658,215 12,396,268
Revenues.......................................... 1,506,380 1,362,027
Net income........................................ 1,141,755 1,000,884
</TABLE>
The Partnership recognized income totalling $537,853, $460,400 and $453,794
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners. Any gain from
the sale of a property is, in general, allocated in the same manner as net
sales proceeds are distributable. Any loss from the sale of a property is,
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.
During the year ended December 31, 1997, the Partnership declared
distributions to the limited partners of $3,150,004 and during each of the
years ended December 31, 1996 and 1995, the Partnership declared distributions
to the limited partners of $3,185,004. No distributions have been made to the
general partners to date.
F-255
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $2,937,632 $2,960,299 $2,987,971
Depreciation for tax reporting purposes in
excess of
depreciation for financial reporting
purposes.................................. (116,620) (123,734) (123,820)
Direct financing leases recorded as
operating leases for
tax reporting purposes.................... 121,311 89,696 73,784
Gain on sale of land and building for
financial reporting
purposes in excess of gain for tax
reporting purposes........................ (195,820) -- --
Equity in earnings of joint ventures for
tax reporting purposes
in excess of equity in earnings of joint
ventures for financial reporting
purposes.................................. 36,745 37,469 37,469
Accrued rental income...................... (70,837) (225,434) (287,264)
Rents paid in advance...................... 13,255 43,825 (95,036)
Allowance for doubtful accounts............ 79,333 14,221 (11,173)
---------- ---------- ----------
Net income for federal income tax
purposes.................................. $2,804,999 $2,796,342 $2,581,931
========== ========== ==========
</TABLE>
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates an annual, noncumulative, subordinated 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, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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
F-256
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
8. Related Party Transactions--(Continued)
disposition fees will be incurred until such replacement property is sold and
the net sales proceeds are distributed. The payment of the real estate
disposition fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital contributions. No
deferred, subordinated real estate disposition fees have been incurred since
inception.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $79,234, $82,487 and $64,398 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $4,619
and $1,405, respectively.
9. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures), for at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Burger King Corporation and BK Acquisition,
Inc........................................... $649,445 $623,949 $617,694
TPI Restaurants, Inc........................... 556,700 565,351 562,259
Carrols Corporation............................ 440,057 442,286 444,866
Flagstar Enterprises, Inc...................... 436,312 460,762 486,188
Golden Corral Corporation...................... 337,337 328,975 329,997
</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 total rental and earned income from joint ventures), for at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Burger King............................... $1,249,715 $1,310,994 $1,293,094
Shoney's.................................. 808,675 889,148 904,534
Hardees................................... 436,312 460,762 486,188
Golden Corral Family Steakhouse
Restaurants.............................. 337,337 328,975 329,997
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-257
<PAGE>
CNL INCOME FUND X, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-259
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-260
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-261
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-262
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-263
Report of Independent Accountants........................................ F-265
Balance Sheets as of December 31, 1997 and 1996.......................... F-266
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-267
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-268
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-269
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-270
</TABLE>
F-258
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $1,300,992 and
$1,113,247.......................................... $17,037,038 $15,709,899
Net investment in direct financing leases............ 10,751,793 13,460,125
Investment in joint ventures......................... 3,437,666 3,505,326
Cash and cash equivalents............................ 1,662,186 1,583,883
Restricted cash...................................... 1,260,266 92,236
Receivables, less allowance for doubtful accounts of
$217,437 and $137,856............................... 294 123,903
Prepaid expenses..................................... 9,249 5,877
Accrued rental income, less allowance for doubtful
accounts of $257,225 and $117,593................... 1,348,423 1,775,374
Other assets......................................... 33,104 33,104
----------- -----------
$35,540,019 $36,289,727
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable..................................... $ 1,367 $ 6,033
Accrued and escrowed real estate taxes payable....... 71,478 27,784
Distributions payable................................ 900,001 900,001
Due to related parties............................... 5,500 4,946
Rents paid in advance and deposits................... 90,378 132,419
----------- -----------
Total liabilities.................................. 1,068,724 1,071,183
Minority interest.................................... 64,480 64,501
----------- -----------
Partners' capital.................................... 34,406,815 35,154,043
----------- -----------
$35,540,019 $36,289,727
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-259
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 499,787 $ 477,904 $1,396,043 $1,436,157
Adjustments to accrued rental
income........................ (13,155) (6,099) (445,370) (22,714)
Earned income from direct
financing leases.............. 353,378 376,124 976,635 1,129,655
Contingent rental income....... 6,239 10,014 16,894 22,186
Interest and other income...... 27,008 14,289 85,774 74,727
--------- --------- ---------- ----------
873,257 872,232 2,029,976 2,640,011
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 43,273 37,138 126,834 112,266
Bad debt expense............... -- -- 5,887 --
Professional services.......... 7,277 5,282 20,636 17,114
Real estate taxes.............. 14,004 -- 23,578 --
State and other taxes.......... -- -- 10,520 9,503
Depreciation and amortization.. 71,349 52,536 187,745 157,609
--------- --------- ---------- ----------
135,903 94,956 375,200 296,492
--------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings in
Unconsolidated Joint Ventures
and Gain on Sale of Land,
Building and Net Investment in
Direct Financing Lease.......... 737,354 777,276 1,654,776 2,343,519
Minority Interest in Income of
Consolidated Joint Venture...... (2,337) (2,271) (6,592) (6,325)
Equity in Earnings of
Unconsolidated Joint Ventures... 76,163 71,523 213,432 204,167
Gain on Sale of Land, Building
and Net Investment in Direct
Financing Lease................. -- 132,238 171,159 132,238
--------- --------- ---------- ----------
Net Income....................... $ 811,180 $ 978,766 $2,032,775 $2,673,599
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 8,112 $ 8,466 $ 18,616 $ 25,414
Limited partners............... 803,068 970,300 2,014,159 2,648,185
--------- --------- ---------- ----------
$ 811,180 $ 978,766 $2,032,775 $2,673,599
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.20 $ 0.24 $ 0.50 $ 0.66
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-260
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 208,709 $ 174,718
Net income........................................ 18,616 33,991
----------- -----------
227,325 208,709
----------- -----------
Limited partners:
Beginning balance................................. 34,945,334 35,047,947
Net income........................................ 2,014,159 3,497,390
Distributions ($0.70 and $0.90 per limited partner
unit, respectively).............................. (2,780,003) (3,600,003)
----------- -----------
34,179,490 34,945,334
----------- -----------
Total partners' capital............................. $34,406,815 $35,154,043
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-261
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $2,774,783 $2,748,032
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ 1,231,106 1,363,805
Increase in restricted cash........................ (1,140,970) (1,363,805)
---------- ----------
Net cash used in investing activities............ 90,136 --
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,780,003) (2,740,001)
Distributions to holder of minority interest....... (6,613) (6,198)
---------- ----------
Net cash used in financing activities............ (2,786,616) (2,746,199)
---------- ----------
Net Increase in Cash and Cash Equivalents.............. 78,303 1,833
Cash and Cash Equivalents at Beginning of Period....... 1,583,883 1,769,483
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,662,186 $1,771,316
---------- ----------
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases as a result of lease amendments.............. $2,024,000 $ --
---------- ----------
Distributions declared and unpaid at end of period... $ 900,001 $ 900,001
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-262
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
X, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 88.26% interest in Allegan Real Estate
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
In January 1998, the Partnership sold its property in Sacramento,
California, to the tenant for $1,250,000 and received net sales proceeds of
$1,230,672, resulting in a gain of $163,349 for financial reporting purposes.
This property was originally acquired by the Partnership in December 1991 and
had a cost of approximately $969,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $261,300 in excess of its original purchase price.
In addition, in March 1998, a vacant parcel of land relating to the property
in Austin, Texas, was sold to a third party who had previously subleased the
land from the Partnership's lessee. In connection therewith, the Partnership
received net sales proceeds of $68,434 ($68,000 of which had been received as a
deposit in 1995), resulting in a gain of $7,810 for financial reporting
purposes.
3. Net Investment in Direct Financing Leases
In March 1998, the Partnership sold its property in Sacramento, California,
for which the building portion had been classified as a direct financing lease.
In connection therewith, the gross investment (minimum lease payments
receivable and the estimated residual value) and unearned income relating to
the building were removed from the accounts and the gain from the sale of the
property was reflected in income (see Note 2).
F-263
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
In August 1998, three of the Partnership's leases were amended. As a result,
the Partnership reclassified the leases from direct financing leases to
operating leases. In accordance with the Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded the
reclassified leases at the lower of original costs, present fair value, or
present carrying amount. No losses on the termination of direct financing
leases were recorded for financial reporting purposes.
4. Restricted Cash
As of September 30, 1998, the net sales proceeds of $1,230,672 from the sale
of the property in Sacramento, California, plus accrued interest of $29,594
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional property.
5. Subsequent Event
In October 1998, the Partnership sold its property in Billings, Montana, to
the tenant for $362,000 and received net sales proceeds of $360,688, resulting
in a gain of $47,800 for financial reporting purposes.
In November 1998, the Partnership reinvested approximately $1,020,800 of the
net sales proceeds it received from the sale of the property in Sacramento,
California in a Jack in the Box property located in San Marcos, Texas. In
connection therewith, the Partnership entered into a long term, triple-net
lease with terms substantially the same as its other leases.
F-264
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund X, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund X, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund X, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 14, 1998
F-265
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.............................. $15,709,899 $15,224,392
Net investment in direct financing leases.............. 13,460,125 14,219,805
Investment in joint ventures........................... 3,505,326 3,449,210
Cash and cash equivalents.............................. 1,583,883 1,769,483
Restricted cash........................................ 92,236 --
Receivables, less allowance for doubtful accounts of
$137,856 and $4,428................................... 123,903 52,470
Prepaid expenses....................................... 5,877 5,503
Accrued rental income, less allowance for doubtful
accounts of $117,593 and $88,781...................... 1,775,374 1,683,593
Other assets........................................... 33,104 33,104
----------- -----------
$36,289,727 $36,437,560
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 6,033 $ 2,913
Escrowed real estate taxes payable..................... 27,784 45,060
Distributions payable.................................. 900,001 940,000
Due to related parties................................. 4,946 1,609
Rents paid in advance and deposits..................... 132,419 160,928
----------- -----------
Total liabilities.................................... 1,071,183 1,150,510
Commitments and Contingencies (Note 11)
Minority interest...................................... 64,501 64,385
Partners' capital...................................... 35,154,043 35,222,665
----------- -----------
$36,289,727 $36,437,560
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-266
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,867,795 $1,832,781 $1,783,928
Earned income from direct financing
leases................................. 1,534,525 1,648,358 1,690,299
Contingent rental income................ 51,678 45,126 53,189
Interest and other income............... 88,853 75,896 89,630
---------- ---------- ----------
3,542,851 3,602,161 3,617,046
---------- ---------- ----------
Expenses:
General operating and administrative.... 153,672 166,049 150,157
Professional services................... 26,890 33,692 23,563
Real estate taxes....................... 9,703 -- --
State and other taxes................... 9,372 2,357 15,510
Depreciation and amortization........... 214,468 207,959 201,696
---------- ---------- ----------
414,105 410,057 390,926
---------- ---------- ----------
Income Before Minority Interest in Income
of Consolidated Joint Venture, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Building.... 3,128,746 3,192,104 3,226,120
Minority Interest in Income of
Consolidated Joint Venture............... (8,522) (8,663) (9,066)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 278,919 278,371 267,799
Gain on Sale of Land and Building......... 132,238 -- 67,214
---------- ---------- ----------
Net Income................................ $3,531,381 $3,461,812 $3,552,067
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 33,991 $ 34,618 $ 35,491
Limited partners........................ 3,497,390 3,427,194 3,516,576
---------- ---------- ----------
$3,531,381 $3,461,812 $3,552,067
========== ========== ==========
Net Income per Limited Partner Unit....... $ 0.87 $ 0.86 $ 0.88
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-267
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $103,609 $40,000,000 $(10,083,130) $10,257,313 $(4,790,000) $35,488,792
Distributions to limited
partners ($0.91 per
limited partner unit).. -- -- -- (3,640,003) -- -- (3,640,003)
Net income.............. -- 35,491 -- -- 3,516,576 -- 3,552,067
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 139,100 40,000,000 (13,723,133) 13,773,889 (4,790,000) 35,400,856
Distributions to limited
partners ($0.91 per
limited partner unit).. -- -- -- (3,640,003) -- -- (3,640,003)
Net income.............. -- 34,618 -- -- 3,427,194 -- 3,461,812
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 173,718 40,000,000 (17,363,136) 17,201,083 (4,790,000) 35,222,665
Distributions to limited
partners ($0.90 per
limited partner unit).. -- -- -- (3,600,003) -- -- (3,600,003)
Net income.............. -- 33,991 -- -- 3,497,390 -- 3,531,381
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $207,709 $40,000,000 $(20,963,139) $20,698,473 $(4,790,000) $35,154,043
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-268
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants........... $ 3,380,391 $ 3,491,064 $ 3,290,242
Distributions from unconsolidated
joint ventures...................... 353,207 354,648 341,527
Cash paid for expenses............... (190,902) (211,345) (177,007)
Interest received.................... 53,721 61,435 72,600
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,596,417 3,695,802 3,527,362
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
building............................ 1,363,805 -- 1,057,386
Deposit received on contract for
sale of land........................ -- -- 69,000
Additions to land and buildings on
operating leases.................... (1,277,308) (978) (359,506)
Investment in direct financing
leases.............................. -- (1,542) (566,097)
Investment in joint venture.......... (130,404) (108,952) --
Increase in restricted cash.......... (89,702) -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities............... (133,609) (111,472) 200,783
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners.... (3,640,002) (3,640,003) (3,700,003)
Distributions to holder of minority
interest............................ (8,406) (7,697) (7,998)
----------- ----------- -----------
Net cash used in financing activities.. (3,648,408) (3,647,700) (3,708,001)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... (185,600) (63,370) 20,144
Cash and Cash Equivalents at Beginning
of Year............................... 1,769,483 1,832,853 1,812,709
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,583,883 $ 1,769,483 $ 1,832,853
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................ $ 3,531,381 $ 3,461,812 $ 3,552,067
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation.......................... 214,468 206,497 199,696
Amortization.......................... -- 1,462 2,000
Minority interest in income of
consolidated joint venture........... 8,522 8,663 9,066
Equity in earnings of unconsolidated
joint ventures, net of
distributions........................ 74,288 75,898 73,630
Gain on sale of land and building..... (132,238) -- (67,214)
Decrease (increase) in receivables.... (71,222) 46,834 10,222
Increase in prepaid expenses.......... (374) (3,852) (664)
Decrease in net investment in direct
financing leases..................... 211,942 160,007 141,684
Increase in accrued rental income..... (201,022) (315,028) (309,574)
Increase (decrease) in accounts
payable and accrued expenses......... (14,156) 14,317 (1,057)
Increase (decrease) in due to related
parties.............................. 3,337 (5,395) 7,004
Increase (decrease) in rents paid in
advance and deposits................. (28,509) 44,587 (89,498)
----------- ----------- -----------
Total adjustments................... 65,036 233,990 (24,705)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ $ 3,596,417 $ 3,695,802 $ 3,527,362
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 900,001 $ 940,000 $ 940,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-269
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund X, 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.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
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.
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 continued 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 88.26%
interest in Allegan Real Estate Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's
F-270
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
proportionate share of the equity in the Partnership's consolidated joint
venture. All significant intercompany accounts and transactions have been
eliminated.
The Partnership's investments in CNL Restaurant Investments III, Williston
Real Estate Joint Venture and Ashland Joint Venture, and the property in
Clinton, North Carolina, and the property in Miami, Florida, for which each
property is held as tenants-in-common with affiliates, are accounted for 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.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For financial
reporting purposes, syndication costs are netted against partners' capital and
represent a reduction of Partnership equity and a reduction in the basis of
each partner's investment.
Use of Estimates--The general partners of the Partnership have made a number
of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant 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 and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while the land
portions of the majority of these leases are operating leases. Substantially
all leases are for 15 to 20 years and provide for minimum and contingent
rentals. In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to five
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
F-271
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 9,947,295 $ 9,926,720
Buildings....................................... 6,875,851 6,196,451
----------- -----------
16,823,146 16,123,171
Less accumulated depreciation................... (1,113,247) (898,779)
----------- -----------
$15,709,899 $15,224,392
=========== ===========
</TABLE>
In September 1997, the Partnership sold its property in Fremont, California,
to the franchisor, for $1,420,000 and received net sales proceeds (net of
$2,745 which represents amounts due to the former tenant for prorated rent) of
$1,363,805, resulting in a gain of $132,238 for financial reporting purposes.
This property was originally acquired by the Partnership in March 1992 and had
a cost of approximately $1,116,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $249,700 in excess of its original purchase price.
In October 1997, the Partnership reinvested approximately $1,277,300 in a
Boston Market property located in Homewood, Alabama.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1997, 1996 and 1995, the Partnership recognized $201,021, $315,029 and
$309,574, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,796,664
1999.......................................................... 1,817,764
2000.......................................................... 1,830,536
2001.......................................................... 1,875,201
2002.......................................................... 2,004,123
Thereafter.................................................... 16,727,751
-----------
$26,052,039
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $25,273,063 $27,990,876
Estimated residual values....................... 4,225,008 4,375,790
Less unearned income............................ (16,037,946) (18,146,861)
----------- -----------
Net investment in direct financing leases....... $13,460,125 $14,219,805
=========== ===========
</TABLE>
F-272
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
In September 1997, the Partnership sold its property in Fremont, California,
for which the building portion had been classified as a direct financing lease.
In connection therewith, the gross investment (minimum lease payment receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts and the gain from the sale relating to the land
portion of the property was reflected in income (Note 3).
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,758,896
1999.......................................................... 1,761,323
2000.......................................................... 1,762,806
2001.......................................................... 1,770,249
2002.......................................................... 1,800,446
Thereafter.................................................... 16,419,343
-----------
$25,273,063
===========
</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, 1996, one of the Partnership's leases was
amended. As a result of the lease amendment, the Partnership reclassified this
lease from a direct financing lease to an operating lease, whereby the property
was recorded at its net carrying value of $567,923.
5. Investment in Joint Ventures
The Partnership has a 50 percent, a 10.51% and a 41 percent interest in the
profits and losses of CNL Restaurant Investments III, Ashland Joint Venture and
Williston Real Estate Joint Venture, respectively. The remaining interests in
these joint ventures are held by affiliates of the Partnership which have the
same general partners.
In January 1996, the Partnership acquired and leased a property in Clinton,
North Carolina, as tenants-in-common with affiliates of the general partners.
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. As of
December 31, 1997, the Partnership owned a 13.37% interest in this property.
In December 1997, the Partnership acquired and leased a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. 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. As of
December 31, 1997, the Partnership owned a 6.69% interest in this property.
F-273
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
CNL Restaurant Investments III owns and leases six properties to an operator
of national fast-food restaurants. Ashland Joint Venture, Williston Real Estate
Joint Venture and 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 joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumulated
depreciation........................................... $9,573,341 $7,822,804
Net investment in direct financing lease................ 661,991 658,422
Cash.................................................... 8,197 1,750
Receivables............................................. 26,766 8,164
Prepaid expenses........................................ 22,852 21,910
Liabilities............................................. 7,415 1,094
Partners' capital....................................... 10,285,732 8,511,956
Revenues................................................ 930,470 916,897
Net income.............................................. 695,878 686,789
</TABLE>
The Partnership recognized income totalling $278,919, $278,371 and $267,799
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
As of December 31, 1997, net sales proceeds of $89,702 from the sale of the
property in Fremont, California, plus accrued interest of $2,534, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property.
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their adjusted capital contributions (the "10% Preferred Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their 10% Preferred Return, plus the return of
their adjusted capital contributions. The general partners will then receive,
to the extent previously subordinated and unpaid, a one percent interest in all
prior distributions of net cash flow and a return of their capital
contributions. Any remaining sales proceeds will be distributed 95 percent to
the limited partners and five percent to the general partners. Any gain from
the sale of a property 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.
During the year ended December 31, 1997, the Partnership declared
distributions to the limited partners of $3,600,003 and during each of the
years ended December 31, 1996 and 1995, the Partnership declared distributions
to the limited partners of $3,640,003. No distributions have been made to the
general partners to date.
F-274
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................. $3,531,381 $3,461,812 $3,552,067
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes....................... (289,098) (298,518) (304,027)
Direct financing leases recorded as
operating leases for tax reporting
purposes................................. 211,942 160,007 141,684
Equity in earnings of unconsolidated joint
ventures for tax reporting purposes in
excess of equity in earnings of
unconsolidated joint ventures for
financial reporting purposes............. 15,294 10,839 12,592
Gain on sale of land and building for
financial reporting purposes in excess of
gain for tax reporting purposes.......... (42,996) -- (16,395)
Allowance for doubtful accounts........... 133,428 -- --
Accrued rental income..................... (201,022) (315,029) (309,574)
Rents paid in advance..................... (22,593) 45,447 (80,403)
Minority interest in timing differences of
consolidated joint venture............... 1,461 2,184 2,062
Other..................................... -- (7,738) 9,613
---------- ---------- ----------
Net income for federal income tax
purposes................................. $3,337,797 $3,059,004 $3,007,619
========== ========== ==========
</TABLE>
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates an annual, noncumulative, subordinated 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, but not in excess of competitive fees for comparable services. These
fees will be incurred and will be payable only after the limited partners
receive their 10% Preferred Return. Due to the fact that these fees are
noncumulative, if the limited partners do not receive their 10% Preferred
Return in any particular year, no management fees will be due or payable for
such year. As a result of such threshold, no management fees were incurred
during the years ended December 31, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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
F-275
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
disposition fees will be incurred until such replacement property is sold and
the net sales proceeds are distributed. In addition, the real estate
disposition fee is subordinated to receipt by the limited partners of their
aggregate 10% Preferred Return, plus their adjusted capital contributions. No
deferred, subordinated real estate disposition fees have been incurred since
inception.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,967, $94,496 and $76,108 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $4,946
and $1,609, respectively.
During 1997, the Partnership acquired a property for a purchase price of
$1,277,300 from CNL BB Corp., an affiliate of the general partners. CNL BB
Corp. had purchased and temporarily held title to this property in order to
facilitate the acquisition of the property by the Partnership. The purchase
price paid by the Partnership represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from unconsolidated
joint ventures and the properties held as tenants-in-common with affiliates),
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Foodmaker, Inc............................... $646,477 $684,277 $686,417
Flagstar Enterprises, Inc. and Denny's,
Inc......................................... 602,913 668,919 674,611
Golden Corral Corporation.................... 548,399 568,164 567,654
</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 total rental and earned income from unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates) for at least one of
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Burger King................................... $777,378 $714,792 $721,870
Jack in the Box............................... 646,477 684,277 686,417
Golden Corral Family Steakhouse Restaurants... 548,399 568,164 567,654
Shoney's...................................... 441,052 439,330 354,457
Hardees....................................... 403,882 468,037 471,507
Perkins....................................... 336,983 393,046 449,149
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-276
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies
In October 1995, the tenant of the Partnership's property located in Austin,
Texas, entered into a sublease agreement for a vacant parcel of land under
which the subtenant has the option to purchase such land. The subtenant
exercised the purchase option and in accordance with the terms of the sublease
agreement, the tenant assigned the purchase contract, together with the
purchase contract payment of $69,000, from the subtenant, to the Partnership.
As of December 31, 1997, the sale for the vacant parcel of land had not been
consummated and as a result, the net proceeds of $68,000 (representing the
original $69,000 received by the Partnership, less $1,000 in costs incurred in
anticipation of the sale) were recorded as a deposit at December 31, 1997. The
contract price of $69,000 exceeds the Partnership's cost attributable to the
parcel of land.
12. Subsequent Events
During 1997, the Partnership entered into a contract to sell the property in
Sacramento, California to the tenant. In January 1998, the Partnership sold
this property for $1,250,000 and received net sales proceeds of $1,234,175,
resulting in a gain of approximately $163,300 for financial reporting purposes.
The Partnership intends to reinvest the net sales proceeds in a replacement
property.
F-277
<PAGE>
CNL INCOME FUND XI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-279
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-280
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997 ............ F-281
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-282
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997 ...................................... F-283
Report of Independent Accountants........................................ F-284
Balance Sheets as of December 31, 1997 and 1996.......................... F-285
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-286
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-287
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-288
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-289
</TABLE>
F-278
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,799,124 and
$2,455,129............................................ $23,217,022 $23,561,017
Net investment in direct financing leases.............. 6,539,506 6,611,661
Investment in joint ventures........................... 2,528,168 2,567,786
Cash and cash equivalents.............................. 1,492,088 1,272,386
Receivables, less allowance for doubtful accounts of
$20,283 in 1998 ...................................... 28,202 119,575
Prepaid expenses....................................... 14,612 13,363
Accrued rental income.................................. 1,607,969 1,517,726
Other assets........................................... 122,024 122,024
----------- -----------
$35,549,591 $35,785,538
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 4,393 $ 6,508
Escrowed real estate taxes payable..................... 24,764 19,410
Distributions payable.................................. 875,006 875,006
Due to related parties................................. 5,263 6,648
Rents paid in advance and deposits..................... 69,832 68,333
----------- -----------
Total liabilities.................................... 979,258 975,905
Minority interest...................................... 501,915 501,401
Partners' capital...................................... 34,068,418 34,308,232
----------- -----------
$35,549,591 $35,785,538
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-279
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 672,887 $ 675,491 $2,023,869 $2,026,676
Earned income from direct
financing leases.............. 195,141 208,391 608,546 629,142
Contingent rental income....... 50,903 46,040 113,667 115,123
Interest and other income...... 16,421 25,999 114,469 53,455
--------- --------- ---------- ----------
935,352 955,921 2,860,551 2,824,396
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 43,130 36,804 117,587 111,662
Professional services.......... 9,699 6,046 23,892 23,451
Management fees to related
parties....................... 9,923 9,327 28,975 27,575
Real estate taxes.............. 2,179 -- 2,179 --
State and other taxes.......... -- -- 24,370 25,779
Depreciation and amortization.. 114,665 114,665 343,995 344,584
--------- --------- ---------- ----------
179,596 166,842 540,998 533,051
--------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Ventures and Equity in Earnings
of Unconsolidated Joint
Ventures........................ 755,756 789,079 2,319,553 2,291,345
Minority Interest in Income of
Consolidated Joint Ventures..... (16,760) (17,628) (50,684) (52,226)
Equity in Earnings of
Unconsolidated Joint Ventures... 58,730 58,782 156,335 163,945
--------- --------- ---------- ----------
Net Income....................... $ 797,726 $ 830,233 $2,425,204 $2,403,064
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 7,977 $ 8,303 $ 24,252 $ 24,031
Limited partners............... 789,749 821,930 2,400,952 2,379,033
--------- --------- ---------- ----------
$ 797,726 $ 830,233 $2,425,204 $2,403,064
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.20 $ 0.21 $ 0.60 $ 0.59
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-280
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 176,232 $ 143,281
Net income........................................ 24,252 32,951
----------- -----------
200,484 176,232
----------- -----------
Limited partners:
Beginning balance................................. 34,132,000 34,369,896
Net income........................................ 2,400,952 3,262,128
Distributions ($0.67 and $0.88 limited partner
unit, respectively).............................. (2,665,018) (3,500,024)
----------- -----------
33,867,934 34,132,000
----------- -----------
Total partners' capital............................. $34,068,418 $34,308,232
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-281
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $2,934,890 $2,743,042
---------- ----------
Cash Flows from Investing Activities:
Investment in joint ventures....................... -- (1,044,750)
Decrease in restricted cash........................ -- 1,044,750
---------- ----------
Net cash provided by investing activities........ -- --
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,665,018) (2,665,018)
Distributions to holders of minority interests..... (50,170) (41,783)
---------- ----------
Net cash used in financing activities............ (2,715,188) (2,706,801)
---------- ----------
Net Increase in Cash and Cash Equivalents.............. 219,702 36,241
Cash and Cash Equivalents at Beginning of Period....... 1,272,386 1,225,860
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,492,088 $1,262,101
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Land and building under operating lease exchanged for
land and building under operating lease............. $ 850,381 $ --
========== ==========
Distributions declared and unpaid at end of period... $ 875,006 $ 875,006
========== ==========
</TABLE>
See accompanying notes to financial statements
F-282
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XI, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 85 percent interest in Denver Joint Venture
and its 77.33% interest in CNL/Airport Joint Venture using the consolidation
method. Minority interests represent the minority joint venture partners'
proportionate share of equity in the Partnership's consolidated joint ventures.
All significant intercompany accounts and transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
In September 1998, the tenant of the property in Columbus, Ohio, exercised
its option under the terms of its lease agreement, to exchange one existing
property with a replacement property. In conjunction therewith, the Partnership
exchanged the Burger King property in Columbus, Ohio, for a Burger King
property in Danbury, Connecticut. The lease for the property in Columbus, Ohio,
was amended to allow the property in Danbury, Connecticut to continue under the
terms of the original lease. All closing costs were paid by the tenant. The
Partnership accounted for this as a nonmonetary exchange of similar assets and
recorded the acquisition of the property in Danbury, Connecticut at the net
book value of the property in Columbus, Ohio. No gain or loss was recognized
due to this being accounted for as a nonmonetary exchange of similar assets.
3. Subsequent Event
In October 1998, the Partnership sold its property in Nashua, New Hampshire,
to a third party for $1,748,000 and received net sales proceeds of $1,630,296,
resulting in a gain of $461,862 for financial reporting purposes.
F-283
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XI, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 16, 1998
F-284
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation............................. $23,561,017 $24,019,677
Net investment in direct financing leases............. 6,611,661 6,686,367
Investment in joint ventures.......................... 2,567,786 1,537,430
Cash and cash equivalents............................. 1,272,386 1,225,860
Restricted cash....................................... -- 1,047,822
Receivables, less allowance for doubtful accounts
$14,746 in 1996...................................... 119,575 92,546
Prepaid expenses...................................... 13,363 13,227
Organization costs, less accumulated amortization of
$10,000 and $9,411................................... -- 589
Accrued rental income................................. 1,517,726 1,257,503
Other assets.......................................... 122,024 122,024
----------- -----------
$35,785,538 $36,003,045
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS CAPITAL
<S> <C> <C>
Accounts payable...................................... $ 6,508 $ 2,202
Escrowed real estate taxes payable.................... 19,410 21,573
Distributions payable................................. 875,006 915,006
Due to related parties................................ 6,648 2,121
Rents paid in advance and deposits.................... 68,333 61,196
----------- -----------
Total liabilities................................... 975,905 1,002,098
Commitment (Note 11)
Minority interests.................................... 501,401 487,770
Partners' capital..................................... 34,308,232 34,513,177
----------- -----------
$35,785,538 $36,003,045
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-285
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,702,558 $2,765,327 $2,774,204
Earned income from direct financing
leases.................................. 841,426 850,650 835,181
Contingent rental income................. 225,888 251,312 200,198
Interest and other income................ 62,440 61,403 62,599
---------- ---------- ----------
3,832,312 3,928,692 3,872,182
---------- ---------- ----------
Expenses:
General operating and administrative..... 148,380 164,642 135,605
Professional services.................... 32,077 30,984 22,995
Management fees to related parties....... 37,974 37,293 36,930
State and other taxes.................... 25,779 14,650 41,596
Depreciation and amortization............ 459,249 478,198 481,226
---------- ---------- ----------
703,459 725,767 718,352
---------- ---------- ----------
Income Before Minority Interests in Income
of Consolidated Joint Ventures, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Building..... 3,128,853 3,202,925 3,153,830
Minority Interests in Income of
Consolidated Joint Ventures............... (69,877) (70,116) (70,038)
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 236,103 118,211 118,384
Gain on Sale of Land and Building.......... -- 213,685 --
---------- ---------- ----------
Net Income................................. $3,295,079 $3,464,705 $3,202,176
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 32,951 $ 33,356 $ 32,021
Limited partners......................... 3,262,128 3,431,349 3,170,155
---------- ---------- ----------
$3,295,079 $3,464,705 $3,202,176
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.82 $ 0.86 $ 0.79
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-286
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 76,904 $40,000,000 $ (7,975,039) $ 7,613,478 $(4,790,000) $ 34,926,343
Distributions to
limited partners
($0.89 per limited
partner unit)......... -- -- -- (3,540,023) -- -- (3,540,023)
Net income............. -- 32,021 -- -- 3,170,155 -- 3,202,176
------ -------- ----------- ------------ ----------- ----------- ------------
Balance, December 31,
1995................... 1,000 108,925 40,000,000 (11,515,062) 10,783,633 (4,790,000) 34,588,496
Distributions to
limited partners
($0.89 per limited
partners unit)........ -- -- -- (3,540,024) -- -- (3,540,024)
Net income............. -- 33,356 -- -- 3,431,349 -- 3,464,705
------ -------- ----------- ------------ ----------- ----------- ------------
Balance, December 31,
1996................... 1,000 142,281 40,000,000 (15,055,086) 14,214,982 (4,790,000) 34,513,177
Distributions to
limited partners
($0.88 per limited
partners unit)........ -- -- -- (3,500,024) -- ---- (3,500,024)
Net income............. -- 32,951 -- -- 3,262,128 -- 3,295,079
------ -------- ----------- ------------ ----------- ----------- ------------
Balance, December 31,
1997................... $1,000 $175,232 $40,000,000 $(18,555,110) $17,477,110 $(4,790,000) $34,30 8,232
====== ======== =========== ============ =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-287
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash received from tenants............. $ 3,585,979 $ 3,657,138 $ 3,693,039
Distributions from unconsolidated
joint ventures........................ 250,497 148,375 141,377
Cash paid for expenses................. (237,312) (251,408) (233,423)
Interest received...................... 43,632 47,609 51,192
----------- ----------- -----------
Net cash provided by operating
activities.......................... 3,642,796 3,601,714 3,652,185
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
building.............................. -- 1,044,750 --
Investment in joint venture............ (1,044,750) -- --
Decrease (increase) in restricted
cash.................................. 1,044,750 (1,044,750) --
----------- ----------- -----------
Net cash provided by investing
activities.......................... -- -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners...... (3,540,024) (3,540,024) (3,500,023)
Distributions to holders of minority
interests............................. (56,246) (58,718) (54,227)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,596,270) (3,598,742) (3,554,250)
----------- ----------- -----------
Net Increase in Cash and Cash
Equivalents............................ 46,526 2,972 97,935
Cash and Cash Equivalents at Beginning
of Year................................ 1,225,860 1,222,888 1,124,953
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,272,386 $ 1,225,860 $ 1,222,888
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,295,079 $ 3,464,705 $ 3,202,176
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 458,660 476,198 479,226
Amortization......................... 589 2,000 2,000
Gain on sale of land building........ -- (213,685) --
Minority interests in income of
consolidated joint ventures......... 69,877 70,116 70,038
Equity in earnings of unconsolidated
joint ventures, net of
distributions....................... 14,394 30,164 22,993
Decrease (increase) in receivables... (23,957) 25,855 58,262
Decrease (increase) in prepaid
expenses............................ (136) 151 (1,003)
Decrease in net investment in direct
financing leases.................... 74,706 62,366 55,203
Increase in accrued rental income.... (260,223) (296,439) (269,953)
Increase (decrease) in accounts
payable and accrued expenses........ 2,143 4,280 (28,847)
Increase (decrease) in due to related
parties............................. 4,527 (4,386) 5,106
Increase (decrease) in rents paid in
advance and deposits................ 7,137 (19,611) 56,984
----------- ----------- -----------
Total adjustments.................... 347,717 137,009 450,009
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,642,796 $ 3,601,714 $ 3,652,185
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 875,006 $ 915,006 $ 915,006
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-288
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XI, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr.
Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate General
Partner. The general partners have responsibility for managing the day-to-day
operations of the Partnership.
Real Estate and Lease Accounting--The Partnership records the acquisition of
land and buildings at cost, including acquisition and closing costs. Land and
buildings are leased to unrelated third parties on a triple-net basis, whereby
the tenant is generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs. The
leases are accounted for using either the direct financing or the operating
methods. Such methods are described below:
Direct financing method--The leases accounted for using the direct
financing method are recorded at their net investment (which at the
inception of the lease generally represents the cost of the asset) (Note
4). Unearned income is deferred and amortized to income over the lease
terms so as to produce a constant periodic rate of return on the
Partnership's net investment in the leases.
Operating method--Land and building leases accounted for using the
operating method are recorded at cost, revenue is recognized as rentals are
earned and depreciation is charged to operations as incurred. Buildings are
depreciated on the straight-line method over their estimated useful lives
of 30 years. When scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term commencing on the date the property is placed in
service.
Accrued rental income represents the aggregate amount of income recognized
on a straight-line basis in excess of scheduled rental payments to date.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to the fair
value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and accrued rental
income, and to decrease rental or other income or increase bad debt expense for
the current period, although the Partnership continues to pursue collection of
such amounts. If amounts are subsequently determined to be uncollectible, the
corresponding receivable and allowance for doubtful accounts are decreased
accordingly.
F-289
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--The Partnership accounts for its 85 percent
interest in Denver Joint Venture and its 77.33% interest in CNL/Airport Joint
Venture using the consolidation method. Minority interests represent the
minority joint venture partners' proportionate share of equity in the
Partnership's consolidated joint ventures. All significant intercompany
accounts and transactions have been eliminated.
The Partnership's investments in Ashland Joint Venture and Des Moines Real
Estate Joint Venture, and a property in Corpus Christi, Texas, for which the
property is held as tenants-in-common, are accounted for using the equity
method since the Partnership shares control with affiliates which have the same
general partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs are 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 use of management estimates relate to the
allowance for doubtful accounts and future cash flows associated with long-
lived assets. Actual results could differ from those estimates.
2. Leases
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases are classified as operating leases
and some of the leases have been classified as direct financing leases. For the
leases classified as direct financing leases, the building portions of the
property leases are accounted for as direct financing leases while the land
portions of the majority of these leases are operating leases. Substantially
all leases are for 14 to 20 years and provide for minimum and contingent
rentals. In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to five
successive five-year periods subject to the same terms and conditions as the
initial lease. Most leases also allow the tenant to purchase the property at
fair market value after a specified portion of the lease has elapsed.
F-290
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $12,269,964 $12,269,964
Buildings....................................... 13,746,182 13,746,182
----------- -----------
26,016,146 26,016,146
Less accumulated depreciation................... (2,455,129) (1,996,469)
----------- -----------
$23,561,017 $24,019,677
=========== ===========
</TABLE>
In November 1996, the Partnership sold its property in Philadelphia,
Pennsylvania, for $1,050,000 and received net sales proceeds of $1,044,750,
resulting in a gain of $213,685 for financial reporting purposes. This property
was originally acquired by the Partnership in September 1992, and had a cost of
approximately $877,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $166,900 in excess of its original purchase price.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1997, 1996 and 1995, the Partnership recognized $260,223, $296,439 and
$269,953, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,584,403
1999.......................................................... 2,592,664
2000.......................................................... 2,592,664
2001.......................................................... 2,601,669
2002.......................................................... 2,650,408
Thereafter.................................................... 19,991,002
-----------
$33,012,810
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $13,834,907 $14,744,153
Estimated residual values....................... 2,144,114 2,144,114
Less unearned income............................ (9,367,360) (10,201,900)
----------- -----------
Net investment in direct financing leases....... $ 6,611,661 $ 6,686,367
=========== ===========
</TABLE>
F-291
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 921,552
1999.......................................................... 921,552
2000.......................................................... 921,552
2001.......................................................... 921,552
2002.......................................................... 926,847
Thereafter.................................................... 9,221,852
-----------
$13,834,907
===========
</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).
5. Investment in Joint Ventures
The Partnership has a 62.16% and a 76.6% interest in the profits and losses
of Ashland Joint Venture and Des Moines Real Estate Joint Venture,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
In January 1997, the Partnership acquired a 72.5% interest in a Black-eyed
Pea property in Corpus Christi, Texas, as tenants-in-common with an affiliate
of the general partners. The Partnership accounts for its investment in this
property using the equity method since the Partnership shares control with an
affiliate, and amounts relating to its investment are included in investment in
joint ventures.
Ashland Joint Venture, Des Moines Real Estate Joint Venture and the
Partnership and affiliates, as tenants-in-common, each own and lease one
property to an operator of national fast-food restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumulated
depreciation........................................... $3,511,507 $2,152,524
Cash.................................................... 621 722
Receivables............................................. 21,638 --
Prepaid expenses........................................ 6,939 6,606
Accrued rental income................................... 99,429 59,917
Liabilities............................................. 466 343
Partners' capital....................................... 3,639,668 2,219,426
Revenues................................................ 430,923 239,454
Net income.............................................. 334,962 169,376
</TABLE>
The Partnership recognized income totalling $236,103, $118,211 and $118,384
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
As of December 31, 1996, the net sales proceeds of $1,044,750 from the sale
of the property in Philadelphia, Pennsylvania, plus accrued interest of $3,072,
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional property. In January 1997
these proceeds were reinvested in a Black-eyed Pea property in Corpus Christi,
Texas, as tenants-in-common with an affiliate of the general partners (see Note
5).
F-292
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their Limited Partners' 10% Return, plus the
return of their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners. Any
gain from the sale of a property 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,500,024, $3,540,024 and
$3,540,023, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................. $3,295,079 $3,464,705 $3,202,176
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes....................... (43,077) (39,035) (37,935)
Gain on sale of land and building for
financial reporting purposes in excess of
gain for tax reporting purposes.......... -- (213,685) --
Direct financing leases recorded as
operating leases for tax reporting
purposes................................. 74,706 62,366 55,203
Equity in earnings of unconsolidated joint
ventures for financial reporting purposes
in excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes....................... (13,296) (606) (7,207)
Accrued rental income..................... (260,223) (296,439) (269,953)
Rents paid in advance..................... 22,436 (19,611) 11,087
Minority interests in timing differences
of consolidated joint ventures........... 14,430 15,933 17,613
Other..................................... (14,746) (8,114) 14,237
---------- ---------- ----------
Net income for federal income tax
purposes................................. $3,075,309 $2,965,514 $2,985,221
========== ========== ==========
</TABLE>
F-293
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates 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 Affiliates. The Partnership incurred management fees of
$37,974, $37,293 and $36,930 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide a substantial amount
of services in connection with the sale. However, if the sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $88,667, $95,845 and $69,156 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $6,648
and $2,121, respectively.
During 1997, the Partnership and an affiliate of the general partners
acquired a property as tenants-in-common for a purchase price of $1,441,057 (of
which the Partnership contributed $1,044,750 or 72.50%) from CNL BB Corp., an
affiliate of the general partners. CNL BB Corp. had purchased and temporarily
held title to this property in order to facilitate the acquisition of the
property by the Partnership and the affiliate. The purchase price paid by the
Partnership and the affiliate represented the costs incurred by CNL BB Corp. to
acquire and carry the property, including closing costs.
F-294
<PAGE>
CNL INCOME FUND XI, LTD.
(A Limited Florida Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of rental and earned income from the unconsolidated joint ventures and the
property held as tenants-in-common with an affiliate of the general partners),
for at lease one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc., Denny's, Inc. and
Quincy's Restaurants, Inc......................... $780,502 $774,347 $785,556
Foodmaker, Inc..................................... 768,032 768,032 768,032
Burger King Corporation and BK Acquisition, Inc.... 733,620 712,334 712,334
Golden Corral Corporation.......................... 538,871 538,355 529,854
DenAmerica Corporation............................. 489,623 381,129 --
</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 total rental and earned income from the unconsolidated joint ventures
and the property held as tenants-in-common with an affiliate of the general
partners), for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Burger King................................... $1,198,027 $1,271,606 $1,237,483
Jack in the Box............................... 768,032 768,032 768,032
Denny's....................................... 854,141 747,341 821,011
Golden Corral Family Steakhouse Restaurants... 538,871 538,355 529,854
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
11. Commitment
During 1996, the Partnership entered into an agreement with an unrelated
third party to sell the Burger King property in Nashua, New Hampshire. The
general partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the property; however, as of January 16,
1998, the sale had not occurred.
F-295
<PAGE>
CNL INCOME FUND XII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31,
1997.................................................................... F-297
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-298
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-299
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997............................................. F-300
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-301
Report of Independent Accountants....................................... F-303
Balance Sheets as of December 31, 1997 and 1996......................... F-304
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-305
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-306
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-307
Notes to Financial Statements for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-308
</TABLE>
F-296
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,711,620 and
$1,460,887........................................... $21,589,219 $ 20,820,279
Net investment in direct financing leases............. 12,503,960 13,656,265
Investment in joint ventures.......................... 2,532,807 2,517,421
Cash and cash equivalents............................. 1,785,128 1,706,415
Receivables, less allowance for doubtful accounts
of $225,482 and $7,482............................... 346 202,472
Prepaid expenses...................................... 12,177 7,216
Lease costs, less accumulated amortization
of $2,759 and $1,307................................. 26,794 24,746
Accrued rental income, less allowance for doubtful
accounts
of $5,182 in 1998.................................... 2,475,477 2,496,176
----------- ------------
$40,925,908 $ 41,430,990
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,312 $ 10,558
Accrued and escrowed real estate taxes payable........ 50,296 3,244
Distributions payable................................. 956,252 956,252
Due to related parties................................ 6,222 6,887
Rents paid in advance and deposits.................... 34,800 36,737
----------- ------------
Total liabilities................................... 1,055,882 1,013,678
----------- ------------
Partners' capital..................................... 39,870,026 40,417,312
----------- ------------
$40,925,908 $ 41,430,990
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-297
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................... $ 592,290 $ 621,234 $1,877,428 $1,829,206
Adjustments to accrued rental
income........................... -- -- (224,867) --
Earned income from direct
financing leases................. 371,635 409,932 1,170,186 1,231,855
Contingent rental income.......... 6,038 11,036 19,755 36,999
Interest and other income......... 7,031 18,420 51,713 59,394
--------- --------- ---------- ----------
976,994 1,060,622 2,894,215 3,157,454
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................... 46,999 38,390 113,005 119,166
Professional services............. 6,630 6,837 19,616 18,999
Bad debt expense.................. 104,323 -- 188,990 --
Management fees to related
parties.......................... 10,320 10,041 31,871 30,005
Real estate taxes................. 33,877 542 35,029 1,952
State and other taxes............. -- -- 17,653 18,496
Depreciation and amortization..... 92,113 80,459 252,185 240,010
--------- --------- ---------- ----------
294,262 136,269 658,349 428,628
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures..................... 682,732 924,353 2,235,866 2,728,826
Equity in Earnings of Joint
Ventures........................... 63,712 71,230 85,604 212,586
--------- --------- ---------- ----------
Net Income.......................... $ 746,444 $ 995,583 $2,321,470 $2,941,412
========= ========= ========== ==========
Allocation of Net Income:
General partners.................. $ 7,465 $ 9,956 $ 23,215 $ 29,414
Limited partners.................. 738,979 985,627 2,298,255 2,911,998
--------- --------- ---------- ----------
$ 746,444 $ 995,583 $2,321,470 $2,941,412
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................... $ 0.16 $ 0.22 $ 0.51 $ 0.65
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding.......... 4,500,000 4,500,000 4,500,000 4,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-298
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 192,411 $ 152,889
Net income.................................... 23,215 39,522
----------- -----------
215,626 192,411
----------- -----------
Limited partners:
Beginning balance............................. 40,224,901 40,137,217
Net income.................................... 2,298,255 3,912,692
Distributions ($0.64 and $0.85 per limited
partner
unit, respectively).......................... (2,868,756) (3,825,008)
----------- -----------
39,654,400 40,224,901
----------- -----------
Total partners' capital..................... $39,870,026 $40,417,312
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-299
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 3,066,225 $2,955,295
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases........................................... -- (55,000)
Investment in joint ventures...................... (115,256) --
Collections on loan to tenant of joint Venture.... -- 4,886
Payment of lease costs............................ (3,500) (24,052)
----------- ----------
Net cash used in investing activities........... (118,756) (74,166)
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,868,756) (2,868,756)
----------- ----------
Net cash used in financing Activities........... (2,868,456) (2,868,756)
----------- ----------
Net Increase in Cash and Cash Equivalents............. 78,713 12,373
Cash and Cash Equivalents at Beginning of Period...... 1,706,415 1,800,601
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 1,785,128 $1,812,974
----------- ----------
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Net investment in direct financing leases
reclassified to land and buildings on operating
leases as a result of lease termination............ $ 1,019,673 $ --
----------- ----------
Distributions declared and unpaid at end of Period.. $ 956,252 $ 956,252
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-300
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XII, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 1998, three of the Partnership's
leases with Long John Silver's, Inc. were rejected in connection with the
tenant filing for bankruptcy. As a result, the Partnership reclassified these
assets from net investment in direct financing leases to land and buildings on
operating leases. In accordance with Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying amount. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
3. Investment in Joint Ventures
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant property. As of September 30, 1998, the Partnership had
contributed $115,256, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$156,763 in additional construction costs to the joint venture. The Partnership
will have an approximate 28 percent interest in the profits and losses of the
joint venture. The Partnership accounts for its investment in this joint
venture under the equity method since the Partnership shares control with
affiliates.
F-301
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Des Moines Real Estate Joint Venture, Williston Real Estate Joint Venture,
Kingsville Real Estate Joint Venture, Middleburg Joint Venture and Columbus
Joint Venture, each own and lease one property to an operator of national fast-
food and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land.................................. $2,127,389 $1,768,636
Net investment in direct financing leases, less
allowance on impairment....................... 2,227,673 2,446,688
Cash........................................... 10,846 6,893
Receivables.................................... 21,639 13,843
Accrued rental income.......................... 156,934 157,252
Other assets................................... 284 443
Liabilities.................................... 94,941 7,673
Partners' capital.............................. 4,449,824 4,386,082
Revenues....................................... 287,596 481,085
Net income (loss).............................. (57,592) 446,047
</TABLE>
The Partnership recognized income totaling $85,604 and $212,586 for the nine
months ended September 30, 1998 and 1997, respectively, from these properties,
$63,712 and $71,230 of which was earned for the quarters ended September 30,
1998 and 1997, respectively.
F-302
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XII, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 23, 1998
F-303
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $20,820,279 $21,082,468
Net investment in direct financing leases............. 13,656,265 13,789,036
Investment in joint ventures.......................... 2,517,421 2,496,749
Cash and cash equivalents............................. 1,706,415 1,800,601
Receivables, less allowance for doubtful accounts of
$7,482 and $23,395................................... 202,472 202,908
Prepaid expenses...................................... 7,216 6,786
Organization costs, less accumulated amortization of
$10,000 and $8,465................................... -- 1,535
Lease costs, less accumulated amortization of $1,307
in 1997.............................................. 24,746 --
Accrued rental income................................. 2,496,176 1,963,055
----------- -----------
$41,430,990 $41,343,138
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 10,558 $ 9,303
Accrued and escrowed real estate taxes payable........ 3,244 14,706
Distributions payable................................. 956,252 956,252
Due to related parties................................ 6,887 2,981
Rents paid in advance................................. 36,737 69,790
----------- -----------
Total liabilities................................... 1,013,678 1,053,032
Partners' capital..................................... 40,417,312 40,290,106
----------- -----------
$41,430,990 $41,343,138
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-304
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,455,312 $2,473,574 $2,599,899
Earned income from direct financing
leases................................... 1,647,530 1,692,066 1,730,201
Contingent rental income.................. 54,330 67,652 70,819
Interest and other income................. 87,719 119,267 88,070
---------- ---------- ----------
4,244,891 4,352,559 4,488,989
---------- ---------- ----------
Expenses:
General operating and administrative...... 162,593 173,614 141,271
Professional services..................... 28,665 39,121 27,680
Management fees to related parties........ 40,218 40,244 40,774
Real estate taxes......................... -- 7,891 --
State and other taxes..................... 18,496 18,471 18,679
Depreciation and amortization............. 320,030 315,319 327,795
---------- ---------- ----------
570,002 594,660 556,199
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land and
Building................................... 3,674,889 3,757,899 3,932,790
Equity in Earnings of Joint Ventures........ 277,325 200,499 81,582
Loss on Sale of Land and Building........... -- (15,3550) --
---------- ---------- ----------
Net Income.................................. $3,952,214 $3,943,043 $4,014,372
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 39,522 $ 39,533 $ 40,144
Limited partners.......................... 3,912,692 3,903,510 3,974,228
---------- ---------- ----------
$3,952,214 $3,943,043 $4,014,372
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.87 $ 0.87 $ 0.88
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-305
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Limited Partners General Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 72,212 $45,000,000 $ (6,820,012) $ 7,149,050 $(5,374,544) $40,027,706
Distributions to limited
partners ($0.86 per
limited partner unit).. -- -- -- (3,870,007) -- -- (3,870,007)
Net income.............. -- 40,144 -- -- 3,974,228 -- 4,014,372
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 112,356 45,000,000 (10,690,019) 11,123,278 (5,374,544) 40,172,071
Distributions to limited
partners ($0.85 per
limited partner unit).. -- -- -- (3,825,008) -- -- (3,825,008)
Net income.............. -- 39,533 -- -- 3,903,510 -- 3,943,043
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 151,889 45,000,000 (14,515,027) 15,026,788 (5,374,544) 40,290,106
Distributions to limited
partners ($0.85 per
limited partner unit).. -- -- -- (3,825,008) -- -- (3,825,008)
Net income.............. -- 39,522 -- -- 3,912,692 -- 3,952,214
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $191,411 $45,000,000 $(18,340,035) $18,939,480 $(5,374,544) $40,417,312
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-306
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,736,731 $3,951,047 $3,878,623
Distributions from joint ventures........ 256,653 190,596 80,633
Cash paid for expenses................... (252,145) (278,240) (224,091)
Interest received........................ 65,749 88,286 84,197
---------- ---------- ----------
Net cash provided by Operating
activities............................ 3,806,988 3,951,689 3,819,362
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land and building.. -- 1,640,000 --
Additions to land and buildings on
operating leases........................ (55,000) -- --
Investment in joint ventures............. -- (1,645,024) --
Collections on loan to tenant of joint
venture................................. 4,886 7,741 7,008
Payment of lease costs................... (26,052) -- --
---------- ---------- ----------
Net cash provided by (used in)
investing activities.................. (76,166) 2,717 7,008
---------- ---------- ----------
Cash Flows From Financing Activities:
Distributions to limited partners........ (3,825,008) (3,870,008) (3,825,007)
---------- ---------- ----------
Net cash used in financing activities.. (3,825,008) (3,870,008) (3,825,007)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... (94,186) 84,398 1,363
Cash and Cash Equivalents at Beginning of
Year...................................... 1,800,601 1,716,203 1,714,840
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,706,415 $1,800,601 $1,716,203
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $3,952,214 $3,943,043 $4,014,372
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation............................. 317,189 313,319 325,795
Amortization............................. 2,841 2,000 2,000
Equity in earnings of joint ventures, net
of distributions........................ (20,672) (9,903) (949)
Loss on sale of land and building........ -- 15,355 --
Decrease (increase) in receivables....... (4,450) 48,671 (24,836)
Decrease in net investment in direct
financing leases........................ 132,771 121,597 111,675
Increase in prepaid expenses............. (430) (4,862) (1,924)
Increase in accrued rental income........ (533,121) (518,502) (519,365)
Increase (decrease) in accounts payable
and accrued expenses.................... (10,207) 8,745 (9,623)
Increase (decrease) in due to related
parties................................. 3,906 (4,269) 7,055
Increase (decrease) in rents paid in
advance................................. (33,053) 36,495 (84,838)
---------- ---------- ----------
Total adjustments...................... (145,226) 8,646 (195,010)
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,806,988 $3,951,689 $3,819,362
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31............................... $ 956,252 $ 956,252 $1,001,252
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-307
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XII, 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 or franchisees 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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
values.
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.
F-308
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Investment in Joint Ventures--The Partnership's investments in Des Moines
Real Estate Joint Venture, Williston Real Estate Joint Venture, Kingsville Real
Estate Joint Venture and Middleburg Joint Venture are accounted for 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.
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 are amortized over five years using
the straight-line method.
Lease Costs--Brokerage fees associated with negotiating a new lease are
amortized over the term of the new lease 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 and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the leases have been classified as operating
leases and some of the leases have been classified as direct financing leases.
For the leases classified as direct financing leases, the building portions of
the property leases are accounted for as direct financing leases while the land
portions of the majority of the leases are operating leases. Substantially all
leases are for 14 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire and extended coverage. The
lease options generally allow tenants to renew the leases for two to four
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.
F-309
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $12,837,754 $12,837,754
Buildings.......................................... 9,443,412 9,388,412
----------- -----------
22,281,166 22,226,166
Less accumulated depreciation...................... (1,460,887) (1,143,698)
----------- -----------
$20,820,279 $21,082,468
=========== ===========
</TABLE>
In April 1996, the Partnership sold its property in Houston, Texas, to an
unrelated third party for $1,640,000. As a result of this transaction, the
Partnership recognized a loss of $15,355 for financial reporting purposes
primarily due to acquisition fees and miscellaneous acquisition expenses that
the Partnership had allocated to this property.
In March 1997, the Partnership entered into a new lease for the property in
Tempe, Arizona. In connection therewith, the Partnership incurred $55,000 in
renovation costs during the year ended December 31, 1997. The renovations were
completed in May 1997.
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended December
31, 1997, 1996 and 1995, the Partnership recognized $533,121, $518,502 and
$519,365, respectively, of such rental income.
F-310
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 2,230,885
1999............................................................. 2,281,192
2000............................................................. 2,283,628
2001............................................................. 2,293,570
2002............................................................. 2,313,592
Thereafter....................................................... 25,464,039
-----------
$36,866,906
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $28,413,665 $30,188,147
Estimated residual Values.......................... 4,190,941 4,190,941
Less unearned income............................... (18,948,341) (20,590,052)
----------- -----------
Net investment in direct financing leases.......... $13,656,265 $13,789,036
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,810,632
1999............................................................. 1,818,830
2000............................................................. 1,818,830
2001............................................................. 1,818,830
2002............................................................. 1,818,830
Thereafter....................................................... 19,327,713
-----------
$28,413,665
===========
</TABLE>
F-311
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1996, one of the Partnership's leases was
terminated. As a result of the lease termination, the Partnership reclassified
this lease from a direct financing lease to an operating lease, whereby the
property was recorded at its net carrying value of $742,358. Due to the fact
that the net carrying value was less than the cost of the property, no loss was
recorded for financial reporting purposes.
5. Investment in Joint Ventures
The Partnership has a 59 percent, an 18.61% and a 31.13% interest in the
profits and losses of Williston Real Estate Joint Venture, Des Moines Real
Estate Joint Venture and Kingsville Real Estate Joint Venture, respectively.
The remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
In May 1996, the Partnership entered into a joint venture arrangement,
Middleburg Joint Venture, with an affiliate of the Partnership which has the
same general partners to hold one restaurant property. As of December 31, 1996,
the Partnership and its co-venture partner had contributed $1,645,024 and
$234,059, respectively, to the joint venture to acquire the restaurant
property. As of December 31, 1996, the Partnership and its co-venture partner
owned an 87.54% and a 12.46% interest, respectively, in the profits and losses
of the joint venture. The Partnership accounts for its investment in this joint
venture under the equity method since the Partnership shares control with the
affiliate.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture and Middleburg Joint Venture each own and
lease one property to an operator of national fast-food or family-style
restaurants. The following presents the joint ventures' combined, condensed
financial information at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and building on operating leases,
less accumulated depreciation........................ $1,768,636 $1,795,026
Net investment in direct financing leases............. 2,446,688 2,466,050
Cash.................................................. 6,893 668
Receivables........................................... 13,843 --
Accrued rental income................................. 157,252 102,435
Other assets.......................................... 443 358
Liabilities........................................... 7,673 673
Partners' capital..................................... 4,386,082 4,363,864
Revenues.............................................. 481,085 405,615
Net income............................................ 446,047 372,158
</TABLE>
F-312
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The Partnership recognized income totalling $277,325, $200,499 and $81,582
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Receivables
During 1993, the Partnership loaned $208,855 to the tenant of the property
owned by Kingsville Real Estate Joint Venture in connection with the purchase
of equipment for the restaurant property. The loan, which bears interest at a
rate of ten percent, is payable over 84 months and is collateralized by the
restaurant equipment. Receivables at December 31, 1997 and 1996, include
$188,642 and $186,040, respectively, relating to this loan including accrued
interest of $7,488 at December 31, 1997.
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their Limited Partners' 10% Return, plus the
return of their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners. Any
gain from the sale of a property 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,825,008, and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $3,870,007, respectively. No distributions have been made
to the general partners to date.
F-313
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,952,214 $3,943,043 $4,014,372
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (249,366) (259,752) (264,905)
Direct financing leases recorded as
operating
leases for tax reporting purposes...... 132,771 121,597 111,675
Loss on sale of land and building for
tax reporting
purposes in excess of loss for
financial reporting purposes........... -- (26,151) --
Equity in earnings of joint ventures for
tax reporting
purposes less than equity in earnings
of joint ventures
for financial reporting purposes....... (51,481) (46,345) (15,685)
Allowance for doubtful accounts......... (15,913) (16,396) 20,792
Accrued rental income................... (533,121) (518,502) (519,365)
Rents paid in advance................... (39,303) 36,495 (84,838)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,195,801 $3,233,989 $3,262,046
========== ========== ==========
</TABLE>
F-314
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc. the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates a management fee of one percent of the sum of gross revenues
from properties 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 Affiliates. The Partnership incurred management fees of
$40,218, $40,244 and $40,774 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide 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 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $92,866, $97,722 and $68,337 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $6,887
and $2,981, respectively.
F-315
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
10. Concentration of Credit Risk
The following schedule presents 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 rental and earned income from joint ventures) for at
least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Flagstar Enter-prises, Inc.,
Denny's, Inc. and Quincy's Restaurants,
Inc....................................... $1,216,908 $1,224,953 $1,234,649
Foodmaker, Inc............................. 1,024,667 1,024,667 1,024,668
Long John Silver's, Inc.................... 647,829 649,992 654,384
</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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Jack in the Box............................. $1,024,667 $1,024,667 $1,024,668
Denny's..................................... 807,547 818,672 823,411
Hardee's.................................... 787,260 791,998 798,357
Long John Silver's.......................... 713,522 715,685 720,077
</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 of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-316
<PAGE>
CNL INCOME FUND XIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-318
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-319
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-320
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-321
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-322
Report of Independent Accountants........................................ F-323
Balance Sheets as of December 31, 1997 and 1996.......................... F-324
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-325
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-326
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-327
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-329
</TABLE>
F-317
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $2,008,739 and
$1,697,320............................................ $23,965,359 $22,788,618
Net investment in direct financing leases.............. 6,359,594 7,910,470
Investment in joint ventures........................... 2,453,391 2,457,810
Cash and cash equivalents.............................. 817,721 907,980
Receivables, less allowance for doubtful accounts of
$25,192 in 1998....................................... 19,822 23,946
Prepaid expenses....................................... 12,251 10,368
Organization costs, less accumulated amortization of
$10,000 and $9,422.................................... -- 578
Accrued rental income.................................. 1,364,156 1,423,820
----------- -----------
$34,992,294 $35,523,590
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 7,516 $ 7,671
Accrued real estate taxes payable...................... 45,195 --
Distributions payable.................................. 850,002 850,002
Due to related parties................................. 5,483 6,791
Rents paid in advance.................................. 5,571 5,570
----------- -----------
Total liabilities.................................. 913,767 870,034
Partners' capital...................................... 34,078,527 34,653,556
----------- -----------
$34,992,294 $35,523,590
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-318
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 583,183 $ 645,571 $1,815,609 $1,855,547
Adjustments to accrued rental
income........................ 3,713 -- (307,405) --
Earned income from direct
financing leases.............. 174,129 179,015 589,349 656,665
Contingent rental income....... 72,309 89,378 213,317 195,164
Interest and other income...... 8,081 17,913 41,267 39,198
--------- --------- ---------- ----------
841,415 931,877 2,352,137 2,746,574
--------- --------- ---------- ----------
Expenses:
General operating and
Administrative................ 44,235 35,046 114,819 116,069
Professional services.......... 5,089 4,520 19,724 16,533
Bad debt expense............... -- 123,862 -- 123,862
Management fees to related
parties....................... 8,472 8,340 26,246 25,596
Real estate taxes.............. 67,472 -- 70,360 --
State and other taxes.......... -- -- 16,184 18,301
Depreciation and amortization.. 115,760 98,418 312,173 295,683
--------- --------- ---------- ----------
241,028 270,186 559,506 596,044
--------- --------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures and Provision
for Loss on Land and Net
Investment in Direct Financing
Lease........................... 600,387 661,691 1,792,631 2,150,530
Equity in Earnings of Joint
Ventures........................ 60,864 39,217 182,346 109,720
Provision for Loss on Land and
Net Investment in Direct
Financing Lease................. -- (7,336) -- (48,538)
--------- --------- ---------- ----------
Net Income....................... $ 661,251 $ 693,572 $1,974,977 $2,211,712
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 6,613 $ 6,977 $ 19,750 $ 22,443
Limited partners............... 654,638 686,595 1,955,227 2,189,269
--------- --------- ---------- ----------
$ 661,251 $ 693,572 $1,974,977 $2,211,712
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.16 $ 0.17 $ 0 .49 $ 0.55
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-319
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 137,207 $ 106,517
Net income......................................... 19,750 30,690
----------- -----------
156,957 137,207
----------- -----------
Limited partners:
Beginning balance.................................. 34,516,349 34,911,420
Net income......................................... 1,955,227 3,004,937
Distributions ($0.64 and $0.85 per limited partner
unit, respectively)............................... (2,550,006) (3,400,008)
----------- -----------
33,921,570 34,516,349
----------- -----------
Total partners' capital.............................. $34,078,527 $34,653,556
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-320
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $2,459,747 $2,511,698
---------- ----------
Cash Flows from Investing Activities:
Investment in joint ventures...................... -- (550,000)
Decrease in restricted cash....................... -- 550,000
Loan to tenant.................................... -- (196,980)
---------- ----------
Net cash used in investing activities........... -- (196,980)
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,550,006) (2,550,006)
---------- ----------
Net cash used in financing
activities..................................... (2,550,006) (2,550,006)
---------- ----------
Net Decrease in Cash and Cash Equivalents............. (90,259) (235,288)
Cash and Cash Equivalents at Beginning of Period...... 907,980 1,103,568
---------- ----------
Cash and Cash Equivalents at End of
Period............................................... $ 817,721 $ 868,280
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and buildings on
operating leases as a result of lease
termination........................................ $1,488,160 $ --
========== ==========
Distributions declared and unpaid at end of
period............................................. $ 850,002 $ 850,002
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-321
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XIII, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 1998, three of the Partnership's
leases with Long John Silver's, Inc. were rejected in connection with the
tenant filing for bankruptcy. As a result, the Partnership reclassified these
assets from net investment in direct financing leases to land and buildings on
operating leases. In accordance with Statement of Financial Accounting
Standards #13, "Accounting for Leases," the Partnership recorded the
reclassified assets at the lower of original cost, present fair value, or
present carrying value. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
F-322
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 21, 1998
F-323
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $22,788,618 $23,612,639
Net investment in direct financing leases............. 7,910,470 8,543,916
Investment in joint ventures.......................... 2,457,810 976,531
Cash and cash equivalents............................. 907,980 1,103,568
Restricted cash....................................... -- 550,770
Receivables, less allowance for doubtful accounts of
$150,734 in 1996..................................... 23,946 100,955
Prepaid expenses...................................... 10,368 9,143
Organization costs, less accumulated amortization of
$9,422 and $7,422.................................... 578 2,578
Accrued rental income, less allowance for doubtful
accounts of $72,734 in 1996.......................... 1,423,820 1,044,970
----------- -----------
$35,523,590 $35,945,070
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,671 $ 6,340
Accrued and escrowed real estate taxes payable........ -- 14,092
Distributions payable................................. 850,002 850,002
Due to related parties................................ 6,791 2,594
Rents paid in advance................................. 5,570 54,105
----------- -----------
Total liabilities..................................... 870,034 927,133
Partners' capital..................................... 34,653,556 35,017,937
----------- -----------
$35,523,590 $35,945,070
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-324
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,371,062 $2,477,156 $2,566,579
Earned income from direct financing
leases.................................. 976,547 899,130 943,194
Contingent rental income................. 287,751 299,495 293,749
Interest and other income................ 46,693 59,319 54,832
---------- ---------- ----------
3,682,053 3,735,100 3,858,354
---------- ---------- ----------
Expenses:
General operating and administrative..... 152,918 156,466 130,501
Bad debt expense......................... 123,071 -- --
Professional services.................... 25,595 33,746 27,703
Management fees to related parties....... 34,321 35,675 36,031
Real estate taxes........................ -- 10,680 --
State and other taxes.................... 18,301 16,793 20,470
Depreciation and amortization............ 394,099 393,434 393,435
---------- ---------- ----------
748,305 646,794 608,140
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land..... 2,933,748 3,088,306 3,250,214
Equity in Earnings of Joint Ventures....... 150,417 60,654 98,520
Gain (Loss) on Sale of Land and Building... (48,538) 82,855 (29,560)
---------- ---------- ----------
Net Income................................. $3,035,627 $3,231,815 $3,319,174
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 30,690 $ 31,490 $ 33,432
Limited partners......................... 3,004,937 3,200,325 3,285,742
---------- ---------- ----------
$3,035,627 $3,231,815 $3,319,174
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.75 $ 0.80 $ 0.82
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-325
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- --------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- lated Syndication
butions Earnings butions Distributions Earnings Costs Total
------- -------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 40,595 $40,000,000 $ (4,153,373) $ 4,018,914 $(4,665,169) $35,241,967
Distribution to
limited partners
($0.84 per limited
partner unit)........ -- -- -- (3,375,011) -- -- (3,375,011)
Net income............ -- 33,432 -- -- 3,285,742 -- 3,319,174
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 74,027 40,000,000 (7,528,384) 7,304,656 (4,665,169) 35,186,130
Distribution to
limited partners
($0.85 per limited
partner unit)........ -- -- -- (3,400,008) -- -- (3,400,008)
Net income............ -- 31,490 -- -- 3,200,325 -- 3,231,815
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 105,517 40,000,000 (10,928,392) 10,504,981 (4,665,169) 35,017,937
Distribution to
limited partners
($0.85 per limited
partner unit)........ -- -- -- (3,400,008) -- -- (3,400,008)
Net income............ -- 30,690 -- -- 3,004,937 -- 3,035,627
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $136,207 $40,000,000 $(14,328,400) $13,509,918 $(4,665,169) $34,653,556
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-326
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............ $ 3,329,633 $ 3,476,985 $ 3,453,186
Distributions from joint ventures..... 151,322 93,700 88,793
Cash paid for expenses................ (236,793) (251,454) (214,011)
Interest received..................... 29,395 48,350 51,410
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,273,557 3,367,581 3,379,378
----------- ----------- -----------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases..................... -- -- (336,116)
Proceeds from sale of land and
building............................. 932,849 550,000 286,411
Advances to tenant.................... (196,980) -- --
Repayment of advances................. 127,843 -- --
Investment in joint ventures.......... (1,482,849) -- (140,052)
Decrease (increase) in restricted
cash................................. 550,000 (550,000) --
Other................................. -- -- 954
----------- ----------- -----------
Net cash used in investing
activities......................... (69,137) -- (188,803)
----------- ----------- -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf of
the Partnership...................... -- -- (3,074)
Distributions to limited partners..... (3,400,008) (3,400,008) (3,350,014)
----------- ----------- -----------
Net cash used in financing
activities......................... (3,400,008) (3,400,008) (3,353,088)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents............................ (195,588) (32,427) (162,513)
Cash and Cash Equivalents at Beginning
of Year................................ 1,103,568 1,135,995 1,298,508
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 907,980 $ 1,103,568 $ 1,135,995
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 3,035,627 $ 3,231,815 $ 3,319,174
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 391,434 391,434 391,435
Amortization........................ 2,665 2,000 2,000
Equity in earnings of joint
ventures, net of distributions..... 905 33,046 (9,727)
Loss (gain) on sale of land and
building........................... 48,538 (82,855) 29,560
Decrease (increase) in receivables.. 77,779 (28,034) (3,833)
Decrease in net investment in direct
financing leases................... 84,646 80,214 71,410
Increase in prepaid expenses........ (1,225) (5,005) (4,138)
Increase in accrued rental income... (378,850) (313,540) (371,167)
Increase (decrease) in accounts
payable and accrued expenses....... (12,761) 12,137 922
Increase (decrease) in due to
related parties.................... 4,197 (4,773) 6,213
Increase (decrease) in rents paid in
advance............................ (48,535) 51,142 (52,471)
----------- ----------- -----------
Total adjustments................. 168,793 135,766 60,204
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,204,420 $ 3,367,581 $ 3,379,378
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 850,002 $ 850,002 $ 850,002
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-327
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XIII, 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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. Although the general partners have made their best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect the general partners'
estimate of net cash flows expected to be generated from its properties and the
need for asset impairment write-downs. If an impairment is indicated, the
assets are adjusted to their fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the allowance for
doubtful accounts, which is netted against receivables and accrued rental
income, and to decrease rental or other income 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.
F-328
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--The Partnership accounts for its interest in
Attalla Joint Venture and Salem Joint Venture, and a property in Arvada,
Colorado, a property in Akron, Ohio, and a property in Miami, Florida, for
which each property is 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.
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 are 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 to operators of
national and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." Some of the leases are classified as
operating leases and some of the leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of these leases are operating
leases. Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
F-329
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $12,742,897 $13,175,484
Buildings....................................... 11,743,041 11,743,041
----------- -----------
24,485,938 24,918,525
Less accumulated depreciation................... (1,697,320) (1,305,886)
----------- -----------
$22,788,618 $23,612,639
=========== ===========
</TABLE>
In November 1996, the Partnership sold its property in Richmond, Virginia,
to the tenant and received sales proceeds of $550,000, resulting in a gain of
$82,855 for financial reporting purposes. This property was originally acquired
by the Partnership in March 1994, and had a cost of approximately $415,400,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $134,600 in excess of its
original purchase price. In January 1997, the Partnership reinvested the net
sales proceeds in a property in Akron, Ohio, as tenants-in-common, with
affiliates of the general partners (see Note 5).
In October 1997, the Partnership sold its property in Orlando, Florida, to a
third party for $953,371 and received net sales proceeds of $932,849, resulting
in a loss of $48,538 for financial reporting purposes. In December 1997, the
Partnership reinvested the net sales proceeds in a property located in Miami,
Florida, as tenants-in-common, with affiliates of the general partners (see
Note 5).
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, 1997, 1996 and 1995, the Partnership recognized $378,850,
$313,541 and $371,167, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,136,766
1999.......................................................... 2,274,706
2000.......................................................... 2,265,811
2001.......................................................... 2,277,006
2002.......................................................... 2,307,013
Thereafter.................................................... 24,312,111
-----------
$35,573,413
===========
</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.
F-330
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable............ $ 15,747,868 $ 18,116,667
Estimated residual values.................... 2,582,058 2,723,067
Less unearned income......................... (10,419,456) (12,295,818)
------------ ------------
Net investment in direct financing leases.... $ 7,910,470 $ 8,543,916
============ ============
</TABLE>
In October 1997, the Partnership sold its property in Orlando, Florida, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payment receivable
and estimated residual value) and unearned income relating to this property
were removed from the accounts and the loss from the sale relating to the land
portion of the property and the net investment in direct financing lease was
reflected in income (Note 3).
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 958,686
1999.......................................................... 964,106
2000.......................................................... 964,106
2001.......................................................... 976,846
2002.......................................................... 994,681
Thereafter.................................................... 10,889,443
-----------
$15,747,868
===========
</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).
5. Investment in Joint Ventures
The Partnership has a 50 percent and a 27.8% interest in the profits and
losses of Attalla Joint Venture and Salem Joint Venture, respectively. The
remaining interests in these joint ventures are held by affiliates of the
Partnership which have the same general partners.
The Partnership also owns a property in Arvada, Colorado, as tenants-in-
common with an affiliate of the general partners. The Partnership accounts for
its investment in this property using the equity method since the Partnership
shares control with an affiliate. As of December 31, 1997, the Partnership
owned a 66.13% interest in this property.
In January 1997, the Partnership used the net sales proceeds from the 1996
sale of the property in Richmond, Virginia, to acquire a property in Akron,
Ohio, as tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the equity
method since the Partnership shares control with affiliates, and amounts
relating to its investment are included in investment in joint ventures. As of
December 31, 1997, the Partnership owned a 63.03% interest in this property.
In addition, in December 1997, the Partnership acquired a property in Miami,
Florida, as tenants-in-common with affiliates of the general partners. The
Partnership accounts for its investment in this property
F-331
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
using the equity method since the Partnership shares control with affiliates,
and amounts relating to its investment are included in investment in joint
ventures. As of December 31, 1997, the Partnership owned a 47.83% interest in
this property.
Attalla Joint Venture and Salem Joint Venture and the Partnership and
affiliates, as tenants-in-common in three 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 the joint ventures and the properties held
as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $4,256,861 $1,482,503
Net investment in direct financing leases........ 364,479 367,661
Cash............................................. 18,729 21,173
Receivables...................................... -- 6,412
Prepaid expenses................................. 380 255
Accrued rental income............................ 106,653 51,745
Liabilities...................................... 15,653 28,121
Partners' capital................................ 4,731,449 1,901,628
Revenues......................................... 347,971 216,960
Net income....................................... 285,922 145,851
</TABLE>
The Partnership recognized income totalling $150,417, $60,654 and $98,520
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
6. Restricted Cash
In 1996, the sales proceeds of $550,000 from the sale of the property in
Richmond, Virginia, plus accrued interest of $770, were being held in an
interest-bearing escrow account pending the release of funds by the escrow
agent to acquire an additional property. In January 1997, the funds were
released from escrow and the Partnership acquired a 63.03% interest in a Burger
King property in Akron, Ohio, as tenants-in-common with an affiliate of the
general partners (Note 5).
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their Limited Partners' 10% Return, plus the
return of their adjusted capital contributions. The general partners will then
receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and
F-332
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
five percent to the general partners. Any gain from the sale of a property is,
in general, allocated in the same manner as net sales proceeds will be
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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,400,008 and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $3,375,011. No distributions have been made to the general
partners to date.
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,035,627 $3,231,815 $3,319,174
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (100,696) (103,634) (103,634)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 84,646 80,214 71,410
Equity in earnings of joint ventures for
tax reporting purposes in excess of
(less than) equity in earnings of joint
ventures for financial reporting
purposes............................... (19,727) 6,819 (17,195)
Loss (gain) on sale of property deferred
for tax reporting purposes............. -- (82,855) 29,560
Loss on sale of property for financial
reporting purposes in excess of loss
for tax reporting purposes............. 38,823 -- --
Allowance for doubtful accounts......... (150,734) 102,198 45,182
Accrued rental income................... (378,850) (313,540) (371,167)
Rents paid in advance................... (48,535) 51,142 (52,471)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,460,554 $2,972,159 $2,920,859
========== ========== ==========
</TABLE>
9. Related Party Transactions
One of the individual partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates 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 and the property held as tenants-
in-common with an affiliate. The management fee, which will not
F-333
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Affiliates. All or any portion of the management fee not
taken as to any fiscal year shall be deferred without interest and may be taken
in such other fiscal year as the Affiliates shall determine. The Partnership
incurred management fees of $34,321, $35,675 and $36,031 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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 10% Preferred Return,
plus their adjusted capital contributions. No deferred, subordinated real
estate disposition fees have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. For the years ended December 31, 1997, 1996 and 1995, the expenses
incurred for these services were $87,322, $91,272 and $67,052, respectively.
The due to related parties at December 31, 1997 and 1996, totalled $6,791
and $2,594, respectively.
During 1997, the Partnership and an affiliate of the general partners
acquired a property in Akron, Ohio, as tenants-in-common for a purchase price
of $872,625 (of which the Partnership contributed $550,000 or 63.03%) from CNL
BB Corp., also an affiliate of the general partners. CNL BB Corp. had purchased
and temporarily held title to this property in order to facilitate the
acquisition of the property by the Partnership and the affiliate, as tenants-
in-common. The purchase price paid by the Partnership and the affiliate
represented the costs incurred by CNL BB Corp. to acquire and carry the
property, including closing costs.
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from joint ventures and the properties held
as tenants-in-common with affiliates) for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's, Inc...................... $759,064 $764,565 $774,281
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc............................ 744,199 765,109 785,570
Golden Corral Corporation.................... 536,886 539,568 533,668
Foodmaker, Inc............................... 450,816 450,393 450,724
Checkers Drive-In Restaurants, Inc........... 366,187 412,422 416,746
</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
F-334
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Concluded)
the Partnership's share of total rental and earned income from joint ventures
and the properties held as tenants-in-common with affiliates) for at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $759,064 $764,565 $774,281
Hardee's...................................... 649,762 670,249 690,324
Golden Corral Family Steakhouse Restaurants... 536,886 539,568 533,668
Burger King................................... 484,111 431,280 419,740
Jack in the Box............................... 450,816 450,393 450,724
Checkers Drive-In Restaurants................. 366,187 412,422 416,746
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-335
<PAGE>
CNL INCOME FUND XIV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-337
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-338
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-339
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-340
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-341
Report of Independent Accountants........................................ F-344
Balance Sheets as of December 31, 1997 and 1996.......................... F-345
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-346
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-347
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-348
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-349
</TABLE>
F-336
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation
of $1,571,136 and $1,295,713......................... $26,043,665 $25,217,725
Net investment in direct financing leases............. 6,392,118 9,041,485
Investment in joint ventures.......................... 3,633,822 3,271,739
Cash and cash equivalents............................. 2,293,184 1,285,777
Restricted cash....................................... 398,539 318,592
Receivables, less allowance for doubtful accounts of
$5,013 in 1998....................................... -- 19,912
Prepaid expenses...................................... 13,689 7,915
Organization costs, less accumulated amortization of
$10,000 and $8,599................................... -- 1,401
Accrued rental income, less allowance for doubtful
accounts
of $11,040 and $6,295................................ 1,795,945 1,820,078
----------- -----------
$40,570,962 $40,984,624
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 1,234 $ 10,258
Accrued and escrowed real estate taxes payable........ 42,751 19,570
Distributions payable................................. 928,130 928,130
Due to related parties................................ 5,929 7,853
Rents paid in advance................................. 35,561 29,656
----------- -----------
Total liabilities................................... 1,013,605 995,467
Partners' capital..................................... 39,557,357 39,989,157
----------- -----------
$40,570,962 $40,984,624
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-337
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 682,180 $ 723,524 $2,107,058 $2,170,802
Adjustment to accrued rental
income........................ (14,350) -- (277,319) --
Earned income from direct
financing leases.............. 184,522 254,117 644,797 764,122
Interest and other income...... 26,585 12,765 73,047 43,367
---------- ---------- ---------- ----------
878,937 990,406 2,547,583 2,978,291
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative................ 51,444 35,386 130,375 111,792
Professional services.......... 5,632 7,006 22,509 18,590
Bad debt expense............... -- -- -- 14,000
Management fees to related
parties....................... 8,842 9,573 27,628 28,863
Real estate taxes.............. 41,562 1,384 46,288 7,192
State and other taxes.......... 1,462 -- 22,498 21,874
Loss on termination of direct
financing lease............... 21,873 -- 21,873 --
Depreciation and amortization.. 107,492 85,053 277,598 255,108
---------- ---------- ---------- ----------
238,307 138,402 548,769 457,419
---------- ---------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures
and Gain on Sale of Land and
Building........................ 640,630 852,004 1,998,814 2,520,872
Equity in Earnings of Joint
Ventures........................ 76,939 78,381 241,570 231,204
Gain on Sale of Land and
Building........................ -- -- 112,206 --
---------- ---------- ---------- ----------
Net Income....................... $ 717,569 $ 930,385 $2,352,590 $2,752,076
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 7,175 $ 9,304 $ 22,403 $ 27,521
Limited partners............... 710,394 921,081 2,330,187 2,724,555
---------- ---------- ---------- ----------
$ 717,569 $ 930,385 $2,352,590 $2,752,076
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.16 $ 0.20 $ 0.52 $ 0.61
========== ========== ========== ==========
Weighted Average Number of
Limited
Partner Units Outstanding....... 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-338
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended
1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
General partners:
Beginning balance........................ $ 146,640 $ 109,981
Net income............................... 22,403 36,659
----------- -----------
169,043 146,640
----------- -----------
Limited partners:
Beginning balance........................ 39,842,517 39,925,756
Net income............................... 2,330,187 3,629,281
Distributions ($0.62 and $0.83 per
limited partner unit, respectively)..... (2,784,390) (3,712,520)
----------- -----------
39,388,314 39,842,517
----------- -----------
Total partners' capital................ $39,557,357 $39,989,157
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-339
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 2,610,638 $2,782,288
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building........... 1,648,110 --
Investment in joint venture....................... (387,573) (77,277)
Return of capital from joint venture.............. -- 51,950
Increase in restricted cash....................... (79,378) --
----------- ----------
Net cash provided by (used in) investing
activities................................... 1,181,159 (25,327)
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,784,390) (2,784,390)
----------- ----------
Net cash used in financing activities......... (2,784,390) (2,784,390)
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.. 1,007,407 (27,429)
Cash and Cash Equivalents at Beginning of Period...... 1,285,777 1,462,012
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 2,293,184 $1,434,583
=========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Net investment in direct financing leases
reclassified to land and buildings on operating
leases as a result of lease termination.......... $ 2,084,141 $ --
=========== ==========
Distributions declared and unpaid at end of
period........................................... $ 928,130 $ 928,130
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-340
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to fair statement of the results for the interim periods presented.
Operating results for the nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, included in the financial statements,
have been derived from audited financial statements as of the date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XIV, Ltd, (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
During the nine months ended September 30, 1998, the partnership sold its
property in Madison, Alabama and two properties in Richmond, Virginia, to third
parties for a total of $1,667,462 and received net sales proceeds of
$1,606,702, resulting in a total gain of $70,798 for financial reporting
purposes. These properties were originally acquired by the partnership in 1993
and 1994, and had costs totaling approximately $1,393,400, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold these properties for a total of approximately $213,300 in
excess of their original purchase prices.
In addition, in April 1998, the Partnership reached an agreement to accept
$360,000 for the property in Riviera Beach, Florida, which was taken through a
right of way taking in December 1997. The Partnership had received preliminary
sales proceeds of $318,592 as of December 31, 1997. Upon agreement of the final
sales price of $360,000, and receipt of the remaining sales proceeds of
$41,408, the Partnership recognized a gain of $41,408 for financial reporting
purposes. This property was originally acquired by the Partnership in 1994 and
had a cost of approximately $276,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold this
property for a total of approximately $83,600 excess of its original purchase
price.
3. Net Investment in Direct Financing Leases
In January 1998, the Partnership sold its property in Madison, Alabama, for
which the building portion had been classified as a direct financing lease. In
connection therewith, the gross investment (minimum lease payments receivable
and the estimated residual value) and unearned income relating to the building
were removed from the accounts (see Note 2).
During the nine months ended September 30, 1998, four of the Partnership's
leases with Long John Silver's Inc. were rejected in connection with the tenant
filing for bankruptcy. As a result, the Partnership reclassified these assets
from net investment in direct financing leases to land and buildings on
operating leases. In accordance with Statement of Financial Accounting
Standards #13, "Accounting for Leases," the
F-341
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
Partnership recorded the reclassified assets at the lower of original cost,
present fair value, or present carrying amount, which resulted in a loss on
termination of direct financing lease of $21,873 for financial reporting
purposes.
4. Investment in Joint Ventures
In April 1998, the Partnership entered into a joint venture arrangement,
Melbourne Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property, at a total cost of $1,052,552. As
of September 30, 1998, the Partnership had contributed $314,011 to purchase
land and pay for construction costs relating to the joint venture. The
Partnership has agreed to contribute approximately $212,300 in additional
construction costs to the joint venture. The Partnership will have an
approximate 50 percent interest in the profits and losses of the joint venture.
The Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with an affiliate.
As of September 30, 1998, Attalla Joint Venture, Salem Joint Venture,
Kingston Joint Venture and Melbourne Joint Venture, each owned and leased one
property, and WoodRidge Real Estate Joint Venture owned and leased six
properties, to operators of fast-food or family-style restaurants. The
following presents the combined, condensed financial information for the joint
ventures at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases,
less accumulated depreciation................ $6,673,070 $6,008,240
Net investment in direct financing lease...... 361,764 364,479
Cash.......................................... 2,783 13,842
Receivables................................... 20,884 2,571
Accrued rental income......................... 212,017 150,621
Other assets.................................. 1,153 1,257
Liabilities................................... 195,521 231,061
Partners' capital............................. 7,076,150 6,309,949
Revenues...................................... 582,901 712,004
Net income.................................... 467,698 588,835
</TABLE>
The Partnership recognized income totaling $241,570 and $231,204 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $76,939 and $78,381 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively.
5. Restricted Cash
As of September 30, 1998, $397,970 in net sales proceeds from the sale of
one of the Properties in Richmond, Virginia, plus accrued interest of $569,
were being held in an interest-bearing escrow account pending the release of
funds by an escrow agent to acquire an additional property.
F-342
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
6. Subsequent Event
In October 1998, the Partnership reinvested approximately $1,533,100 of the
net sales proceeds it received from the sales of the properties in Richmond,
Virginia and the right of way taking of the property in Riviera Beach, Florida,
and a portion of the net sales proceeds it received from the sale of the
property in Madison, Alabama, in a Bennigan's property located in Fayetteville,
North Carolina. In connection therewith, the Partnership entered into a long
term, triple-net lease with terms substantially the same as its other leases.
The Partnership acquired the Bennigan's property from an affiliate of the
general partners. The affiliate had purchased and temporarily held title to the
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by the affiliate to acquire the property, including closing costs.
F-343
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XIV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XIV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XIV, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 20, 1998
F-344
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $25,217,725 $25,852,484
Net investment in direct financing leases............. 9,041,485 9,125,272
Investment in joint ventures.......................... 3,271,739 3,201,156
Cash and cash equivalents............................. 1,285,777 1,462,012
Restricted cash....................................... 318,592 --
Receivables, less allowance for doubtful accounts of
$22,970 in 1996...................................... 19,912 23,477
Prepaid expenses...................................... 7,915 8,243
Organization costs, less accumulated amortization of
$8,599 and $6,599.................................... 1,401 3,401
Accrued rental income................................. 1,820,078 1,369,804
----------- -----------
$40,984,624 $41,045,849
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 10,258 $ 5,447
Accrued and escrowed real estate taxes payable........ 19,570 12,364
Distributions payable................................. 928,130 928,130
Due to related parties................................ 7,853 1,651
Rents paid in advance................................. 29,656 62,520
----------- -----------
Total liabilities................................... 995,467 1,010,112
Commitments (Note 11)
Partners' capital..................................... 39,989,157 40,035,737
----------- -----------
$40,984,624 $41,045,849
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-345
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,893,900 $2,960,909 $2,980,928
Earned income from direct financing
leases.................................... 1,017,627 1,026,616 1,034,636
Interest and other income.................. 47,287 56,377 52,426
---------- ---------- ----------
3,958,814 4,043,902 4,067,990
---------- ---------- ----------
Expenses:
General operating and administrative....... 154,654 162,163 143,138
Professional services...................... 29,746 24,138 31,270
Bad debt expense........................... 10,500 -- 12,619
Management fees to related parties......... 38,626 38,785 38,832
Real estate taxes.......................... 7,192 3,426 8,116
State and other taxes...................... 21,874 18,109 14,865
Depreciation and amortization.............. 340,161 340,089 340,112
---------- ---------- ----------
602,753 586,710 588,952
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land.......... 3,356,061 3,457,192 3,479,038
Equity in Earnings of Joint Ventures........ 309,879 459,137 338,717
Loss on Sale of Land........................ -- -- (66,518)
---------- ---------- ----------
Net Income.................................. $3,665,940 $3,916,329 $3,751,237
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 36,659 $ 39,163 $ 38,073
Limited partners........................... 3,629,281 3,877,166 3,713,164
---------- ---------- ----------
$3,665,940 $3,916,329 $3,751,237
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.81 $ 0.86 $ 0.83
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,500,000 4,500,000 4,500,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-346
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Contributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 31,745 $45,000,000 $ (3,082,753) $ 3,142,776 $(5,383,945) $39,708,823
Distributions to
limited partners
($0.81) per limited
partner unit)......... -- -- -- (3,628,130) -- -- (3,628,130)
Net income............. -- 38,073 -- 3,713,164 -- 3,751,237
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1995................... 1,000 69,818 45,000,000 (6,710,883) 6,855,940 (5,383,945) 39,831,930
Distributions to
limited partners
($0.83 per limited
partners unit)........ -- -- -- (3,712,522) -- -- (3,712,522)
Net income............. -- 39,163 -- -- 3,877,166 -- 3,916,329
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1996................... 1,000 108,981 45,000,000 (10,423,405) 10,733,106 (5,383,945) 40,035,737
Distributions to
limited partners
($0.83 per limited
partner unit)......... -- -- -- (3,712,520) -- -- (3,712,520)
Net income............. -- 36,659 -- -- 3,629,281 -- 3,665,940
------ -------- ----------- ------------ ----------- ----------- -----------
Balance, December 31,
1997................... $1,000 $145,640 $45,000,000 $(14,135,925) $14,362,387 $(5,383,945) $39,989,157
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-347
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,501,064 $3,572,793 $3,626,651
Distributions from joint ventures........ 308,220 340,299 270,406
Cash paid for expenses................... (243,326) (250,885) (237,937)
Interest received........................ 40,232 44,089 50,724
---------- ---------- ----------
Net cash provided by operating
activities............................. 3,606,190 3,706,296 3,709,844
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land............... -- -- 696,012
Proceeds received from right of way
taking.................................. 318,592 -- --
Additions to land and buildings on
operating leases........................ -- -- (964,073)
Investment in direct financing leases.... -- -- (75,352)
Investment in joint ventures............. (121,855) (7,500) (1,087,218)
Return of capital from joint venture..... 51,950 -- --
Increase in restricted cash.............. (318,592) -- --
Other.................................... -- -- 5,530
---------- ---------- ----------
Net cash used in investing activities... (69,905) (7,500) (1,425,101)
---------- ---------- ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership............................. -- -- (577)
Distributions to limited partners....... (3,712,520) (3,712,522) (3,543,751)
---------- ---------- ----------
Net cash used in financing activities... (3,712,520) (3,712,522) (3,544,328)
---------- ---------- ----------
Net Decrease in Cash and Cash
Equivalents.............................. (176,235) (13,726) (1,259,585)
Cash and Cash Equivalents at Beginning of
Year..................................... 1,462,012 1,475,738 2,735,323
---------- ---------- ----------
Cash and Cash Equivalents at End of Year.. $1,285,777 $1,462,012 $1,475,738
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $3,665,940 $3,916,329 $3,751,237
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation............................ 337,180 337,181 337,393
Amortization............................ 2,981 2,908 2,719
Equity in earnings of joint ventures, net
of distributions....................... (1,659) (118,889) (68,311)
Loss on sale of land.................... -- -- 66,518
Decrease (increase) in receivables...... 3,565 (13,946) 36,872
Decrease (increase) in prepaid expenses. 328 (4,802) (3,441)
Decrease in net investment in direct
financing leases....................... 83,787 74,798 66,778
Increase in accrued rental income....... (471,287) (491,221) (497,969)
Decrease in other assets................ -- -- 3,315
Increase (decrease) in accounts payable. 12,017 (8,408) 22,223
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition costs paid on behalf of the
Partnership............................ 6,202 (5,218) 6,869
Increase (decrease) in rents paid in
advance................................ (32,864) 17,564 (14,359)
---------- ---------- ----------
Total adjustments....................... (59,750) (210,033) (41,393)
---------- ----------
Net Cash Provided by Operating
Activities............................... $3,606,190 $3,706,296 $3,709,844
========== ========== ==========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.............................. $ 928,130 $ 928,130 $ 928,130
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-348
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XIV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for the
purpose of acquiring both newly constructed and existing restaurant properties,
as well as properties upon which restaurants were to be constructed, which are
leased primarily to operators of national and regional fast-food and family-
style restaurant chains. Under the terms of a registration statement filed with
the Securities and Exchange Commission, the Partnership was authorized to sell
a maximum of 4,500,000 units ($45,000,000) of limited partnership interest. A
total of 4,500,000 units ($45,000,000) of limited partnership interest were
sold.
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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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.
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.
F-349
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Investment in Joint Ventures--The Partnership accounts for its interests in
Attalla Joint Venture, Wood-Ridge Real Estate Joint Venture, Salem Joint
Venture and CNL Kingston Joint Venture using the equity method since the
Partnership shares control with affiliates which have the same general
partners.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institution with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs are 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 have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of the leases are operating
leases. Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow tenants to renew the
leases for two to five successive five-year periods subject to the same terms
and conditions as the initial lease. Most leases also allow the tenant to
purchase the property at fair market value after a specified portion of the
lease has elapsed.
F-350
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $16,425,914 $16,723,493
Buildings....................................... 10,087,524 10,087,524
----------- -----------
26,513,438 26,811,017
Less accumulated depreciation................... (1,295,713) (958,533)
----------- -----------
$25,217,725 $25,852,484
=========== ===========
</TABLE>
In December, 1997, the Port of Palm Bay deposited $660,000 in the registry
of the court on behalf of the Partnership and the tenant in exchange for taking
possession of the property located in Riviera Beach, Florida through a total
right of way taking. The Partnership owned the land and the tenant owned the
building relating to this property. The general partners of the Partnership and
the tenant are in the process of negotiating the allocation of the $660,000.
The general partners anticipate that the Partnership will be entitled to
receive at least $330,000 but the general partners intend to pursue a larger
allocation of this amount. As of December 31, 1997, the Partnership had removed
the carrying value of the land in the amount of $318,592 from its accounts due
to the fact that the Port of Palm Bay had taken possession of the property, and
in exchange, the Partnership recorded restricted cash in the amount of $318,592
(See Note 6). The general partners anticipate that the Partnership will
recognize a gain as a result of the taking of this property and will recognize
such gain when the final proceeds are determined. As of January 20, 1998, the
final amount of proceeds to be received had not been determined.
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, 1997, 1996 and 1995, the Partnership recognized $471,287,
$491,221 and $497,969, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,398,237
1999.......................................................... 2,560,989
2000.......................................................... 2,630,941
2001.......................................................... 2,650,138
2002.......................................................... 2,707,496
Thereafter.................................................... 31,197,883
-----------
$44,145,684
===========
</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.
F-351
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $18,621,827 $19,723,241
Estimated residual values....................... 2,842,002 2,842,002
Less unearned income............................ (12,422,344) (13,439,971)
----------- -----------
Net investment in direct financing leases....... $ 9,041,485 $ 9,125,272
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,104,743
1999.......................................................... 1,122,218
2000.......................................................... 1,129,246
2001.......................................................... 1,132,069
2002.......................................................... 1,140,538
Thereafter.................................................... 12,993,013
-----------
$18,621,827
===========
</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).
5. Investment in Joint Ventures
The Partnership owns a 50 percent, a 72.2% and a 50% interest in the profits
and losses of Attalla Joint Venture, Salem Joint Venture and Wood-Ridge Real
Estate Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
In September 1996, Wood-Ridge Real Estate Joint Venture sold its two
properties to the tenant of these properties 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 re-invested $4,404,046
of the net sales proceeds in five properties. In January 1997, Wood-Ridge Real
Estate Joint Venture reinvested $502,598 of the remaining net sales proceeds in
a Taco Bell property in Anniston, Alabama. As of December 31, 1997, the
Partnership and the other joint venture partner had each received approximately
$52,000, representing a return of capital, for the remaining uninvested net
sales proceeds.
In September 1997, the Partnership entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the Partnership which has the
same general partners, to construct and hold one restaurant property. As of
December 31, 1997, the Partnership and its co-venture partner had contributed
$121,855 and
F-352
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
$183,241, respectively, to CNL Kingston Joint Venture to fund construction
costs relating to the property owned by the joint venture. The Partnership and
its co-venture partner have agreed to contribute approximately $85,600 and
$128,700, respectively, in additional construction costs to the joint venture.
When construction is completed, the Partnership and its co-venture partner
expect to have an approximate 40 and 60 percent interest, respectively, in the
profits and losses of the joint venture. As of December 31, 1997, the
Partnership owned a 39.94% interest in the profits and losses of the joint
venture. The Partnership accounts for its investment in this joint venture
under the equity method since the Partnership shares control with an affiliate.
As of December 31, 1997, Attalla Joint Venture, Salem Joint Venture and
Kingston Joint Venture each owned and leased one property, and Wood-Ridge Real
Estate Joint Venture owned and leased six properties, to operators of fast-food
or family-style restaurants. The following presents the joint ventures'
condensed financial information at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,008,240 $5,102,901
Net investment in direct financing lease......... 364,479 367,661
Cash............................................. 13,842 818
Restricted cash.................................. -- 595,426
Receivables...................................... 2,571 7,037
Accrued rental income............................ 150,621 62,163
Other assets..................................... 1,257 15,390
Liabilities...................................... 231,061 33,565
Partners' capital................................ 6,309,949 6,117,831
Revenues......................................... 712,004 690,225
Gain on sale of land and buildings............... -- 261,106
Net income....................................... 588,835 887,177
</TABLE>
The Partnership recognized income totaling $309,879, $459,137 and $338,717
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
In December 1997, the Port of Palm Bay deposited $660,000 in the registry of
the court on behalf of the Partnership in exchange for taking possession of the
property (see Note 3).
7. Allocations and Distributions
Generally, all net income and net losses of the Partnership, excluding gains
and losses from the sale of properties, are allocated 99 percent to the limited
partners and one percent to the general partners. Distributions of net cash
flow are made 99 percent to the limited partners and one percent to the general
partners; provided, however, that the one percent of net cash flow to be
distributed to the general partners is subordinated to receipt by the limited
partners of an aggregate, ten percent, cumulative, noncompounded annual return
on their invested capital contributions (the "Limited Partners' 10% Return").
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with their Limited Partners' 10% Return, plus
F-353
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
the return of their adjusted capital contributions. The general partners will
then receive, to the extent previously subordinated and unpaid, a one percent
interest in all prior distributions of net cash flow and a return of their
capital contributions. Any remaining sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners. Any
gain from the sale of a property 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,712,520, $3,712,522 and
$3,628,130, respectively. No distributions have been made to the general
partners to date.
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $3,665,940 $3,916,329 $3,751,237
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes........................ (130,766) (130,766) (130,551)
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 83,787 74,798 66,778
Loss on sale of land for financial
reporting purposes in excess of loss for
tax reporting purposes.................... -- -- 66,518
Equity in earnings of joint ventures for
financial reporting purposes in excess of
equity in earnings of joint ventures for
tax reporting purposes.................... 3,109 (174,253) (80,207)
Accrued rental income...................... (471,287) (491,221) (497,969)
Rents paid in advance...................... (32,864) 17,564 (14,359)
Other...................................... (21,988) 23,878 718
---------- ---------- ----------
Net income for federal income tax
purposes.................................. $3,095,931 $3,236,329 $3,162,165
========== ========== ==========
</TABLE>
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates a management fee of one percent of the sum of gross revenues
from
F-354
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 Affiliates. All or any portion of the management fee not
taken as to any fiscal year shall be deferred without interest and may be taken
in such other fiscal year as the Affiliates shall determine. The Partnership
incurred management fees of $38,626, $38,785 and $38,832 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide a substantial amount of
services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate Limited Partners' 10%
Return plus their invested capital contributions. No deferred, subordinated
real estate disposition fees have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $89,910, $96,082 and $75,263 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totaled $7,853 and
$1,651, respectively.
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income (including
the Partnership's share of total rental and earned income from joint ventures)
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc. and Denny's,
Inc. ...................................... $863,373 $879,594 $882,060
Long John Silver's, Inc. ................... 850,159 853,992 860,391
Checkers Drive-In Restaurants, Inc. ........ 724,612 732,941 732,196
Foodmaker, Inc. ............................ 562,725 556,100 551,800
Golden Corral Corporation................... 520,911 476,350 466,737
</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 total rental and earned income from joint ventures) for at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $850,159 $853,992 $860,391
Checkers Drive-in Restaurants ................ 724,612 732,941 732,196
Denny's....................................... 618,154 615,021 592,660
Jack in the Box............................... 562,725 556,100 551,800
Golden Corral Family Steakhouse Restaurants... 520,911 476,350 466,737
Hardee's...................................... 483,606 498,655 500,235
</TABLE>
F-355
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Although the Partnership's properties are geographically diverse throughout
the United States and the Partnership's lessees operate a variety of restaurant
concepts, default by any lessee or restaurant chain contributing more than ten
percent of the Partnership's revenues could significantly impact the results of
operations of the Partnership. However, the general partners believe that the
risk of such a default is reduced due to the essential or important nature of
these properties for the on-going operations of the lessees.
11. Commitments
During 1997, the Partnership entered into an agreement with the tenant of
the Checkers #486 property in Richmond, Virginia, to sell the property. The
general partners believe that the anticipated sales price exceeds the
Partnership's cost attributable to the property. As of January 20, 1998, the
sale had not occurred.
During 1997, the Partnership entered into an agreement with a third party to
sell the property in Marietta, Georgia. The general partners believe that the
anticipated sales price exceeds the Partnership's cost attributable to the
property. As of January 20, 1998, the sale had not occurred.
12. Subsequent Events
In January 1998, the Partnership sold its property in Madison, Alabama, to a
third party for $740,000 and received net sales proceeds of $700,950. Due to
the fact that the Partnership had recognized accrued rental income since the
inception of the lease relating to the straight-lining of future scheduled rent
increases in accordance with generally accepted accounting principles, the
Partnership wrote-off $13,314 of such accrued rental income during 1997. The
Partnership intends to reinvest the net sales proceeds in an additional
property.
During 1997, the Partnership entered into a contract to sell the property in
Richmond, Virginia (#548) to a third party. In January 1998, the Partnership
sold this property for $512,462 and received net sales proceeds in that amount,
resulting in a gain of $70,798 for financial reporting purposes. The
Partnership intends to reinvest the net sales proceeds in an additional
property.
F-356
<PAGE>
CNL INCOME FUND XV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31,
1997................................................................... F-358
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................ F-359
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............ F-360
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997............................................ F-361
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997...................................... F-362
Report of Independent Accountants....................................... F-364
Balance Sheets as of December 31, 1997 and 1996......................... F-365
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-366
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995.......................................................... F-367
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-368
Notes to Financial Statements for the Years Ended December 31, 1997,
1996 and 1995.......................................................... F-369
</TABLE>
F-357
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,004,141 and $801,601.. $23,531,327 $22,145,138
Net investment in direct financing leases............. 7,609,576 9,264,307
Investment in joint ventures.......................... 2,743,255 2,561,816
Cash and cash equivalents............................. 1,222,529 1,614,708
Receivables, less allowance for doubtful accounts of
$7,434 in 1998....................................... -- 26,888
Prepaid expenses...................................... 20,315 7,633
Organization costs, less accumulated amortization of
$9,049 and $7,548.................................... 951 2,452
Accrued rental income................................. 1,474,597 1,422,781
----------- -----------
$36,602,550 $37,045,723
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 1,078 $ 6,991
Accrued and escrowed real estate taxes payable......... 31,820 6,158
Distributions payable.................................. 800,000 800,000
Due to related parties................................. 5,049 4,311
Rents paid in advance and deposits..................... -- 4,860
----------- -----------
Total liabilities...................................... 837,947 822,320
Partners' capital...................................... 35,764,603 36,223,403
----------- -----------
$36,602,550 $37,045,723
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-358
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 613,294 $ 631,816 $1,849,278 $1,894,349
Adjustments to accrued rental
income.......................... -- -- (250,631) --
Earned income from direct
financing leases................ 219,480 264,571 726,544 795,619
Interest and other income........ 12,045 15,534 51,682 45,595
--------- --------- ---------- ----------
844,819 911,921 2,376,873 2,735,563
--------- --------- ---------- ----------
Expenses:
General operating and
administrative.................. 40,231 31,490 107,194 101,281
Professional services............ 5,358 5,077 18,867 15,189
Management fees to related
parties......................... 8,180 8,847 25,475 26,312
Real estate taxes................ 28,562 -- 31,208 --
State and other taxes............ -- -- 27,763 26,009
Depreciation and amortization.... 80,468 62,099 204,668 186,248
--------- --------- ---------- ----------
162,799 107,513 415,175 355,039
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures.................... 682,020 804,408 1,961,698 2,380,524
Equity in Earnings of Joint
Ventures.......................... 59,208 60,424 179,502 177,735
--------- --------- ---------- ----------
Net Income......................... $ 741,228 $ 864,832 $2,141,200 $2,558,259
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 7,412 $ 8,649 $ 21,412 $ 25,583
Limited partners................. 733,816 856,183 2,119,788 2,532,676
--------- --------- ---------- ----------
$ 741,228 $ 864.832 $2,141,200 $2,558,259
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.18 $ 0.21 $ 0.53 $ 0.63
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-359
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------- ------------
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 117,411 $ 83,062
Net income.................................... 21,412 34,349
----------- -----------
138,823 117,411
----------- -----------
Limited partners:
Beginning balance............................. 36,105,992 35,905,436
Net income.................................... 2,119,788 3,400,556
Distributions ($0.65 and $0.80 per limited
partner unit, respectively).................. (2,600,000) (3,200,000)
----------- -----------
35,625,780 36,105,992
----------- -----------
Total partners' capital......................... $35,764,603 $36,223,403
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-360
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities........... $ 2,415,807 $ 2,550,613
----------- -----------
Cash Flows from Investing Activities:
Investment in joint ventures...................... (207,986) --
Return of capital from joint venture.............. -- 51,950
----------- -----------
Net cash provided by (used in)
investing activities........................... (207,986) 51,950
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,600,000) (2,480,000)
----------- -----------
Net cash used in financing
activities..................................... (2,600,000) (2,480,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (392,179) 122,563
Cash and Cash Equivalents at Beginning
of Period........................................... 1,614,708 1,536,163
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,222,529 $ 1,658,726
=========== ===========
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Net investment in direct financing lease
reclassified to land and building on operating
leases as a result of lease termination............ $ 1,588,729 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................. $ 800,000 $ 800,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-361
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XV, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 1998, four of the Partnership's
leases with Long John Silver's, Inc. were rejected in connection with the
tenant filing for bankruptcy. As a result, the Partnership reclassified these
assets from net investment in direct financing leases to land and buildings on
operating leases. In accordance with 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.
3. Investment in Joint Ventures
In June 1998, the Partnership acquired a 14.93% interest in a property in
Fort Myers, Florida, as tenants-in-common with an affiliate of the general
partners. The Partnership accounts for its investment in this property using
the equity method since the Partnership shares control with an affiliate, and
amounts relating to its investments are included in investment in joint
ventures.
F-362
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--Continued
Quarters and Nine Months Ended September 30, 1998 and 1997
Wood-Ridge Real Estate Joint Venture and the Partnership and affiliates as
tenants-in-common in two separate tenancy-in-common arrangements, own and lease
six properties and one property, respectively, to operators 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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.................... $6,094,108 $5,563,722
Net investment in direct financing lease..... 829,116 --
Cash......................................... 8,207 10,890
Receivables.................................. -- 5,923
Accrued rental income........................ 117,515 74,001
Other assets................................. 955 1,078
Liabilities.................................. 24,817 18,195
Partners' capital............................ 7,025,084 5,637,419
Revenues..................................... 534,294 650,354
Net income................................... 425,472 522,611
</TABLE>
The Partnership recognized income totaling $179,502 and $177,735 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $59,208 and $60,424 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-363
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XV, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 19, 1998
F-364
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $22,145,138 $22,390,701
Net investment in direct financing leases............. 9,264,307 9,351,815
Investment in joint ventures.......................... 2,561,816 2,624,620
Cash and cash equivalents............................. 1,614,708 1,536,163
Receivables, less allowance for doubtful accounts of
$1,458 in 1996....................................... 26,888 30,176
Prepaid expenses...................................... 7,633 7,049
Organization costs, less accumulated amortization of
$7,548 and $5,548.................................... 2,452 4,452
Accrued rental income................................. 1,422,781 991,702
----------- -----------
$37,045,723 $36,936,678
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 6,991 $ 3,053
Escrowed real estate taxes payable..................... 6,158 8,581
Distributions payable.................................. 800,000 880,000
Due to related parties................................. 4,311 1,355
Rents paid in advance.................................. 4,860 55,191
----------- -----------
Total liabilities...................................... 822,320 948,180
Partners' capital...................................... 36,223,403 35,988,498
----------- -----------
$37,045,723 $36,936,678
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-365
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,527,261 $2,527,261 $2,492,250
Earned income from direct financing
leases................................... 1,059,530 1,069,205 954,495
Contingent rental income.................. 25,791 23,318 97,539
Interest and other income................. 56,183 55,964 90,095
---------- ---------- ----------
3,668,765 3,675,748 3,634,379
---------- ---------- ----------
Expenses:
General operating and administrative...... 135,714 149,388 150,586
Professional services..................... 24,526 19,881 30,960
Management fees to related parties........ 35,321 35,126 34,213
State and other taxes..................... 29,200 30,924 12,560
Depreciation and amortization............. 248,348 248,232 243,175
---------- ---------- ----------
473,109 483,551 471,494
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land.......... 3,195,656 3,192,197 3,162,885
Equity in Earnings of Joint Ventures........ 239,249 392,862 280,606
Loss on Sale of Land........................ -- -- (71,023)
---------- ---------- ----------
Net Income.................................. $3,434,905 $3,585,059 $3,372,468
========== ========== ==========
Allocation of Net Income:
General partners............................ $ 34,349 $ 35,851 $ 34,352
Limited partners............................ 3,400,556 3,549,208 3,338,116
---------- ---------- ----------
$3,434,905 $3,585,059 $3,372,468
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.85 $ 0.89 $ 0.83
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-366
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- -------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
------- -------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 11,859 $40,000,000 $ (1,185,946) $ 1,174,059 $(4,790,000) $35,210,972
Distributions to limited
partners ($0.73 per
limited
partner unit).......... -- -- -- (2,900,001) -- -- (2,900,001)
Net income.............. -- 34,352 -- -- 3,338,116 -- 3,372,468
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-367
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,228,741 $3,378,973 $3,136,569
Distributions from joint ventures........ 249,318 259,407 237,566
Cash paid for expenses................... (218,106) (246,748) (222,824)
Interest received........................ 46,642 43,050 88,059
---------- ---------- ----------
Net cash provided by operating
activities............................ 3,306,595 3,434,682 3,239,370
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land............... -- -- 811,706
Additions to land and buildings on
operating leases........................ -- -- (1,625,601)
Investment in direct financing leases.... -- -- (2,412,973)
Investment in joint ventures............. -- (129,939) (720,552)
Return of capital from joint venture..... 51,950 -- --
Other.................................... -- -- 25,150
---------- ---------- ----------
Net cash provided by (used in)investing
activities............................ 51,950 (129,939) (3,922,270)
---------- ---------- ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership............................. -- -- (23,507)
Distributions to limited partners........ (3,280,000) (3,200,000) (2,650,003)
---------- ---------- ----------
Net cash used in financing activities.. (3,280,000) (3,200,000) (2,673,510)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 78,545 104,743 (3,356,410)
Cash and Cash Equivalents at Beginning of
year...................................... 1,536,163 1,431,420 4,787,830
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,614,708 $1,536,163 $1,431,420
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................. $3,434,905 $3,585,059 $3,372,468
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 245,563 245,563 241,175
Amortization............................... 2,785 2,669 2,000
Equity in earnings of joint ventures, net
of distributions.......................... 10,069 (133,455) (43,040)
Loss on sale of land....................... -- -- 71,023
Decrease (increase) in receivables......... 3,288 58,013 (38,005)
Decrease in net investment in direct
financing leases.......................... 87,508 77,834 65,572
Increase in prepaid expenses............... (584) (4,234) (2,815)
Increase in accrued rental income.......... (431,079) (431,654) (429,233)
Increase in accounts payable and accrued
expenses.................................. 1,515 1,972 2,586
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition costs paid in behalf of the
Partnership............................... 2,956 (6,880) 7,683
Increase (decrease) in rents paid in
advance................................... (50,331) 39,795 (10,044)
---------- ---------- ----------
Total adjustments.......................... (128,310) (150,377) (133,098)
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,306,595 $3,434,682 $3,239,370
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31............................... $ 800,000 $ 880,000 $ 800,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-368
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date.
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.
Investment in Joint Ventures--The Partnership accounts for its interests in
Wood-Ridge Real Estate Joint Venture and a property in Clinton, North
Carolina, 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.
F-369
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 are amortized over five years using
the straight-line method.
Income Taxes--Under Section 701 of the Internal Revenue Code, all income,
expenses and tax credit items flow through to the partners for tax purposes.
Therefore, no provision for federal income taxes is provided in the
accompanying financial statements. The Partnership is subject to certain state
taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs are netted against partners'
capital and represent a reduction of Partnership equity and a reduction in the
basis of each partner's investment.
Use of Estimates--The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. The more significant areas requiring the use of management
estimates relate to the allowance for doubtful accounts and future cash flows
associated with long-lived assets. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1997 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases
The Partnership leases its land or land and buildings primarily to
operators of national and regional fast-food and family-style restaurants. The
leases are accounted for under the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases." Some of the leases are
classified as operating leases and some of the leases have been classified as
direct financing leases. For the leases classified as direct financing leases,
the building portions of the property leases are accounted for as direct
financing leases while the land portions of the majority of these leases are
operating leases. Substantially all leases are for 15 to 20 years and provide
for minimum and contingent rentals. In addition, the tenant pays all property
taxes and assessments, fully maintains the interior and exterior of the
building and carries insurance coverage for public liability, property damage,
fire and extended coverage. The lease options generally allow tenants to renew
the leases for two to five successive five-year periods subject to the same
terms and conditions as the initial lease. Most leases also allow the tenant
to purchase the property at fair market value after a specified portion of the
lease has elapsed.
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................. $15,579,852 $15,579,852
Buildings........................................ 7,366,887 7,366,887
----------- -----------
22,946,739 22,946,739
Less accumulated depreciation.................... (801,601) (556,038)
----------- -----------
$22,145,138 $22,390,701
=========== ===========
</TABLE>
F-370
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1997, 1996 and 1995, the Partnership recognized
$431,079, $431,654 and $429,233, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 2,096,763
1999........................................................... 2,171,812
2000........................................................... 2,329,693
2001........................................................... 2,333,165
2002........................................................... 2,364,378
Thereafter..................................................... 28,891,694
-----------
$40,187,505
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $19,905,444 $21,052,482
Estimated residual values........................ 2,873,859 2,873,859
Less unearned income............................. (13,514,996) (14,574,526)
----------- -----------
Net investment in direct financing leases........ $ 9,264,307 $ 9,351,815
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,147,038
1999........................................................... 1,147,038
2000........................................................... 1,149,782
2001........................................................... 1,155,269
2002........................................................... 1,177,626
Thereafter..................................................... 14,128,691
-----------
$19,905,444
===========
</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).
F-371
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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.
In September 1996, Wood-Ridge Real Estate Joint Venture sold its two
properties to the tenant of these properties 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 and January 1997, Wood-Ridge Real Estate Joint Venture
reinvested $4,404,046 and $502,598, respectively, of the net sales proceeds
from the sale of the two properties during 1996, in five properties and one
property, respectively. As of December 31, 1997, the Partnership had received
approximately $52,000, representing its pro-rata share of the uninvested net
sales proceeds. As of December 31, 1997, the Partnership owned a 50 percent
interest in the profits and losses of the joint venture.
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, with affiliates of the general partners as tenants-in-common. In
connection therewith, the Partnership contributed $122,439 for a 15.02%
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, and the Partnership and affiliates,
as tenants-in-common, own and lease six properties and one property,
respectively, to operators 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $5,563,722 $5,178,396
Cash.............................................. 10,890 781
Restricted cash................................... -- 595,426
Receivables....................................... 5,923 15,200
Accrued rental income............................. 74,001 11,971
Other assets...................................... 1,078 15,263
Liabilities....................................... 18,195 33,238
Partners' capital................................. 5,637,419 5,783,799
Revenues.......................................... 650,354 643,646
Gain on sale of land and buildings................ -- 261,106
Net income........................................ 522,611 837,850
</TABLE>
The Partnership recognized income totaling $239,249, $392,862 and $280,606
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
entities.
F-372
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 sale of properties, 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 the sale of a property 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,200,000, $3,280,000 and
$2,900,001, respectively. No distributions have been made to the general
partners to date.
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $3,434,905 $3,585,059 $3,372,468
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (160,007) (160,007) (139,941)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 87,508 77,834 65,572
Loss on sale of land for financial
reporting purposes in excess of loss
for tax reporting purposes........... -- -- 71,023
Equity in earnings of joint ventures
for financial reporting purposes in
excess of equity in earnings of joint
ventures for tax reporting purposes.. 23,823 (158,836) (67,933)
Accrued rental income................. (431,079) (431,654) (429,233)
Rents paid in advance................. (50,331) 39,795 (10,044)
Other................................. (670) 2,127 --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $2,904,149 $2,954,318 $2,861,912
========== ========== ==========
</TABLE>
F-373
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
acted as manager of the Partnership's properties pursuant to a management
agreement with the Partnership. In connection therewith, the Partnership agreed
to pay Affiliates 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 Affiliates. All or any portion of the management fee not
taken as to any fiscal year shall be deferred without interest and may be taken
in such other fiscal year as the Affiliates shall determine. The Partnership
incurred management fees of $35,321, $35,126 and $34,213 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates of the
general partners provided accounting and administrative services to the
Partnership on a day-to-day basis. The Partnership incurred $78,051, $87,265
and $87,894 for the years ended December 31, 1997, 1996 and 1995, respectively,
for such services.
The due to related parties at December 31, 1997 and 1996, totaled $4,311 and
$1,355, respectively.
F-374
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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
at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In
Restaurants, Inc.............................. $716,905 $723,558 $731,967
Long John Silver's, Inc........................ 710,325 714,804 721,162
Flagstar Enterprises, Inc.
and Quincy's Restaurants, Inc................. 635,413 638,042 639,981
Golden Corral Corporation...................... 582,600 531,775 567,697
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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................. $773,265 $777,743 $758,408
Checkers Drive-In Restaurants.................. 716,905 723,558 731,967
Golden Corral Family
Steakhouse Restaurants........................ 582,600 531,775 567,697
Hardee's....................................... 543,889 546,037 547,539
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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-375
<PAGE>
CNL INCOME FUND XVI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-377
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-378
Condensed Statements of Partner's Capital for the Nine Months Ended Sep-
tember 30, 1998 and for the Year Ended December 31, 1997................ F-379
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-380
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-382
Report of Independent Accountants........................................ F-385
Balance Sheets as of December 31, 1997 and 1996.......................... F-386
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-387
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-388
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-389
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-390
</TABLE>
F-376
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accu-
mulated depreciation
and allowance for loss on land and building....... $30,418,876 $30,658,994
Net investment in direct financing leases.......... 5,373,527 5,968,812
Investment in joint ventures....................... 1,510,306 771,684
Cash and cash equivalents.......................... 1,641,160 1,673,869
Restricted cash.................................... -- 627,899
Receivables, less allowance for doubtful accounts
of $51,686 and $879............................... -- 31,946
Prepaid expenses................................... 22,089 9,293
Organization costs, less accumulated amortization
of $8,050 and $6,550.............................. 1,950 3,450
Accrued rental income.............................. 1,398,364 1,192,373
----------- -----------
$40,366,272 $40,938,320
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Construction costs payable......................... $ -- $ 53,278
Accounts payable................................... 2,927 2,707
Accrued and escrowed real estate taxes payable..... 32,363 4,353
Distributions payable.............................. 900,000 900,000
Due to related parties............................. 5,178 3,351
Rents paid in advance and deposits................. 39,871 69,705
----------- -----------
Total liabilities................................ 980,339 1,033,394
Partners' capital.................................. 39,385,933 39,904,926
----------- -----------
$40,366,272 $40,938,320
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-377
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 854,766 $ 888,575 $2,626,090 $2,677,179
Adjustment to accrued rental
income........................ (433) -- (119,505) --
Earned income from direct
financing leases.............. 133,949 175,648 469,325 527,794
Interest and other income...... 10,716 19,767 45,220 58,596
---------- ---------- ---------- ----------
998,998 1,083,990 3,021,130 3,263,569
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative................ 47,302 33,457 121,325 114,516
Professional services.......... 8,320 5,684 26,271 18,996
Management fees to related
parties....................... 9,257 9,823 29,073 29,565
Real estate taxes.............. 29,370 -- 30,209 --
State and other taxes.......... 7 25 19,398 20,559
Loss on termination of direct
financing lease............... 4,471 -- 4,471 --
Depreciation and amortization.. 144,394 140,916 413,391 422,966
---------- ---------- ---------- ----------
243,121 189,905 644,138 606,602
========== ========== ========== ==========
Income Before Equity in Earnings
of Joint Ventures, Gain on Sale
of Land and Provision for Loss
on Land and Building............ 755,877 894,085 2,376,992 2,656,967
Equity in Earnings of Joint
Ventures........................ 33,458 18,506 98,414 55,126
Gain on Sale of Land............. -- -- -- 41,148
Provision for Loss on Land and
Building........................ (204,399) -- (204,399) --
---------- ---------- ---------- ----------
Net Income....................... $ 584,936 $ 912,591 $2,271,007 $2,753,241
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 7,327 $ 9,125 $ 24,188 $ 27,120
Limited partners............... 577,609 903,466 2,246,819 2,726,121
---------- ---------- ---------- ----------
$ 5584,936 $ 912,591 $2,271,007 $2,753,241
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.13 $ 0.20 $ 0.50 $ 0.61
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-378
<PAGE>
CNL INCOME FUND XVI LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Year Ended
Nine Months Ended December
September 30, 31,
1998 1997
----------------- -----------
<S> <C> <C>
General partners:
Beginning balance............................. $ 99,615 $ 63,423
Net income.................................... 24,188 36,192
----------- -----------
123,803 99,615
----------- -----------
Limited partners:
Beginning balance............................. 39,805,311 39,781,176
Net income.................................... 2,246,819 3,624,135
Distributions ($0.62 and $0.80 per limited
partner unit, respectively).................. (2,790,000) (3,600,000)
----------- -----------
39,262,130 39,805,311
----------- -----------
Total partners' capital..................... $39,385,933 $39,904,926
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-379
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,759,611 $ 2,923,755
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ -- 610,384
Reimbursement from developer of construction
costs............................................. 161,648 --
Additions to land and buildings on operating
leases............................................ (3,545) (23,501)
Investment in direct financing leases.............. (28,403) (29,257)
Investment in joint ventures....................... (742,404) --
Decrease in restricted cash........................ 610,384 --
----------- -----------
Net cash provided by (used in) investing
activities...................................... (2,320) 557,626
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,790,000) (2,700,000)
----------- -----------
Net cash used in financing activities............ (2,790,000) (2,700,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (32,709) 781,381
Cash and Cash Equivalents at Beginning of Period..... 1,673,869 1,546,203
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,641,160 $ 2,327,584
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-380
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Land and building under operating lease exchanged for land
and building under operating lease........................ $827,789 $ --
======== ========
Land and building under direct financing lease exchanged
for land and building under direct financing lease........ $761,334 $ --
======== ========
Net investment in direct financing lease reclassified to
land and building on operating lease as aresult of lease
termination............................................... $534,275 $ --
======== ========
Distributions declared and unpaid at end of period......... $900,000 $900,000
======== ========
</TABLE>
See accompanying notes to financial statements.
F-381
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine months Ended September 30, 1998 and 1997
1.Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XVI, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2.Land and Building on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $15,378,218 $15,259,455
Buildings....................................... 17,094,391 16,836,982
----------- -----------
32,472,609 32,096,437
Less accumulated depreciation................... (1,849,334) (1,437,443)
----------- -----------
30,623,275 30,658,994
Less allowance for loss on land and building.... (204,399) --
----------- -----------
$30,418,876 $30,658,994
=========== ===========
</TABLE>
In May 1998, the tenant of the property in Madison, Tennessee exercised its
option under the terms of its lease agreement, to substitute a replacement
property for the existing, non-performing property. In conjunction therewith,
the Partnership exchanged the non-performing Boston Market property in Madison,
Tennessee for a Boston Market property in Lawrence, Kansas. The lease for the
property in Madison, Tennessee was amended to allow the property in Lawrence,
Kansas to continue under the terms of the original lease. All closing costs
were paid by the tenant. The Partnership accounted for this as a nonmonetary
exchange of similar assets and recorded the acquisition of the property in
Lawrence, Kansas at the net book value of the property in Madison, Tennessee.
No gain or loss was recognized due to this being accounted for as a nonmonetary
exchange of similar assets.
During the nine months ended September 30, 1998, the Partnership established
an allowance for loss on land and building of $204,399, relating to the
property located in Celina, Ohio. The allowance represents the difference
between the carrying value of the property at September 30, 1998 and the
current estimate of net realizable value for this property.
F-382
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine months Ended September 30, 1998 and 1997
3.Net Investment in Direct Financing Leases
In June 1998, the tenant of the property in Chattanooga, Tennessee exercised
its option under the terms of its lease agreement, to substitute a replacement
property for the existing, non-performing property. In conjunction therewith,
the Partnership exchanged the non-performing Boston Market property in
Chattanooga, Tennessee for a Boston Market property in Indianapolis, Indiana.
The lease for the property in Chattanooga, Tennessee was amended to allow the
property in Indianapolis, Indiana to continue under the terms of the original
lease. All closing costs were paid by the tenant. The Partnership accounted for
this as a nonmonetary exchange of similar assets and recorded the acquisition
of the property in Indianapolis, Indiana at the net book value of the property
in Chattanooga, Tennessee. No gain or loss was recognized due to this being
accounted for as a nonmonetary exchange of similar assets.
During the quarter and nine months ended September 30, 1998, one of the
Partnership's leases with Long John Silver's, Inc. was rejected in connection
with the tenant filing for bankruptcy. As a result, the Partnership
reclassified the asset from net investment in direct financing leases to land
and buildings on operating leases. In accordance with Statement of Financial
Accounting Standards #13, "Accounting for Leases," the Partnership recorded the
reclassified asset at the lower of original cost, present fair value, or
present carrying amount, which resulted in a loss on the termination of a
direct financing lease of $4,471 for financial reporting purposes.
4.Investment in Joint Ventures
In January 1998, the Partnership acquired a 40.42% interest in an IHOP
property in Memphis, Tennessee, as tenants-in-common with affiliates of the
general partners. 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.
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant property. As of September 30, 1998, the Partnership had
contributed $134,507, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$182,946 in additional construction costs to the joint venture. The Partnership
will have an approximate 32 percent interest in the profits and losses of the
joint venture. The Partnership accounts for its investment in this joint
venture under the equity method since the Partnership shares control with
affiliates.
Columbus Joint Venture and the Partnership and affiliates as tenants-in-
common in two separate tenancy-in-common arrangements, each own and lease one
property to operators of national fast-food and family-style restaurants. The
following presents the combined, condensed financial information for the joint
venture and the two properties held as tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation...................... $2,908,637 $941,142
Cash........................................... 9,842 8,190
Prepaid expenses............................... 197 29
Accrued rental income.......................... 47,907 20,171
Liabilities.................................... 90,656 8,163
Partners' capital.............................. 2,875,927 961,369
Revenues....................................... 211,863 112,744
Net income..................................... 175,432 91,575
</TABLE>
F-383
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine months Ended September 30, 1998 and 1997
The Partnership recognized income totaling $98,414 and $55,126 for the nine
months ended September 30, 1998 and 1997, respectively, from these properties,
$33,458 and $18,506 of which was earned for the quarters ended September 30,
1998 and 1997, respectively.
5.Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual restaurant chains, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental income from the joint venture and the properties held as
tenants-in-common with affiliates) for at least one of the nine month periods
ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Denny's................................................... $876,194 $873,738
Golden Corral Family Steakhouse Restaurant................ 703,784 710,655
Jack in the Box........................................... 417,457 417,457
Boston Market............................................. 372,579 246,975
</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 restaurant chains could significantly
impact the results of operations of the Partnership. However, the general
partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
In October 1998, the tenant of five of the Boston Market properties
(including one property held as tenants-in-common with an affiliate of the
general partners) filed for bankruptcy. If the leases are eventually rejected,
the Partnership anticipates that rental income relating to these properties
will terminate until new tenants for the properties are located, or until the
properties are sold and the proceeds from such sales are reinvested in
additional properties. However, the general partners do not anticipate that any
decrease in rental income due to lost revenues relating to these properties
will have a material effect on the Partnership's financial position or results
of operations.
F-384
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XVI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XVI, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 26, 1998
F-385
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $30,658,994 $31,766,349
Net investment in direct financing leases............. 5,968,812 6,006,496
Investment in joint venture........................... 771,684 774,389
Cash and cash equivalents............................. 1,673,869 1,546,203
Restricted cash....................................... 627,899 --
Receivables, less allowance for doubtful accounts of
$879 and $9,875...................................... 31,946 76,094
Prepaid expenses...................................... 9,293 9,174
Organization costs, less accumulated amortization of
$6,550 and $4,550.................................... 3,450 5,450
Accrued rental income................................. 1,192,373 771,487
----------- -----------
$40,938,320 $40,955,642
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Acquisition and construction costs payable............ $ 53,278 $ 106,036
Accounts payable...................................... 2,707 2,262
Escrowed real estate taxes payable.................... 4,353 3,343
Distributions payable................................. 900,000 900,000
Due to related parties................................ 3,351 2,292
Rents paid in advance and deposits.................... 69,705 97,110
----------- -----------
Total liabilities................................. 1,033,394 1,111,043
Partners' capital..................................... 39,904,926 39,844,599
----------- -----------
$40,938,320 $40,955,642
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-386
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $3,562,920 $3,571,244 $2,209,434
Earned income from direct financing
leases.................................... 703,149 726,314 489,522
Contingent rental income................... 35,604 37,600 --
Interest................................... 73,634 75,160 321,137
Other income............................... 7,180 8,232 3,548
---------- ---------- ----------
4,382,487 4,418,550 3,023,641
---------- ---------- ----------
Expenses:
General operating and administrative....... 186,934 183,734 187,800
Professional services...................... 25,352 26,569 59,526
Management fees to related parties......... 40,087 39,206 24,128
State and other taxes...................... 20,559 12,369 3,141
Depreciation and amortization.............. 563,883 552,447 318,205
---------- ---------- ----------
836,815 814,325 592,800
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Venture and Gain on Sale of Land and
Buildings................................... 3,545,672 3,604,225 2,430,841
Equity in Earnings of Joint Venture.......... 73,507 19,668 --
Gain on Sale of Land and Buildings........... 41,148 124,305 --
---------- ---------- ----------
Net Income................................... $3,660,327 $3,748,198 $2,430,841
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 36,192 $ 36,239 $ 24,308
Limited partners........................... 3,624,135 3,711,959 2,406,533
---------- ---------- ----------
$3,660,327 $3,748,198 $2,430,841
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.81 $ 0.82 $ 0.60
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 4,500,000 4,500,000 4,010,281
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-387
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 1,876 $20,174,172 $ (151,434) $ 185,701 $(2,737,282) $17,474,033
Contributions from
limited partners....... -- -- 24,825,828 -- -- -- 24,825,828
Distributions to limited
partners ($0.61 per
limited partner unit).. -- -- -- (2,437,832) -- -- (2,437,832)
Syndication costs....... -- -- -- -- -- (2,652,718) (2,652,718)
Net income.............. -- 24,308 -- -- 2,406,533 -- 2,430,841
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1995................... 1,000 26,184 45,000,000 (2,589,266) 2,592,234 (5,390,000) 39,640,152
Distributions to limited
partners ($0.79 per
limited partner unit).. -- -- -- (3,543,751) -- -- (3,543,751)
Net income.............. -- 36,239 -- -- 3,711,959 -- 3,748,198
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,000 62,423 45,000,000 (6,133,017) 6,304,193 (5,390,000) 39,844,599
Distributions to limited
partners ($0.80 per
limited partner unit).. -- -- -- (3,600,000) -- -- (3,600,000)
Net income.............. -- 36,192 -- -- 3,624,135 -- 3,660,327
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1997................... $1,000 $98,615 $45,000,000 $(9,733,017) $9,928,328 $(5,390,000) $39,904,926
====== ======= =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-388
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants.......... $ 3,881,005 $ 4,007,432 $ 2,353,106
Distributions from joint venture.... 76,212 20,279 --
Cash paid for expenses.............. (231,712) (349,145) (194,749)
Interest received................... 54,919 75,160 323,038
----------- ----------- -----------
Net cash provided by operating ac-
tivities......................... 3,780,424 3,753,726 2,481,395
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings.......................... 610,384 775,000 --
Additions to land and buildings on
operating leases................... (23,501) (2,355,627) (16,012,458)
Investment in direct financing
leases............................. (29,257) (405,937) (5,595,236)
Investment in joint venture......... -- (775,000) --
Increase in restricted cash......... (610,384) -- --
Increase in other assets............ -- (58,720)
Other............................... -- -- 20,714
----------- ----------- -----------
Net cash used in investing activi-
ties............................. (52,758) (2,761,564) (21,645,700)
----------- ----------- -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition and
syndication costs paid by related
parties on behalf of the
Partnership........................ -- (2,494) (405,569)
Contributions from limited part-
ners............................... -- -- 24,825,828
Distributions to limited partners... (3,600,000) (3,431,251) (1,798,921)
Payment of syndication costs........ -- -- (2,452,743)
----------- ----------- -----------
Net cash provided by (used in) fi-
nancing activities............... (3,600,000) (3,433,745) 20,168,595
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 127,666 (2,441,583) 1,004,290
Cash and Cash Equivalents at Beginning
of Year............................... 1,546,203 3,987,786 2,983,496
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,673,869 $ 1,546,203 $ 3,987,786
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income........................... $ 3,660,327 $ 3,748,198 $ 2,430,841
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation........................ 561,883 550,447 316,205
Amortization........................ 2,000 2,000 2,000
Equity in earnings of joint venture,
net of distributions............... 2,705 611 --
Gain on sale of land and buildings.. (41,148) (124,305) --
Decrease (increase) in receivables.. 26,633 58,396 (83,993)
Decrease in net investment in direct
financing leases................... 37,684 29,269 16,003
Increase in prepaid expenses........ (119) (8,514) (660)
Increase in accrued rental income... (444,650) (468,201) (299,090)
Increase in accounts payable and ac-
crued expenses..................... 1,455 517 4,036
Increase (decrease) in due to re-
lated parties, excluding reimburse-
ment of acquisition and syndication
costs paid on behalf of the Part-
nership............................ 1,059 (76,259) 76,682
Increase (decrease) in rents paid in
advance and deposits............... (27,405) 41,567 19,371
----------- ----------- -----------
Total adjustments................. 120,097 5,528 50,554
----------- ----------- -----------
Net Cash Provided by Operating Activi-
ties.................................. $ 3,780,424 $ 3,753,726 $ 2,481,395
=========== =========== ===========
Supplemental Schedule of Non-Cash In-
vesting and Financing Activities:
Related parties paid certain acquisi-
tion and syndication costs on behalf
of the Partnership as follows:
Acquisition costs................... $ -- $ 9,356 $ 97,589
Syndication costs................... -- -- 258,466
----------- ----------- -----------
$ -- $ 9,356 $ 356,055
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 900,000 $ 900,000 $ 787,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-389
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1.Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XVI, 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. Under the terms of a registration statement filed with
the Securities and Exchange Commission, the Partnership is authorized to sell a
maximum of 4,500,000 units ($45,000,000) of limited partnership interest. A
total of 4,500,000 units ($45,000,000) of limited partnership interest was
sold.
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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date.
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.
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
F-390
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1.Significant Accounting Policies--Continued
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 Venture--The Partnership accounts for its interest in a
property in Fayetteville, North Carolina, held as tenants-in-common with an
affiliate, using the equity method since the Partnership shares control with an
affiliate which has 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.
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 are 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 (Note 6).
Weighted Average Number of Limited Partner Units Outstanding--Net income and
distributions per limited partner unit are calculated based upon the weighted
average number of units of limited partnership interest outstanding during the
period the Partnership was operational.
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 have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portion of some of the leases are operating leases. All
leases are for 15 to 20 years and provide for minimum and contingent rentals.
In addition, the tenant pays all property taxes and assessments, fully
maintains the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire
F-391
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2.Leases--Continued
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $15,259,455 $15,804,927
Buildings.......................................... 16,836,982 16,836,982
----------- -----------
32,096,437 32,641,909
Less accumulated Depreciation...................... (1,437,443) (875,560)
----------- -----------
$30,658,994 $31,766,349
=========== ===========
</TABLE>
In April 1996, the Partnership sold its property in Appleton, Wisconsin, and
received net sales proceeds of $775,000, resulting in a gain of $124,305 for
financial reporting purposes. This property was originally acquired by the
Partnership in February 1995 and had a cost of approximately $595,100,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $179,900 in excess of its
original purchase price.
In March 1997, the Partnership sold its property in Oviedo, Florida, for
$620,000 and received net sales proceeds of $610,384, resulting in a gain of
$41,148 for financial reporting purposes. This property was originally acquired
by the Partnership in November 1994 and had a cost of approximately $509,700,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $100,700 in excess of its
original purchase price.
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, 1997, 1996 and 1995, the Partnership recognized $444,650,
$468,201 and $299,090, respectively, of such rental income.
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 3,128,262
1999............................................................. 3,177,377
2000............................................................. 3,309,707
2001............................................................. 3,378,687
2002............................................................. 3,401,533
Thereafter....................................................... 38,510,788
-----------
$54,906,354
===========
</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.
F-392
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $13,526,299 $14,267,132
Estimated residual Values.......................... 1,932,560 1,932,560
Less unearned income............................... (9,490,047) (10,193,196)
----------- -----------
Net investment in direct financing leases.......... $ 5,968,812 $ 6,006,496
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 741,451
1999............................................................. 742,074
2000............................................................. 755,382
2001............................................................. 759,526
2002............................................................. 765,536
Thereafter....................................................... 9,762,330
-----------
$13,526,299
===========
</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).
5.Investment in Joint Venture
In October 1996, the Partnership acquired a property in Fayetteville, North
Carolina, with an affiliate of the Partnership that has the same general
partners, as tenants-in-common. In connection therewith, the Partnership
contributed $775,000 for a 80.27% interest in such property. The Partnership
accounts for its investment in this property using the equity method since the
Partnership shares control with an affiliate. Amounts relating to this
investment are presented as an investment in joint venture.
The Partnership and an affiliate, as tenants-in-common, own and lease one
Boston Market property. The following presents the combined, condensed
financial information for the property held as tenants-in-common with an
affiliate at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and building on operating lease, less accumulated
depreciation........................................... $941,142 $960,732
Cash.................................................... 8,190 100
Prepaid expenses........................................ 29 --
Accrued rental income................................... 20,171 3,929
Liabilities............................................. 8,163 23
Partners' capital....................................... 961,369 964,738
Revenues................................................ 112,744 29,293
Net income.............................................. 91,575 24,502
</TABLE>
The Partnership recognized income totalling $73,507 and $19,668 for the
years ended December 31, 1997 and 1996, respectively, from this property held
as tenants-in-common with an affiliate.
F-393
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6.Restricted Cash
As of December 31, 1997, the net sales proceeds of $610,384 from the sale of
the property in Oviedo, Florida, plus accrued interest of $17,515, were being
held in an interest-bearing escrow account pending the release of funds by the
escrow agent to acquire an additional property.
7.Syndication Costs
Syndication costs consisting of legal fees, commissions, the marketing
support and due diligence expense reimbursement fee, printing and other
expenses incurred in connection with the offering totalled $5,390,000. These
offering expenses were charged to the limited partners' capital accounts to
reflect the net capital proceeds of the offering.
8.Allocations and Distributions
Generally, 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 sale of properties, 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 the sale of a property 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,600,000, $3,543,751 and
$2,437,832, respectively. No distributions have been made to the general
partners to date.
F-394
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9.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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,660,327 $3,748,198 $2,430,841
Depreciation for tax reporting purposes
less than (in excess of) depreciation
for financial reporting purposes....... 3,576 (1,943) (13,929)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 37,684 29,269 16,003
Equity in earnings of joint venture for
financial reporting purposes in excess
of equity in earnings of joint venture
for tax reporting purposes............. (477) (1,330) --
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... 23,764 (124,305) --
Allowance for doubtful accounts......... (8,996) 6,913 2,962
Accrued rental income................... (444,650) (468,201) (299,090)
Rents paid in advance................... (27,405) 47,221 2,595
Other................................... -- 4,008 --
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,243,823 $3,239,830 $2,139,382
========== ========== ==========
</TABLE>
10.Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL
Securities, Corp. and CNL Fund Advisors, Inc. The other individual general
partner, Robert A. Bourne, is president of CNL Securities Corp. and served as
president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") and CNL Securities Corp. each performed certain services for the
Partnership, as described below.
For the year ended December 31, 1995, the Partnership incurred $2,110,195 in
syndication costs due to CNL Securities Corp. for services in connection with
selling limited partnership interests. A substantial portion of these amounts
($1,991,106) was paid as commissions to other broker-dealers.
In addition, for the year ended December 31, 1995, the Partnership incurred
$124,129 as a marketing support and due diligence expense reimbursement fee due
to CNL Securities Corp. This fee equals 0.5% of the limited partner
contributions of $24,825,828 received during the year ended December 31, 1995.
A portion of this fee has been reallowed to other broker-dealers and all due
diligence expenses were paid from such fee.
Additionally, the Partnership incurred $1,365,421 for the year ended
December 31, 1995 in acquisition fees due to the Affiliates for services in
finding, negotiating and acquiring properties on behalf of the Partnership.
These fees represent 5.5% of the limited partner capital contributions of
$24,825,828 received during the year ended December 31, 1995.
F-395
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10.Related Party Transactions--Continued
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates an annual, noncumulative, subordinated 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 geo-graphic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliates. All
or any portion of the management fee not taken as to any fiscal year shall be
deferred without interest and may be taken in such other fiscal year as the
Affiliates shall determine. The Partnership incurred management fees of
$40,087, $39,206 and $24,128 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide a substantial amount
of services in connection with the sale. However, if the net sales proceeds are
reinvested in a replacement property, no such real estate disposition fees will
be incurred until such replacement property is sold and the net sales proceeds
are distributed. The payment of the real estate disposition fee is subordinated
to receipt by the limited partners of their aggregate Limited Partners' 8%
Return, plus their invested capital contributions. No deferred, subordinated
real estate disposition fees have been incurred since inception.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership (including accounting
and administrative services in connection with the offering of units) on a day-
to-day basis. The expenses incurred for these services were classified as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Syndication costs............................... $ -- $ -- $159,928
General operating and administrative expenses... 89,270 118,677 114,317
------- -------- --------
$89,270 $118,677 $274,245
======= ======== ========
</TABLE>
During 1996, the Partnership acquired one property from an affiliate of the
general partners, for a purchase price of $775,000. The property is being held
as tenants-in-common, with another affiliate of the general partners. The
affiliates had purchased and temporarily held title to these properties in
order to facilitate the acquisition of the properties by the Partnership. The
purchase prices paid by the Partnership represented the costs incurred by the
affiliates to acquire the properties, including closing costs.
The due to related parties at December 31, 1997 and 1996 totalled $3,351 and
$2,292, respectively.
11.Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the Partnership's share
of total rental and earned income from the property held as tenants-in-common
with an affiliate) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
DenAmerica Corp............................ $1,046,845 $1,051,328 $361,810
Golden Corral Corporation.................. 979,009 954,476 663,648
Foodmaker, Inc............................. 556,610 556,610 557,877
Checkers Drive-In Restaurants, Inc......... 237,152 290,041 290,041
</TABLE>
F-396
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Concentration of Credit Risk--Continued
In addition, the following schedule presents total rental and earned income
from individual restaurant chains, each representing more than ten percent of
the Partnership's total rental and earned income (including the Partnership's
share of total rental and earned income from the property held as tenants-in-
common with an affiliate) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Denny's................................... $1,164,928 $1,163,621 $461,380
Golden Corral Family Steakhouse
Restaurants.............................. 979,009 954,476 663,648
Jack in the Box........................... 556,610 556,610 557,877
Long John Silver's........................ 406,033 432,495 331,094
Checkers Drive-In Restaurants............. 237,152 290,041 290,041
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12.Subsequent Event
In January 1998, the Partnership acquired a property in Memphis, Tennessee,
as tenants-in-common with affiliates of the general partners. In connection
therewith, the Partnership contributed $607,896 for a 40.42% interest in such
property. The Partnership will account for its investment in this property
using the equity method since the Partnership will share control with
affiliates.
F-397
<PAGE>
CNL INCOME FUND XVII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-399
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-400
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-401
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-402
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-403
Report of Independent Accountants........................................ F-405
Balance Sheets as of December 31, 1997 and 1996.......................... F-406
Statements of Income for the Years Ended December 31, 1997, 1996 and the
Period February 10, 1995 (date of inception) through Year Ended December
31, 1995................................................................ F-407
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and the Period February 10, 1995 (date of inception) through Year
Ended December 31, 1995................................................. F-408
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-409
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-411
</TABLE>
F-398
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $818,692 and $553,968.... $20,741,467 $21,328,869
Net investment in direct financing leases............. 2,988,761 3,056,783
Investment in joint ventures.......................... 1,448,628 1,328,067
Cash and cash equivalents............................. 1,462,427 1,238,799
Receivables, less allowance for doubtful accounts of
$14,333 in 1997...................................... 22,200 613
Prepaid expenses...................................... 7,219 20
Organization costs, less accumulated amortization of
$5,809 and $4,309.................................... 4,191 5,691
Accrued rental income................................. 573,632 357,246
Other assets.......................................... 119,765 104,391
----------- -----------
$27,368,290 $27,420,479
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 2,868 $ 2,922
Accrued construction costs payable.................... -- 38,834
Accrued real estate taxes payable..................... 20,645 --
Distributions payable................................. 600,000 600,000
Due to related parties................................ 3,362 2,875
Rents paid in advance................................. 41,300 55,762
Deferred rental income................................ 52,021 64,690
----------- -----------
Total liabilities................................... 720,196 765,083
Minority interest..................................... 429,452 419,193
Partners' capital..................................... 26,218,642 26,236,203
----------- -----------
$27,368,290 $27,420,479
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-399
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 604,073 $ 620,623 $ 1,832,554 $ 1,726,684
Earned income from direct
financing leases........... 93,834 94,807 282,256 224,912
Interest and other income... 11,128 8,372 36,667 58,641
--------- --------- ----------- -----------
709,035 723,802 2,151,477 2,010,237
--------- --------- ----------- -----------
Expenses:
General operating and
administrative............. 29,293 26,636 86,909 101,337
Professional services....... 4,393 6,530 15,022 16,595
Real estate taxes........... 20,645 -- 20,645 --
Management fees to related
parties.................... 6,604 6,655 19,966 18,844
State and other taxes....... 7 -- 11,811 6,442
Depreciation and
amortization............... 96,125 100,107 273,084 288,145
--------- --------- ----------- -----------
157,067 139,928 427,437 431,363
--------- --------- ----------- -----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture
and Equity in Earnings of
Unconsolidated Joint
Ventures..................... 551,968 583,874 1,724,040 1,578,874
Minority Interest in Income of
Consolidated Joint Venture... (15,703) (15,697) (46,922) (26,129)
Equity in Earnings of
Unconsolidated
Joint Ventures............... 35,536 26,437 105,321 71,795
--------- --------- ----------- -----------
Net Income.................... $ 571,801 $ 594,614 $ 1,782,439 $ 1,624,540
========= ========= =========== ===========
Allocation of Net Income:
General partners............ $ (282) $ (54) $ (176) $ (630)
Limited partners............ 572,083 594,668 1,782,615 1,625,170
--------- --------- ----------- -----------
$ 571,801 $ 594,614 $ 1,782,439 $ 1,624,540
========= ========= =========== ===========
Net Income Per Limited Partner
Unit......................... $ 0.19 $ 0.20 $ 0.59 $ 0.54
========= ========= =========== ===========
Weighted Average Number of
Limited
Partner Units Outstanding.... 3,000,000 3,000,000 3,000,000 3,000,000
========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-400
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ (551) $ 288
Net income......................................... (176) (839)
----------- -----------
(727) (551)
----------- -----------
Limited partners:
Beginning balance.................................. 26,236,754 26,319,858
Net income......................................... 1,782,615 2,204,396
Distributions ($0.60 and $0.76 per limited partner
unit, respectively)............................... (1,800,000) (2,287,500)
----------- -----------
26,219,369 26,236,754
----------- -----------
Total partners' capital.............................. $26,218,642 $26,236,203
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-401
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $1,881,998 $1,912,554
---------- ----------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases............................................ 306,100 (1,978,420)
Investment in direct financing leases.............. -- (1,130,497)
Investment in joint ventures....................... (127,807) (1,050,402)
---------- ----------
Net cash provided by (used in) investing
activities...................................... 178,293 (4,159,319)
---------- ----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs paid by related
parties on behalf of the Partnership -- (25,434)
Contributions from minority interest............... -- 278,170
Distributions to limited partners.................. (1,800,000) (1,577,584)
Distributions to hold of minority interest......... (36,663) (29,184)
---------- ----------
Net cash used in financing activities............ (1,836,663) (1,354,032)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... 223,628 (3,600,797)
Cash and Cash Equivalents at Beginning of Period....... 1,238,799 4,716,719
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,462,427 $1,115,922
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition costs on
behalf of the Partnership as follows:............... $ -- $ 11,253
========== ==========
Land and building under operating lease exchanged for
land and building under operating lease............. $ 899,654 $ --
========== ==========
Distributions declared and unpaid at end of period... $ 600,000 $ 600,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-402
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XVII, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 80 percent interest in the accounts of
CNL/GC El Cajon Joint Venture using the consolidation method. Minority interest
represents the minority joint venture partner's proportionate share of the
equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
In June 1998, the tenant of the property in Troy, Ohio, exercised its option
under the terms of its lease agreement to substitute the existing property for
a replacement property. In conjunction therewith, the Partnership exchanged the
property in Troy, Ohio, with a property in Inglewood, California. The lease for
the property in Troy, Ohio, was amended to allow the property in Inglewood,
California to continue under the terms of the original lease. All closing costs
were paid by the tenant. The Partnership accounted for this as a nonmonetary
exchange of similar assets and recorded the acquisition of the property in
Inglewood, California, at the net book value of the property in Troy, Ohio. No
gain or loss was recognized due to this being accounted for as a nonmonetary
exchange of similar assets.
3. 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
and properties held as tenants-in-common), for at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation............................ $339,073 $349,449
National Restaurant Enterprises, Inc................. 328,582 208,212
DenAmerica Corp...................................... 323,884 319,740
Foodmaker, Inc....................................... 262,135 240,487
San Diego Food Holdings, Inc......................... 237,131 133,858
</TABLE>
F-403
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the ongoing operations of the lessees.
F-404
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XVII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
years ended December 31, 1997 and 1996 and the period February 10, 1995 (date
of inception) through December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XVII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years ended December 31, 1997 and 1996 and the
period February 10, 1995 (date of inception) through December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 4, 1998
F-405
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $21,328,869 $21,364,032
Net investment in direct financing leases............. 3,056,783 1,982,164
Investment in joint ventures.......................... 1,328,067 201,171
Cash and cash equivalents............................. 1,238,799 4,716,719
Receivables, less allowance for
doubtful accounts of $14,333
and $4,469............................................ 613 63,253
Organization costs, less accumulated amortization of
$4,309 and $2,309.................................... 5,691 7,691
Accrued rental income................................. 460,915 167,216
Other assets.......................................... 104,411 172,761
----------- -----------
$27,524,148 $28,675,007
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
<CAPTION>
Accounts payable...................................... $ 2,922 $ 2,985
<S> <C> <C>
Accrued construction costs payable.................... 38,834 1,560,712
Distributions payable................................. 600,000 490,084
Due to related parties................................ 2,875 17,153
Rents paid in advance................................. 55,762 52,769
Deferred rental income................................ 168,359 90,482
----------- -----------
Total liabilities..................................... 868,752 2,214,185
Minority interest..................................... 419,193 140,676
Partners' capital..................................... 26,236,203 26,320,146
----------- -----------
$27,524,148 $28,675,007
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-406
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
February 10,
1995 (Date)
of
Inception)
Year Ended December through Year
31, Ended
---------------------- December 31,
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,323,256 $1,054,534 $ --
Earned income from direct financing
leases................................. 319,487 130,745 --
Interest................................ 69,779 244,406 12,153
Other income............................ 1,128 9,984 --
---------- ---------- -------
2,713,650 1,439,669 12,153
---------- ---------- -------
Expenses:
General operating and administrative.... 128,168 144,728 3,360
Professional services................... 21,877 14,326 133
Management fee to related party......... 25,377 10,482 --
State and other taxes................... 6,443 -- --
Depreciation and amortization........... 387,292 179,208 309
---------- ---------- -------
569,157 348,744 3,802
---------- ---------- -------
Income Before Minority Interest in Income
of Consolidated Joint Venture and Equity
in Earnings of Unconsolidated Joint
Ventures................................. 2,144,493 1,090,925 8,351
Minority Interest in Income of
Consolidated Joint Venture............... (41,854) -- --
Equity in Earnings of Unconsolidated Joint
Ventures................................. 100,918 4,834 --
---------- ---------- -------
Net Income................................ $2,203,557 $1,095,759 $ 8,351
========== ========== =======
Allocation of Net Income:
General partners........................ $ (839) $ (709) $ (3)
Limited partners........................ 2,204,396 1,096,468 8,354
---------- ---------- -------
$2,203,557 $1,095,759 $ 8,351
========== ========== =======
Net Income per Limited Partner Unit....... $ 0.73 $ 0.52 $ 0.02
========== ========== =======
Weighted Average Number of Limited Partner
Units Outstanding........................ 3,000,000 2,121,253 340,780
========== ========== =======
</TABLE>
See accompanying notes to financial statements.
F-407
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995 (Date
of Inception)
through December 31, 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------------- -----------------------------------------------
Accumu- Accumu-
Contri- lated Contri- Distri- lated Syndication
butions Earnings butions butions Earnings Costs Total
----------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Inception,
(February 10, 1995).... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Contributions from
general partners....... 1,000 -- -- -- -- -- 1,000
Contributions from
limited partners....... -- -- 5,696,921 -- -- -- 5,696,921
Distributions to limited
partners
($0.08 per limited
partner unit).......... -- -- -- (28,275) -- -- (28,275)
Syndication costs....... -- -- -- -- -- (1,035,764) (1,035,764)
Net income.............. -- (3) -- -- 8,354 -- 8,351
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1995................... 1,000 (3) 5,696,921 (28,275) 8,354 (1,035,764) 4,642,233
Contributions from
limited partners....... -- -- 24,303,079 -- -- -- 24,303,079
Distributions to limited
partners
($0.55 per limited
partner unit).......... -- -- -- (1,166,689) -- -- (1,166,689)
Syndication costs....... -- -- -- -- -- (2,554,236) (2,554,236)
Net income.............. -- (709) -- -- 1,096,468 -- 1,095,759
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,000 (712) 30,000,000 (1,194,964) 1,104,822 (3,590,000) 26,320,146
Distributions to limited
partners
($0.76 per limited
partner unit).......... -- -- -- (2,287,500 -- -- (2,287,500)
Net income.............. -- (839) -- -- 2,204,396 -- 2,203,557
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1997................... $ 1,000 $ (1,551) $30,000,000 $(3,482,464) $3,309,218 $(3,590,000) $26,236,203
=========== =========== =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-408
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOW
-----------------------
<TABLE>
<CAPTION>
February 10,
1995 (Date)
Year Ended of Inception
December Year Ended through
31, December 31, December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants.......... $ 2,502,057 $ 1,149,196 --
Distributions from unconsolidated
joint ventures..................... 106,346 4,985 --
Cash paid for expenses.............. (183,068) (165,639) (3,141)
Interest received................... 69,779 244,406 12,153
----------- ------------ ----------
Net cash provided by operating
activities........................ 2,495,114 1,232,948 9,012
----------- ------------ ----------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases................... (1,740,491) (19,735,346) (332,928)
Investment in direct financing
leases............................. (1,130,497) (1,784,925) --
Investment in joint ventures........ (1,135,681) (201,501) --
Increase in other assets............ -- -- (221,282)
Other............................... -- 410 (410)
----------- ------------ ----------
Net cash used in investing
activities........................ (4,006,669) (21,721,362) (554,620)
----------- ------------ ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization and syndication costs
paid by related parties on behalf
of the Partnership................. (25,444) (326,483) (347,907)
Contributions from general
partners........................... -- -- 1,000
Contributions from limited
partners........................... -- 24,303,079 5,696,921
Contributions from holder of
minority interest.................. 278,170 140,676 --
Distributions to limited partners... (2,177,584) (703,681) (1,199)
Distributions to holder of minority
interest........................... (41,507) -- --
Payment of syndication costs........ -- (2,407,317) (604,348)
----------- ------------ ----------
Net cash provided by (used
in)financing activities........... (1,966,365) 21,006,274 4,744,467
----------- ------------ ----------
Net Increase (Decrease) in Cash and
Cash Equivalents..................... (3,477,920) 517,860 4,198,859
Cash and Cash Equivalents at Beginning
of Period............................ 4,716,719 4,198,859 --
----------- ------------ ----------
Cash and Cash Equivalents at End of
Period............................... $ 1,238,799 $ 4,716,719 $4,198,859
=========== ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-409
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
February 10,
1995 (Date
of
Inception)
Year Ended Year Ended through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $2,203,557 $1,095,759 $ 8,351
---------- ---------- --------
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation........................ 376,973 176,995 --
Amortization........................ 10,319 2,213 309
Minority interest in income
consolidated
joint venture...................... 41,854 -- --
Equity in earnings of unconsolidated
joint
ventures, net of distributions..... 5,428 151 --
Decrease (increase) in receivables.. 39,518 (40,131) --
Decrease in net investment in direct
financing leases................... 30,454 16,345 --
Increase in accrued rental income... (293,699) (167,216) --
Increase (decrease) in accounts
payable and
accrued expenses................... (63) 2,985 --
Increase (decrease) in due to
related parties,
excluding acquisition, organization
and
syndication costs paid on behalf of
the
Partnership........................ (97) 2,596 352
Increase in rents paid in advance... 2,993 52,769 --
Increase in deferred rental income.. 77,877 90,482 --
---------- ---------- --------
Total adjustments................. 291,557 137,189 661
---------- ---------- --------
Net Cash Provided by Operating
Activities............................. $2,495,114 $1,232,948 $ 9,012
========== ========== ========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, organization
and syndication costs on behalf of
the Partnership
as follows:
Acquisition costs................... $ 11,262 $ 69,836 $ 30,424
Organization costs.................. -- -- 10,000
Syndication costs................... -- 231,885 346,450
---------- ---------- --------
$ 11,262 $ 301,721 $386,874
========== ========== ========
Distributions declared and unpaid at
December 31.......................... $ 600,000 $ 490,084 $ 27,076
========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-410
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XVII, 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, family-style and casual dining restaurant chains. Under
the terms of a registration statement filed with the Securities and
Exchange Commission, the Partnership was authorized to sell a maximum of
3,000,000 units ($30,000,000) of limited partnership interest. A total of
3,000,000 units ($30,000,000) of limited partnership interest were sold.
The Partnership was a development stage enterprise from February 10, 1995
through November 3, 1995. Since operations had not begun, activities
through November 3, 1995, were devoted to organization of the Partnership.
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) (see
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 (including
rental payments, if any, required during the construction of a
property) 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date. In contrast, deferred rental income represents the
aggregate amount of scheduled rental payments to date (including rental
payments due during construction and prior to the property being placed
in service) in excess of income recognized on a straight-line basis
over the lease term commencing on the date the property is placed in
service.
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, or deferred rental income, will be removed
from the accounts and gains or losses from sales will be 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
F-411
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies--Continued
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.
Investment in Joint Ventures--The Partnership accounts for its 80 percent
interest in CNL/GC El Cajon Joint Venture using the consolidation method.
Minority interest represents the minority joint venture partner's
proportionate share of the equity in the Partnership's consolidated joint
venture. All significant intercompany accounts and transactions have been
eliminated.
The Partnership's investments in CNL Kingston Joint Venture and CNL
Mansfield Joint Venture, and a property in Corpus Christi, Texas, a
property in Akron, Ohio, and a property in Fayetteville, North Carolina,
for which each property is held as tenants-in-common, are accounted for
using the equity method since the Partnership shares control with
affiliates which have the same general partners.
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, certificates of deposit and money market funds (some of
which are backed by government securities). Cash equivalents are stated at
cost plus accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks, certificates of deposit 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 are amortized over five years using
the straight-line method upon commencement of operations.
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 (Note 6).
Weighted Average Number of Limited Partner Units Outstanding--Net income
and distributions per limited partner unit are calculated based upon the
weighted average number of units of limited partnership interest
outstanding during the period the Partnership was operational.
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
F-412
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies--Continued
liabilities to prepare these financial statements in conformity with
generally accepted accounted principles. The more significant areas
requiring the use of management estimates relate to the allowance for
doubtful accounts and future cash flows associated with long-lived assets.
Actual results could differ from those estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1997 presentation. These
reclassifications had no effect on partners' capital or net income.
2. Leases
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards No.
13, "Accounting for Leases." Some of the leases are classified as operating
leases and some of the leases have been classified as direct financing
leases. For the leases classified as direct financing leases, the building
portions of the property leases are accounted for as direct financing
leases while the land portion of the leases are operating leases. All
leases are for 15 to 20 years and provide for minimum and contingent
rentals. In addition, the tenant pays all property taxes and assessments,
fully maintains the interior and exterior of the building and carries
insurance coverage for public liability, property damage, fire and extended
coverage. The lease options generally allow tenants to renew the leases for
two to four 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>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $10,357,191 $10,148,827
Buildings...................................... 11,525,646 11,168,540
----------- -----------
21,882,837 21,317,367
Less accumulated depreciation.................. (553,968) (176,995)
----------- -----------
21,328,869 21,140,372
Construction in progress....................... -- 223,660
----------- -----------
$21,328,869 $21,364,032
=========== ===========
</TABLE>
Some leases provide for escalating guaranteed minimum rents throughout the
lease term. Income from these scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. For the years ended
December 31, 1997 and 1996, the Partnership recognized $293,699 and
$167,216, respectively, of such rental income.
F-413
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,160,765
1999.......................................................... 2,173,058
2000.......................................................... 2,185,696
2001.......................................................... 2,279,375
2002.......................................................... 2,336,127
Thereafter.................................................... 30,028,040
-----------
$41,163,061
===========
</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>
1997 1996
---------- ----------
<S> <C> <C>
Minimum lease payments receivable................ $7,636,851 $4,301,029
Estimated residual values........................ 775,896 499,627
Less unearned income............................. (5,355,964) (2,818,492)
---------- ----------
Net investment in direct financing leases........ $3,056,783 $1,982,164
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 411,927
1999........................................................... 411,927
2000........................................................... 411,927
2001........................................................... 411,927
2002........................................................... 411,927
Thereafter..................................................... 5,577,216
----------
$7,636,851
==========
</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).
5. Investment in Joint Ventures:
In October 1996, the Partnership acquired an approximate 20 percent
interest in a property in Fayetteville, North Carolina, as tenants-in-
common, with an affiliate of the general partners. The Partnership accounts
F-414
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
5. Investment in Joint Ventures--Continued
for its investment in this property using the equity method since the
Partnership shares control with an affiliate, and amounts relating to its
investment are included in investment in joint ventures.
In January 1997, the Partnership acquired an approximate 27 percent
interest in a property in Corpus Christi, Texas, and an approximate 37
percent interest in a property in Akron, Ohio, each as tenants-in-common,
with affiliates of the general partners. The Partnership accounts for its
investment in these properties using the equity method since the
Partnership shares control with affiliates, and amounts relating to these
investments are included in investment in joint ventures.
In February 1997, the Partnership entered into a joint venture arrangement,
CNL Mansfield Joint Venture, with an affiliate of the Partnership which has
the same general partners, to hold one restaurant property in Mansfield,
Texas. As of December 31, 1997, the Partnership and its co-venture partner
had contributed $163,964 and $616,245, respectively, to the joint venture
to acquire the restaurant property. As of December 31, 1997, the
Partnership and its co-venture partner owned a 21 percent and 79 percent
interest, respectively, in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with the affiliate.
In September 1997, the Partnership entered into a joint venture
arrangement, CNL Kingston Joint Venture, with an affiliate of the
Partnership which has the same general partners, to construct and hold one
restaurant property. As of December 31, 1997, the Partnership and its co-
venture partner had contributed $183,241 and $121,855, respectively, to CNL
Kingston Joint Venture to fund construction costs relating to the property
owned by the joint venture. The partnership and its co-venture partner have
agreed to contribute approximately $128,700 and $85,600, respectively, in
additional construction costs to the joint venture. When construction is
completed, the Partnership and its co-venture partner expect to have a
60.06 and 39.94 percent interest, respectively, in the profits and losses
of the joint venture. As of December 31, 1997, the Partnership owned a
60.06% interest in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with an affiliate.
CNL Mansfield Joint Venture and CNL Kingston Joint Venture, and the
Partnership and affiliates, as tenants-in-common in three 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 the joint ventures and the
properties held as tenants-in-common with affiliates at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.......................... $4,495,671 $960,732
Cash............................................... 8,936 100
Accrued rental income.............................. 65,395 3,929
Other assets....................................... 1,931 --
Liabilities........................................ 228,896 23
Partners' capital.................................. 4,343,037 964,738
Revenues........................................... 453,481 29,293
Net income......................................... 375,257 24,502
</TABLE>
F-415
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
5. Investment in Joint Ventures--Continued
The Partnership recognized income totaling $100,918 and $4,834 for the
years ended December 31, 1997 and 1996 from these joint ventures and the
properties held as tenants-in-common with affiliates.
6. Syndication Costs
Syndication costs consisting of legal fees, commissions, a due diligence
expense reimbursement fee, printing and other expenses incurred in
connection with the offering totaled $3,590,000. These offering expenses
were charged to the limited partners' capital accounts to reflect the net
capital proceeds of the offering.
7. Allocations and Distributions
Generally, distributions of net cash flow, as defined in the limited
partnership agreement of the Partnership, are made 95 percent to the
limited partners and five percent to the general partners; provided,
however, that for any particular year, the five percent of net cash flow to
be distributed to the general partners will be subordinated to receipt by
the limited partners in that year of an eight percent noncumulative,
noncompounded return on their aggregate invested capital contributions (the
"Limited Partners' 8% Return").
Generally, net income (determined without regard to any depreciation and
amortization deductions and gains and losses from the sale of properties)
is allocated between the limited partners and the general partners first,
in an amount not to exceed the net cash flow distributed to the partners
attributable to such year in the same proportions as such net cash flow is
distributed; and thereafter, 99 percent to the limited partners and one
percent to the general partners. All deductions for depreciation and
amortization are allocated 99 percent to the limited partners and one
percent to the general partners.
Net sales proceeds from the sale of a property generally will be
distributed first to the limited partners in an amount sufficient to
provide them with the return of their invested capital contributions, plus
their cumulative Limited Partners' 8% Return. The general partners will
then receive a return of their capital contributions and, to the extent
previously subordinated and unpaid, a five percent interest in all net cash
flow distributions. Any remaining net sales proceeds will be distributed 95
percent to the limited partners and five percent to the general partners.
Any gain from the sale of a property will be, in general, allocated in the
same manner as net sales proceeds are distributable. Any loss will be
allocated first, on a pro rata basis to the partners with positive balances
in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1997 and 1996 and during the period
February 10, 1995 (date of inception) through December 31, 1995, the
Partnership declared distributions to the limited partners of $2,287,500,
$1,166,689 and $28,275, respectively. No distributions have been made to
the general partners to date.
F-416
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
8. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years ended
December 31, 1997 and 1996 and the period February 10, 1995 (date of
inception) through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $2,203,557 $1,095,759 $ 8,351
Depreciation for financial reporting
purposes in excess of depreciation for tax
reporting purposes........................ 25,005 13,226 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 30,454 16,345 --
Equity in earnings of unconsolidated joint
venture for financial reporting purposes
in excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes........................ (3,650) (479) --
Minority interest in timing differences of
consolidated joint venture................ 217 --
Capitalization of administrative expenses
for tax reporting purposes................ 1,557 11,940 3,493
Amortization for tax reporting purposes (in
excess of) less than amortization for
financial reporting purposes.............. 1,667 (2,025) 309
Accrued rental income...................... (293,699) (167,216) --
Deferred rental income..................... 80,635 90,482 --
Rents paid in advance...................... 2,993 52,769 --
Other...................................... 9,865 4,163 --
---------- ---------- -------
Net income for federal income tax
purposes.................................. $2,058,601 $1,114,964 $12,153
========== ========== =======
</TABLE>
9. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL
Securities Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is
director and chief executive officer of CNL Securities Corp. and is
director, chairman of the board of directors and chief executive officer of
CNL Fund Advisors, Inc. The other individual general partner, Robert A.
Bourne, is director and president of CNL Securities Corp., is director,
vice chairman of the board of directors and treasurer of CNL Fund Advisors,
Inc. and served as president of CNL Fund Advisors, Inc. through October 31,
1997.
For the year ended December 31, 1996 and the period February 10, 1995 (Date
of Inception) through December 31, 1995, the Partnership incurred
$2,065,762 and $484,238, respectively, in syndication costs due to CNL
Securities Corp. for services in connection with selling limited
partnership interests. A substantial portion of these amounts ($2,359,831)
was paid as commissions to other broker-dealers.
In addition, for the year ended December 31, 1996 and the period February
10, 1995 (Date of Inception) through December 31, 1995, the Partnership
incurred $121,515 and $28,485, respectively, as a due diligence expense
reimbursement fee due to CNL Securities Corp. This fee equals 0.5% of the
limited
F-417
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
9. Related Party Transactions--Continued
partner contributions of $30,000,000. The majority of this fee was
reallowed to other broker-dealers for payment of bona fide due diligence
expenses.
Additionally, the Partnership incurred $1,093,639 and $256,361 for the year
ended December 31, 1996 and the period February 10, 1995 (Date of
Inception) through December 31, 1995, respectively, in acquisition fees due
to CNL Fund Advisors, Inc. for services in finding, negotiating and
acquiring properties on behalf of the Partnership. These fees represent
4.5% of the limited partner capital contributions of $30,000,000.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (Date of Inception) through December 31, 1995, CNL Fund Advisors,
Inc. acted as manager of the Partnership's properties pursuant to a
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay CNL Fund Advisors, Inc. an annual, 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 CNL Fund Advisors, Inc. 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 CNL Fund Advisors, Inc. shall
determine. The Partnership incurred management fees of $25,377 and $10,482
for the years ended December 31, 1997 and 1996. No such fees were incurred
for the period February 10, 1995 (date of inception) through December 31,
1995.
During the years ended December 31, 1997 and 1996 and for the period
February 10, 1995 (date of inception) through December 31, 1995, Affiliates
provided accounting and administrative services to the Partnership
(including accounting and administrative services in connection with the
offering of units) on a day-to-day basis. The expenses incurred for these
services were classified as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Syndication costs................................. $ -- $177,683 $133,982
General operating and administrative expenses..... 90,700 96,729 2,659
------- -------- --------
$90,700 $274,412 $136,641
======= ======== ========
</TABLE>
The due to related parties at December 31, 1997 and 1996 totaled $2,875 and
$17,153, respectively.
During 1996, the Partnership acquired from affiliates of the general
partners three properties, one of which was held with another affiliate as
tenants-in-common, for an aggregate purchase price of $1,667,140. The
affiliates of the general partners had purchased and temporarily held title
to these properties in order to facilitate the acquisition of these
properties by the Partnership. The purchase prices paid by the Partnership
represented the costs incurred by the affiliates of the general partners to
acquire the properties, including closing costs.
During 1997, the Partnership and affiliates of the general partners
acquired two properties as tenants-in- common for an aggregate purchase
price of $718,932 from CNL BB Corp., an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to these properties
in order to facilitate
F-418
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
9. Related Party Transactions--Continued
the acquisition of the properties by the Partnership and the affiliates.
The purchase price paid by the Partnership and the affiliates represented
the costs incurred by CNL BB Corp. to acquire and carry the property,
including closing costs.
10. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, or affiliated groups of lessees, each representing more
than ten percent of the Partnership's total rental and earned income
(including rental and earned income from the Partnership's consolidated
joint venture, the Partnership's share of rental income from the
unconsolidated joint ventures and the three properties held as tenants-in-
common with affiliates of the general partners) for at least one of the
years ended December 31, 1997 and 1996 and the period February 10, 1995
(date of inception) through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----
<S> <C> <C> <C>
Golden Corral Corporation........................... $467,275 $286,307 $--
DenAmerica Corp..................................... 427,800 250,535 --
National Restaurant Enterprises, Inc................ 376,461 197,882 --
Foodmaker, Inc...................................... 326,007 116,658 --
RTM Indianapolis, Inc. and RTM Southwest, Texas,
Inc................................................ 269,010 133,200 --
</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 rental and
earned income from the Partnership's consolidated joint venture, the
Partnership's share of total rental income from the unconsolidated joint
ventures and the three properties held as tenants-in-common with affiliates
of the general partners) for at least one of the years ended December 31,
1997 and 1996 and the period February 10, 1995 (date of inception through
December 31, 1995):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants......... $680,316 $286,307 $--
Burger King......................................... 410,876 197,882 --
Jack in the Box..................................... 326,007 116,659 --
Boston Market....................................... 299,744 105,682 --
Arby's.............................................. 269,010 133,200 --
Denny's............................................. 252,968 250,535 --
</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 of these lessees or restaurant chains
could significantly impact the results of operations of the Partnership.
However, the general partners believe that the risk of such a default is
reduced due to the essential or important nature of these properties for
the on-going operations of the lessees.
F-419
<PAGE>
CNL INCOME FUND XVIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-421
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-422
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-423
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-424
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-426
Report of Independent Accountants........................................ F-429
Balance Sheets as of December 31, 1997 and 1996.......................... F-430
Statements of Income for the Years Ended December 31, 1997, 1996 and the
Period February 10, 1995 (date of inception) through Year Ended December
31, 1995................................................................ F-431
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and the Period February 10, 1995 (date of inception) through Year
Ended December 31, 1995................................................. F-432
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-433
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-434
</TABLE>
F-420
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $407,185 and
$140,380.......................................... $22,157,631 $21,311,062
Net investment in direct financing leases.......... 6,817,422 6,004,878
Investment in joint venture........................ 166,224 --
Cash and cash equivalents.......................... 1,866,555 4,143,327
Receivables, less allowance for doubtful accounts
of $790 in 1998................................... -- 68,000
Prepaid expenses................................... 11,203 --
Organization costs, less accumulated amortization
of $3,911 and $2,411.............................. 6,089 7,589
Accrued rental income.............................. 189,143 111,867
Other assets....................................... 212,132 160,532
----------- -----------
$31,426,399 $31,807,255
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable................................... $ 2,365 $ 10,456
Accrued construction costs payable................. -- 1,108,627
Accrued real estate taxes payable.................. 23,500 --
Distributions payable.............................. 700,000 510,636
Due to related parties............................. 14,652 118,231
Rents paid in advance.............................. 13,008 28,277
Deferred rental income............................. 116,769 184,448
----------- -----------
Total liabilities................................ 870,294 1,960,675
=========== ===========
Partners' capital.................................. 30,556,105 29,846,580
----------- -----------
$31,426,399 $31,807,255
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-421
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 611,530 $ 314,510 $1,758,037 $ 525,308
Earned income from direct
financing leases.............. 170,108 123,417 470,287 186,153
Interest and other income...... 14,189 32,728 114,967 102,034
--------- --------- ---------- ---------
795,827 470,655 2,343,291 813,495
--------- --------- ---------- ---------
Expenses:
General operating and
administrative................ 46,347 32,870 117,608 87,976
Professional services.......... 4,184 5,863 14,164 18,267
Management fees to related
parties....................... 7,651 4,707 21,180 9,232
Real estate taxes.............. 23,500 -- 23,500 --
State and other taxes.......... -- -- 8,605 424
Depreciation and amortization.. 89,370 44,405 268,305 78,584
--------- --------- ---------- ---------
171,052 87,845 453,362 194,483
--------- --------- ---------- ---------
Net Income....................... $ 624,775 $ 382,810 $1,889,929 $ 619,012
========= ========= ========== =========
Allocation of Net Income:
General partners............... $ (752) $ (444) $ (678) $ (786)
Limited partners............... 625,527 383,254 1,890,607 619,798
--------- --------- ---------- ---------
$ 624,775 $ 382,810 $1,889,929 $ 619,012
========= ========= ========== =========
Net Income Per Limited Partner
Unit............................ $ 0.18 $ 0.15 $ 0.54 $ 0.32
========= ========= ========== =========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 3,500,000 2,507,828 3,496,435 1,945,482
========= ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-422
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ (428) $ 993
Net income.................................... (678) (1,421)
----------- -----------
(1,106) (428)
----------- -----------
Limited partners:
Beginning balance............................. 29,847,008 6,995,220
Contributions................................. 854,241 25,723,944
Syndication costs............................. (76,881) (2,717,452)
Net income.................................... 1,890,607 1,156,181
Distributions ($0.56 and $0.57 per weighted
average limited partner unit, respectively).. (1,957,764) (1,310,885)
----------- -----------
30,557,211 29,847,008
----------- -----------
Total partners' capital......................... $30,556,105 $29,846,580
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-423
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities......... $ 2,158,678 $ 909,568
----------- ------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases......................................... (2,219,314) (13,810,648)
Investment in direct financing leases........... (876,076) (5,838,231)
Investment in joint venture..................... (166,025) --
Increase in other assets........................ (51,600) --
Other........................................... -- 80
----------- ------------
Net cash used in investing activities......... (3,313,015) (19,648,799)
----------- ------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and syndication
costs paid by related parties on behalf of the
Partnership.................................... (37,135) (338,567)
Contributions from limited partners............. 854,241 19,964,832
Distributions to limited partners............... (1,768,400) (476,754)
Payment of syndication costs.................... (161,141) (2,037,781)
Other........................................... (10,000) (77,000)
----------- ------------
Net cash provided by (used in) financing
activities................................... (1,122,435) 17,034,730
----------- ------------
Net Decrease in Cash and Cash Equivalents........... (2,276,772) (1,704,501)
Cash and Cash Equivalents at Beginning of Period.... 4,143,327 5,371,325
----------- ------------
Cash and Cash Equivalents at End of Period.......... $ 1,866,555 $ 3,666,824
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-424
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain acquisition and syndication
costs on behalf of the Partnership as follows:
Acquisition costs........................................ $ 35,864 $125,693
Syndication costs........................................ -- 210,866
-------- --------
$ 35,864 $336,559
======== ========
Distributions declared and unpaid at end of period......... $700,000 $379,266
======== ========
</TABLE>
See accompanying notes to financial statements.
F-425
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ended
December 31, 1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of that
date.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Form 10-K of CNL Income Fund
XVIII, Ltd. (the "Partnership") for the year ended December 31, 1997.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
In March 1998, the Financial Accounting Standards Board reached a consensus
in EITF 97-11, entitled "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions." EITF 97-11 provides that internal costs of identifying
and acquiring operating Property should be expensed as incurred. Due to the
fact that the Partnership does not have an internal acquisitions function and
instead, contracts these services from CNL Fund Advisors, Inc., an affiliate of
the general partners, EITF 97-11 had no material effect on the Partnership's
financial position or results of operations.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Investment in Joint Ventures
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with affiliates of the general partners, to construct
and hold one restaurant property. As of September 30, 1998, the Partnership had
contributed $166,025, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$225,811 in additional construction costs to the joint venture. The Partnership
will have an approximate 40 percent interest in the profits and losses of the
joint venture. The Partnership accounts for its investment in this property
using the equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in joint
ventures. The following presents the combined, condensed financial information
for the joint venture at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and construction in progress.................... $497,989 $--
Cash................................................. 8,950 --
Liabilities.......................................... 90,650 --
Partners' capital.................................... 416,289 --
</TABLE>
F-426
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Investment in Joint Ventures--Continued
The Company did not recognize any income from this joint venture because the
property owned by the joint venture was not operational as of September 30,
1998.
3. Related Party Transactions
During the nine months ended September 30, 1998 and 1997, the Partnership
incurred $72,610 and $1,697,011, respectively, in syndication costs due to CNL
Securities Corp. for services in connection with selling units of limited
partnership interest. During the nine months ended September 30, 1998 and 1997,
a substantial portion of these amounts ($67,539 and $1,591,343, respectively)
was reallowed to other broker-dealers.
In addition, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred $4,271 and $99,824, respectively, in due diligence expense
reimbursement fees due to CNL Securities Corp. These fees equal 0.5% of the
limited partner contributions of $854,241 and $19,964,832, received during the
nine months ended September 30, 1998 and 1997, respectively. The majority of
these fees were reallowed to other broker- dealers for payment of bona fide due
diligence expenses.
Additionally, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred $38,441 and $898,417, respectively, in acquisition fees
due to CNL Fund Advisors, Inc. for services in finding, negotiating and
acquiring properties on behalf of the Partnership. These fees represent 4.5% of
the limited partner capital contributions received during the nine months ended
September 30, 1998 and 1997, and are included in land and buildings on
operating leases, net investment in direct financing leases, investment in
joint venture, and other assets.
In addition, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred management fees of $21,180 and $9,232, respectively, due
to CNL Fund Advisors, Inc.
During the nine months ended September 30, 1998 and 1997, certain affiliates
of the general partners provided various administrative services to the
Partnership, including services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; limited
partners distributions and reporting; due diligence and marketing; and investor
relations (including administrative services in connection with selling units
of limited partnership interest), on a day-to-day basis. The expenses incurred
for these services were classified as follows for the nine months ended
September 30:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Syndication costs.......................................... $ -- $212,279
General operating and administrative expenses.............. 77,601 70,404
------- --------
$77,601 $282,683
======= ========
</TABLE>
F-427
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Related Party Transactions--Continued
The amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Due to CNL Securities Corp.:
Commissions................................... $ -- $ 79,069
Due diligence expense reimbursement fee....... -- 5,191
------- --------
-- 84,260
------- --------
Due to CNL Fund Advisors, Inc.:
Expenditures incurred on behalf of the
Partnership.................................. 10,220 1,737
Acquisition fees.............................. -- 29,757
Accounting and administrative services........ 2,484 1,921
Management fees............................... 1,948 556
------- --------
14,652 33,971
------- --------
$14,652 $118,231
======= ========
</TABLE>
F-428
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XVIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
years in the period ended December 31, 1997 and 1996 and the period February
10, 1995 (date of inception) through December 31, 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CNL Income Fund XVIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years ended December 31, 1997 and 1996 and the period
February 10, 1995 (date of inception) through December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 4, 1998
F-429
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.............................. $21,311,062 $1,530,768
Net investment in direct financing leases.............. 6,004,878 --
Cash and cash equivalents.............................. 4,143,327 5,371,325
Receivables............................................ 68,000 3,711
Organization costs, less accumulated amortization of
$2,411 and $411....................................... 7,589 9,589
Accrued rental income.................................. 128,225 146
Other assets........................................... 160,532 324,785
----------- ----------
$31,823,613 $7,240,324
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 10,456 $ 104,514
Accrued construction costs payable..................... 1,108,627 --
Distributions payable.................................. 510,636 55,708
Due to related parties................................. 118,231 83,889
Rents paid in advance.................................. 28,277 --
Deferred rental income................................. 200,806 --
----------- ----------
Total liabilities.................................... 1,977,033 244,111
Partners' capital...................................... 29,846,580 6,996,213
----------- ----------
$31,823,613 $7,240,324
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-430
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
February 10,
1995 (Date
Year Ended of Inception)
December 31, through
------------------- December 31,
1997 1996 1995
---------- ------- -------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $ 950,316 $ 1,373 $--
Earned income from direct financing
leases.................................. 340,305 -- --
Interest and other income................ 162,621 30,241 --
---------- ------- ---
1,453,242 31,614 --
---------- ------- ---
Expenses:
General operating and administrative..... 123,708 3,980 --
Professional services.................... 20,429 -- --
Management fees to related party......... 11,842 12 --
State and other taxes.................... 424 -- --
Depreciation and amortization............ 142,079 712 --
---------- ------- ---
298,482 4,704 --
---------- ------- ---
Net Income................................. $1,154,760 $26,910 $--
========== ======= ===
Allocation of Net Income:
General partners......................... $ (1,421) $ (7) $--
Limited partners......................... 1,156,181 26,917 --
---------- ------- ---
$1,154,760 $26,910 $--
========== ======= ===
Net Income per Limited Partner Unit........ $ 0.51 $ 0.05 $--
========== ======= ===
Weighted Average Number of Limited Partner
Units Outstanding......................... 2,279,801 503,436 --
========== ======= ===
</TABLE>
See accompanying notes to financial statements.
F-431
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
<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, February 10,
1995 (Date of
Inception)............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Contributions from
general partners..... 1,000 -- -- -- -- -- 1,000
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1995................... 1,000 -- -- -- -- -- 1,000
Contributions from
limited partners..... -- -- 8,421,815 -- -- -- 8,421,815
Distributions to
limited partners
($0.11 per limited
partner unit)........ -- -- -- (57,846) -- -- (57,846)
Syndication costs..... -- -- -- -- -- (1,395,666) (1,395,666)
Net income............ -- (7) -- -- 26,917 -- 26,910
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,000 (7) 8,421,815 (57,846) 26,917 (1,395,666) 6,996,213
Contributions from
limited partners..... -- -- 25,723,944 -- -- -- 25,723,944
Distributions to
limited partners
($0.57 per limited
partner unit)........ -- -- -- (1,310,885) -- -- (1,310,885)
Syndication costs..... -- -- -- -- -- (2,717,452) (2,717,452)
Net income............ -- (1,421) -- -- 1,156,181 -- 1,154,760
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1997................... $1,000 $(1,428) $34,145,759 $(1,368,731) $1,183,098 $(4,113,118) $29,846,580
====== ======= =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-432
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 10,
1995 (Date
of Inception)
Year Ended December 31, through
------------------------- December 31,
1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants.............. $ 1,353,968 $ -- $ --
Interest received....................... 161,826 30,241 --
Cash paid for expenses.................. (154,038) (3,095) --
------------ ----------- --------
Net cash provided by operating
activities........................... 1,361,756 27,146 --
------------ ----------- --------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases....................... (18,581,999) (1,533,446) --
Investment in direct financing leases... (5,962,087) -- --
Increase in other assets................ -- (276,848) --
Other................................... 107 (107) (20)
------------ ----------- --------
Net cash used in investing
activities........................... (24,543,979) (1,810,401) (20)
------------ ----------- --------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization and syndication costs paid
by related parties
on behalf of the Partnership........... (396,548) (497,420) --
Contributions from general partners..... -- -- 1,000
Contributions from limited partners..... 25,723,944 8,498,815 --
Distributions to limited partners....... (855,957) (2,138) --
Payment of syndication costs............ (2,450,214) (845,657) --
Other................................... (67,000) -- --
------------ ----------- --------
Net cash provided by financing
activities........................... 21,954,225 7,153,600 1,000
------------ ----------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents................................ (1,227,998) 5,370,345 980
Cash and Cash Equivalents at Beginning of
Period..................................... 5,371,325 980 --
------------ ----------- --------
Cash and Cash Equivalents at End of Period.. $ 4,143,327 $ 5,371,325 $ 980
============ =========== ========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $ 1,154,760 $ 26,910 $ --
------------ ----------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation............................ 140,079 301 --
Amortization............................ 2,000 411 --
Increase in receivables................. (66,771) (1,227) --
Decrease in net investment in direct
financing leases....................... 28,084 -- --
Increase in accrued rental income....... (128,079) (146) --
Increase in accounts payable............ 398 57 --
Increase in due to related parties,
excluding acquisition, organization and
syndication costs paid on behalf of
the Partnership........................ 2,202 820 --
Increase in rents paid in advance....... 28,277 -- --
Increase in deferred rental income...... 200,806 -- --
Other................................... -- 20 --
------------ ----------- --------
Total adjustments..................... 206,996 236 --
------------ ----------- --------
Net Cash Provided by Operating Activities... $ 1,361,756 $ 27,146 $ --
============ =========== ========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Related parties paid certain acquisition,
organization and syndication costs on
behalf of the Partnership as follows:
Acquisition costs....................... $ 134,138 $ 18,036 $ --
Organization costs...................... -- -- 10,000
Syndication costs....................... 211,216 285,858 186,174
------------ ----------- --------
$ 345,354 $ 303,894 $196,174
============ =========== ========
Distributions declared and unpaid at
December 31............................ $ 510,636 $ 55,708 $ --
============ =========== ========
</TABLE>
See accompanying notes to financial statements.
F-433
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XVIII, 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, family-style
and casual dining restaurant chains. Under the terms of a registration
statement filed with the Securities and Exchange Commission, the Partnership is
authorized to sell a maximum of 3,500,000 units ($35,000,000) of limited
partnership interest. A total of 3,414,576 units ($34,145,759) of limited
partnership interest had been sold as of December 31, 1997.
The Partnership was a development stage enterprise from February 10, 1995
through October 11, 1996. Since operations had not begun, activities through
October 11, 1996, were devoted to organization of the Partnership.
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 the direct financing or 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) (see
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 (including rental payments, if any,
required during the construction of a property) 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.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental payments
to date. In contrast, deferred rental income represents the aggregate
amount of scheduled rental payments to date (including rental payments due
during construction and prior to the property being placed in service) in
excess of income recognized on a straight-line basis over the lease term
commencing on the date the property is placed in service.
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, will be removed from the accounts and gains or
losses from sales will be reflected in income. The general partners of the
Partnership review
F-434
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies--(Continued)
properties for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to the fair
value.
Cash and Cash Equivalents--The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of demand deposits at commercial
banks and money market funds (some of which are backed by government
securities). Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured levels;
however, the Partnership has not experienced any losses in such accounts. The
Partnership limits investment of temporary cash investments to financial
institutions with high credit standing; therefore, the Partnership believes it
is not exposed to any significant credit risk on cash and cash equivalents.
Organization Costs--Organization costs are amortized over five years using
the straight-line method upon commencement of operations.
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 (Note 5).
Rents Paid in Advance--Rents paid in advance by lessees for future periods
are deferred upon receipt and are recognized as revenues during the period in
which the rental income is earned. Rents paid in advance include "interim rent"
payments required to be paid under the terms of certain leases for construction
properties equal to a pre-determined rate times the amount funded by the
Partnership during the period commencing with the effective date of the lease
to the date minimum annual rent becomes payable. Once minimum annual rent
becomes payable, the "interim rent" payments are amortized and recorded as
income either (i) over the lease term so as to produce a constant periodic rate
of return for leases accounted for using the direct financing method, or (ii)
over the lease term using the straight-line method for leases accounted for
using the operating method, whichever is applicable.
Weighted Average Number of Limited Partner Units Outstanding--Net income and
distributions per limited partner unit are calculated based upon the weighted
average number of units of limited partnership interest outstanding during the
period the Partnership was operational.
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
F-435
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies--(Continued)
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform to 1997 presentation. These reclassifications
had no effect on partners' capital or net income.
2. Leases
The Partnership leases its land and buildings to operators of national and
regional fast-food and family-style restaurants. The leases are accounted for
under the provisions of Statement of Financial Accounting Standards No. 13,
"Accounting for Leases." Some of the Partnership's leases are classified as
operating leases and some of the leases have been classified as direct
financing leases. For the leases classified as direct financing leases, the
building portions of the property leases are accounted for as direct financing
leases while the land portions of the majority of the leases are operating
leases. The leases have initial terms of 15 to 26 years and provide for minimum
and contingent rentals. In addition, the tenant pays all property taxes and
assessments, fully maintains the interior and exterior of the building and
carries insurance coverage for public liability, property damage, fire and
extended coverage. The lease options generally allow the 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>
1997 1996
----------- ----------
<S> <C> <C>
Land................................................ $10,812,849 $ 852,578
Building............................................ 9,476,977 659,134
----------- ----------
20,289,826 1,511,712
Less accumulated depreciation....................... (140,380) (301)
----------- ----------
20,149,446 1,511,411
Construction in progress............................ 1,161,616 19,357
----------- ----------
$21,311,062 $1,530,768
=========== ==========
</TABLE>
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, 1997 and 1996, the Partnership recognized $128,079 and $146,
respectively, of such rental income.
F-436
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
3. Land and Buildings on Operating Leases--(Continued)
The following is a schedule of the future minimum lease payments to be
received on the noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,840,935
1999............................................................. 1,855,422
2000............................................................. 1,857,340
2001............................................................. 1,858,867
2002............................................................. 1,934,126
Thereafter....................................................... 23,592,272
-----------
$32,938,962
===========
</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 term. 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
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>
1997 1996
----------- ----
<S> <C> <C>
Minimum lease payments receivable......................... $13,241,374 $--
Estimated residual values................................. 1,773,526 --
Less unearned income...................................... (9,010,022) --
----------- ----
Net investment in direct financing leases................. $ 6,004,878 $--
=========== ====
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 677,167
1999............................................................. 677,167
2000............................................................. 677,167
2001............................................................. 677,167
2002............................................................. 683,170
Thereafter....................................................... 9,849,536
-----------
$13,241,374
===========
</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).
F-437
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
5. Syndication Costs
Syndication costs consisting of legal fees, commissions, the due diligence
expense reimbursement fee, printing and other expenses incurred in connection
with the offering totaled $2,717,452 and $1,395,666 for the years ended
December 31, 1997 and 1996, respectively. These offering expenses were charged
to the limited partners' capital accounts to reflect the net capital proceeds
of the offering. All organizational and offering expenses, as defined in the
Partnership's prospectus, which exceed three percent of the total gross
proceeds received from the sale of units of the Partnership will be paid or
reimbursed by the general partners and will not be the responsibility of the
Partnership.
6. Allocations and Distributions
Generally, distributions of net cash flow, as defined in the limited
partnership agreement of the Partnership, are made 95 percent to the limited
partners and five percent to the general partners; provided, however, that for
any particular year, the five percent of net cash flow to be distributed to the
general partners will be subordinated to receipt by the limited partners in
that year of an eight percent noncumulative, noncompounded return on their
aggregate invested capital contributions (the "Limited Partners' 8% Return").
Generally, net income (determined without regard to any depreciation and
amortization deductions and gains and losses from the sale of properties) is
allocated between the limited partners and the general partners first, in an
amount not to exceed the net cash flow distributed to the partners attributable
to such year in the same proportions as such net cash flow is distributed; and
thereafter, 99 percent to the limited partners and one percent to the general
partners. All deductions for depreciation and amortization are allocated 99
percent to the limited partners and one percent to the general partners.
Net sales proceeds from the sale of a property generally will be distributed
first to the limited partners in an amount sufficient to provide them with the
return of their invested capital contributions, plus their cumulative Limited
Partners' 8% Return. The general partners will then receive a return of their
capital contributions and, to the extent previously subordinated and unpaid, a
five percent interest in all net cash flow distributions. Any remaining net
sales proceeds will be distributed 95 percent to the limited partners and five
percent to the general partners.
Any gain from the sale of a property will be, in general, allocated in the
same manner as net sales proceeds are distributable. Any loss will be allocated
first, on a pro rata basis to the partners with positive balances in their
capital accounts; and thereafter, 95 percent to the limited partners and five
percent to the general partners.
During the years ended December 31, 1997 and 1996, the Partnership declared
distributions to the limited partners of $1,310,885 and $57,846. No
distributions have been made to the general partners to date.
F-438
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
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, 1997 and 1996 and the period February 10, 1995 (date of inception)
through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- ----
<S> <C> <C> <C>
Net income for financial reporting purposes....... $1,154,760 $26,910 $--
Depreciation for tax reporting purposes in excess
of depreciation for financial reporting
purposes......................................... (45,009) (386) --
Direct financing leases recorded as operating
leases for tax reporting purposes................ 28,084 -- --
Capitalization of administrative expenses for tax
reporting purposes............................... -- 3,662
Accrued rental income............................. (128,079) (146) --
Deferred rental income............................ 281,415 --
Rents paid in advance............................. 28,277 -- --
Amortization for financial reporting purposes
(less than) in excess of amortization for tax
reporting purposes............................... (732) 183 --
Other............................................. 34 -- --
---------- ------- ----
Net income for federal income tax purposes........ $1,318,750 $30,223 $--
========== ======= ====
</TABLE>
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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and is director, chairman of the
board of directors and chief executive officer of CNL Fund Advisors, Inc. The
other individual general partner, Robert A. Bourne, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc through October 1997.
CNL Securities Corp. is entitled to receive selling commissions amounting to
8.5% of the total amount raised from the sale of units of limited partnership
interest for services in connection with the formation of the Partnership and
the offering of units, a substantial portion of which is paid as commissions to
other broker-dealers. For the years ended December 31, 1997 and 1996, the
Partnership incurred $2,186,535 and $715,854, respectively, as syndication
costs for such fees, of which $2,050,986 and $673,534, respectively, was or
will be reallowed to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a due diligence
expense reimbursement fee equal to 0.5% of the total amount raised from the
sale of units of limited partnership interest, a portion of which may be
reallowed to other broker-dealers and from which all due diligence expenses
will be paid. For the years ended December 31, 1997 and 1996, the Partnership
incurred $128,620 and $42,109, respectively, of such fees. The majority of
these fees were reallowed to other broker-dealers for payment of bona fide due
diligence expenses.
F-439
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
8. Related Party Transactions--(Continued)
CNL Fund Advisors, Inc. is entitled to receive acquisition fees for services
in finding, negotiating and acquiring properties on behalf of the Partnership
equal to 4.5% of the total amount raised from the sale of units of limited
partnership interest. For the years ended December 31, 1997 and 1996, the
Partnership incurred $1,157,577 and $378,982, respectively, of such fees. Such
fees are included in land and buildings, net investment in direct financing
leases and other assets.
The Partnership and CNL Fund Advisors, Inc. have entered into a management
agreement pursuant to which CNL Fund Advisors, Inc. receives annual management
fees 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 CNL Fund
Advisors, Inc. 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 CNL Fund Advisors, Inc. shall determine. For the years ended
December 31, 1997 and 1996, the Partnership incurred $11,842 and $12,
respectively, for such management fees.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (date of inception) through December 31, 1995, CNL Fund Advisors, Inc.
and its affiliates provided accounting and administrative services to the
Partnership (including accounting and administrative services in connection
with the offering of units) on a day-to-day basis. For the years ended December
31, 1997 and 1996, and the period February 10, 1995 (date of inception) through
December 31, 1995, the expenses incurred for these services were classified as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Syndication costs................................. $212,279 $106,887 $37,586
General operating and administrative expenses..... 98,207 2,980 --
-------- -------- -------
$310,486 $109,867 $37,586
======== ======== =======
</TABLE>
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to CNL Securities Corp.:
Commissions.............................................. $79,069 $44,186
Marketing support and due diligence expense reimbursement
fee..................................................... 5,191 2,599
-------- -------
84,260 46,785
-------- -------
Due to CNL Fund Advisors, Inc. and its affiliates:
Expenditures incurred on behalf of the Partnership....... 1,737 2,788
Acquisition fees......................................... 29,757 23,392
Accounting and administrative services................... 1,921 10,912
Management fees.......................................... 556 12
-------- -------
33,971 37,104
-------- -------
$118,231 $83,889
======== =======
</TABLE>
F-440
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
9. Concentration of Credit Risk
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income for at least one of the periods
ended:
<TABLE>
<CAPTION>
February 10,
1995
(Date of
Inception)
through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Golden Corral Corp.................... $241,395 $ -- $--
Foodmaker, Inc........................ 240,261 -- --
Tiffany, L.L.C........................ 154,153 -- --
IHOP Properties, Inc.................. 152,343 -- --
Platinum Rotisserie, L.L.C............ 133,591 -- --
Carrols Corporation................... 100,312 1,373 --
</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 for at least one of the
periods ended:
<TABLE>
<CAPTION>
February 10,
1995
(Date of
Inception)
through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Golden Corral......................... $395,548 $ -- $--
Jack in the Box....................... 240,261 -- --
Boston Market......................... 231,489 -- --
IHOP.................................. 152,343 -- --
Burger King........................... 100,312 1,373 --
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the ongoing operations of
the lessees.
10. Subsequent Events
During the period January 1, 1997 through February 4, 1998, the Partnership
received capital contributions for an additional 74,408 units ($744,077) of
limited partnership interest.
F-441
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the Acquisition, and is based on estimates and assumptions set
for the below in the notes to such information which included pro forma
adjustments. This unaudited pro forma financial information has been prepared
utilizing the historical financial statements of APF, the historical combined
financial information of the Funds, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CNL Financial Services, Inc. and CNL
Financial Corp.) and should be read in conjunction with the selected historical
financial data and accompanying notes of APF, CNL Income Funds, Advisor and CNL
Restaurant Financial Services Group. The pro forma balance sheet assumes that
the Acquisition occurred on September 30, 1998; the pro forma consolidated
statements of earnings assume that the restaurant property Acquisitions (as
defined on page ) and the Acquisition occurred on January 1, 1997.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
F-442
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Unaudited Pro Forma Balance Sheet--As of September 30, 1998............. F-444
Unaudited Pro Forma Income Statement--For the Nine Months ended
September 30, 1998..................................................... F-445
Unaudited Pro Forma Income Statement--For the Year ended December 31,
1997................................................................... F-446
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................. F-447
</TABLE>
F-443
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
-----------------------------------------------------------------------------------
CNL Financial CNL Combined
APF Income Funds Advisor Services, Inc. Financial Corp. Portfolios
------------ ------------ ---------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $332,327,405 $ 0 $ 0 $ 0 $ 631,295,377
Net investment in
direct financing
leases.......... 117,028,760 90,696,044 0 0 0 207,724,804
Mortgages and
notes
receivable...... 33,523,506 4,836,808 0 0 173,776,981 212,137,295
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 50,429,925 0 0 0 51,061,299
Cash and cash
equivalents..... 90,674,289 25,730,166 283,300 599,997 5,098,033 122,385,785
Receivables...... 575,104 314,049 7,544,985 6,824,632 517,471 15,776,241
Accrued rental
income.......... 3,071,451 18,089,015 0 0 0 21,160,466
Other assets..... 5,711,195 1,018,297 401,524 295,570 3,854,477 11,281,063
------------ ------------ ---------- ---------- ------------ --------------
Total assets.... $566,383,967 $523,441,709 $8,429,809 $7,720,199 $189,808,590 $1,295,784,274
============ ============ ========== ========== ============ ==============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 615,567 $ 449,751 $ 193,949 $ 1,236,138 $ 2,874,901
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 12,929,500 2,220,000 0 0 15,149,500
Due to related
parties......... 2,552,411 945,723 0 1,452,512 6,556,920 11,507,566
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 168,790 0 0 0 1,184,548
Rents paid in
advance......... 437,497 802,726 0 0 0 1,240,223
Minority
interest........ 282,544 1,740,749 0 0 0 2,023,293
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 506,238,654 0 0 0 506,238,654
------------ ------------ ---------- ---------- ------------ --------------
Total
liabilities and
equity......... $566,383,967 $523,441,709 $8,429,809 $7,720,199 $189,808,590 $1,295,784,274
============ ============ ========== ========== ============ ==============
<CAPTION>
Pro Forma
--------------------------------
Adjustments Pro Forma
---------------- ---------------
<S> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $ 92,857,763 (1)
26,052,741 (2) $ 750,205,881
Net investment in
direct financing
leases.......... 24,117,264 (1) 231,842,068
Mortgages and
notes
receivable...... 849,195 (2) 212,986,490
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 13,158,851 (1) 64,220,150
Cash and cash
equivalents..... (7,175,000)(1)
(8,933,000)(1)
(26,901,936)(2) 79,375,849
Receivables...... (8,795,102)(3) 6,981,139
Accrued rental
income.......... (18,089,015)(1) 3,071,451
Other assets..... 39,696,874)(1)
(4,673,130)(1) 46,304,807
---------------- ---------------
Total assets.... $122,165,505 $1,417,949,779
================ ===============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ -- $ 2,874,901
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 15,149,500
Due to related
parties......... (8,795,102)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. (168,790)(1) 1,015,758
Rents paid in
advance......... -- 1,240,223
Minority
interest........ -- 2,023,293
Common Stock..... 713,825 (1) 1,347,012
Additional paid
in capital...... 715,496,888 (1) 1,281,929,753
Accumulated
distributions in
excess of net
earnings........ (78,842,662)(1)
2,990,864 (4) (76,101,067)
Partners
capital......... (506,238,654)(1) 0
---------------- ---------------
Total
liabilities and
equity......... $122,165,505 $1,417,949,779
================ ===============
</TABLE>
F-444
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------------------------------
CNL Financial CNL Combined
APF Income Funds Advisor Services, Inc. Financial Corp. Portfolios
----------- ------------ ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income... $22,947,199 $35,891,418 $ 0 $ 0 $ 0 $ 58,838,617
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income.... 6,117,911 1,528,771 751 432,506 18,031,141 26,111,080
----------- ----------- ----------- ---------- ----------- ------------
Total revenue... 29,065,110 37,420,189 21,405,878 5,548,055 18,037,958 111,477,190
Expenses:
General and
administrative.. 1,539,004 3,037,610 6,701,115 4,107,311 2,597,171 17,982,211
Advisory fees... 1,248,393 210,414 0 0 1,026,231 2,485,038
Fees to
Restaurant
Financial
Services Group.. 0 0 256,456 1,569,202 0 1,825,658
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201
State taxes..... 397,569 248,468 15,226 18,564 201,616 881,443
Depreciation--
other........... 0 0 75,607 55,056 0 130,663
Depreciation--
property........ 2,684,924 4,611,116 0 0 0 7,296,040
Amortization.... 8,096 35,869 55,932 138 945,299 1,045,334
----------- ----------- ----------- ---------- ----------- ------------
Total operating
expenses........ 5,877,986 8,143,477 7,210,004 5,753,805 19,001,316 45,986,588
----------- ----------- ----------- ---------- ----------- ------------
Operating
earnings
(losses)......... 23,187,124 29,276,712 14,195,874 (205,750) (963,358) 65,490,602
Equity in
earnings of
joint
ventures/minority
interest........ (23,271) 2,507,758 0 12,452 0 2,496,939
Gain /(loss) on
sale of
properties...... 0 2,239,278 0 0 0 2,239,278
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268
Provision for
loss on
properties...... 0 (577,405) 0 0 0 (577,405)
Other expenses.. 0 (45,150) 0 0 0 (45,150)
----------- ----------- ----------- ---------- ----------- ------------
Net earnings
(losses) before
federal income
taxes............ 23,163,853 33,401,193 14,195,874 (193,298) 2,054,910 72,622,532
Provision
(credit) for
federal income
taxes........... 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ----------- ----------- ---------- ----------- ------------
Net income....... $23,163,853 $33,401,193 $ 8,588,459 $ (112,069) $ 1,265,015 $ 66,306,451
=========== =========== =========== ========== =========== ============
Earnings per
share............ $ 0.49
===========
Shares
outstanding:
Weighted
average......... 47,633,909
===========
End of period... 62,118,679
===========
<CAPTION>
Pro Forma
--------------------------------
Adjustments Pro Forma
---------------- ---------------
<S> <C> <C>
Revenues:
Rental and
earned income... $ 9,747,393 (a)
836,671 (b) $ 69,422,681
Fees............ (21,920,894)(c)
(2,875,906)(d) 1,730,693
Interest and
other income.... 1,526,547 (e) 27,637,627
---------------- ---------------
Total revenue... (12,686,189) 98,791,001
Expenses:
General and
administrative.. (1,641,779)(f)
(1,415,100)(g)
(571,595)(h) 14,353,737
Advisory fees... (2,485,038)(i) 0
Fees to
Restaurant
Financial
Services Group.. (1,825,658)(n) 0
Interest........ (68,670)(m) 14,271,531
State taxes..... 601,369 (j) 1,482,812
Depreciation--
other........... -- 130,663
Depreciation--
property........ 2,870,103 (k) 10,166,143
Amortization.... 1,488,633 (l) 2,533,967
---------------- ---------------
Total operating
expenses........ (3,047,735) 42,938,853
---------------- ---------------
Operating
earnings
(losses)......... (9,638,454) 55,852,148
Equity in
earnings of
joint
ventures/minority
interest........ -- 2,496,939
Gain /(loss) on
sale of
properties...... -- 2,239,278
Gain on
securitization.. -- 3,018,268
Provision for
loss on
properties...... -- (577,405)
Other expenses.. -- (45,150)
---------------- ---------------
Net earnings
(losses) before
federal income
taxes............ (9,638,454) 62,984,078
Provision
(credit) for
federal income
taxes........... (6,316,081)(o) 0
---------------- ---------------
Net income....... $(3,322,373) $ 62,984,078
================ ===============
Earnings per
share............ $ 0.48
===============
Shares
outstanding:
Weighted
average......... 130,673,371(p)
===============
End of period... 134,701,179
===============
</TABLE>
F-445
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------------- ----------------------------
CNL Financial CNL Combined
APF Income Funds Advisor Services, Inc. Financial Corp. Portfolios Adjustments Pro Forma
----------- ------------ ---------- -------------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income... $15,490,615 $51,340,020 $ 0 $ 0 $ 0 $66,830,635 $25,281,493 (a)
1,061,687 (b) $ 93,173,815
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (10,087,047)(c)
(2,662,141)(d) 1,600,462
Interest and
other income.... 3,967,318 1,815,714 165,569 0 10,932,843 16,881,444 249,395 (e) 17,130,839
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Total Revenue... 19,457,933 53,155,734 8,476,405 5,965,110 11,006,547 98,061,729 13,843,387 111,905,116
Expenses:
General and
administrative.. 1,010,725 3,691,750 4,266,169 1,889,904 828,848 11,687,396 (1,038,365)(f)
(1,619,238)(g)
(714,640)(h) 8,315,153
Advisory fees... 804,879 263,766 0 0 1,802,532 2,871,177 (2,871,177)(i) 0
Fees to
Restaurant
Financial
Services Group.. 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes..... 251,358 234,022 12,084 1,294 1,600 500,358 110,893 (j) 611,251
Depreciation--
other........... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property........ 1,784,269 6,028,330 0 0 0 7,812,599 5,109,705 (k) 12,922,304
Amortization.... 10,793 37,729 18,093 61,324 916,577 1,044,516 1,984,844 (l) 3,029,360
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Total operating
expenses........ 3,862,024 10,255,597 4,658,030 2,744,515 11,869,557 33,389,723 135,346 33,525,069
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Operating
earnings
(losses)......... 15,595,909 42,900,137 3,818,375 3,220,595 (863,010) 64,672,006 13,708,041 78,380,047
Equity in
earnings of
joint
ventures/minority
interest........ (31,453) 3,678,871 0 (126,627) 0 3,520,791 -- 3,520,791
Gain on sale of
properties...... 0 4,224,500 0 0 0 4,224,500 -- 4,224,500
Provision for
loss on
properties...... 0 (665,574) 0 0 0 (665,574) -- (665,574)
Other income.... 0 214,000 0 0 0 214,000 -- 214,000
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Net earnings
before federal
income taxes..... 15,564,456 50,351,934 3,818,375 3,093,968 (863,010) 71,965,723 13,708,041 85,673,764
Provision
(credit) for
federal income
taxes........... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Net earnings
(losses)......... $15,564,456 $50,351,934 $2,310,117 $1,821,835 $ (545,225) $69,503,117 $16,170,647 $ 85,673,764
=========== =========== ========== ========== =========== =========== =========== ============
Earnings per
share............ $ 0.66 $ 0.65
=========== ============
Shares
outstanding:
Weighted
average......... 23,423,868 131,446,067
=========== ============
End of period... 36,192,971 131,446,067
=========== ============
</TABLE>
F-446
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Funds, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Consent Solicitation. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Consent Solicitation. This unaudited
pro forma financial information has been prepared utilizing the historical
financial statements of APF and the historical combined financial information
of the CNL Income Funds, Advisor and CNL Restaurant Financial Services Group
and should be read in conjunction with the selected historical financial data
and accompanying notes of APF, the CNL Income Funds, Advisor and the CNL
Restaurant Financial Services Group. The Pro Forma Balance Sheet was prepared
as if the Offering and Property Transactions and the Acquisition Proposal
occurred on September 30, 1998. The Pro Forma Statements of Earnings were
prepared as if the Property Acquisitions and the Acquisition Proposal occurred
as of January 1, 1997. The pro forma information is unaudited and is not
necessarily indicative of the consolidated operating results which would have
occurred if the Offering and Acquisition Transaction and the Acquisition
Proposal had been consummated at the beginning of the period, nor does it
purport to represent the future financial position or results of operations for
future periods. In management's opinion, all material adjustments necessary to
reflect the recurring effects of the Acquisition Proposal have been made.
Capitalized terms have the meanings as defined in the Consent Solicitation.
2. Method of Accounting
The acquisition of the CNL Income Funds and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. APF
will recognize goodwill to the extent that the consideration paid exceeds the
fair value of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, APF will expense the costs incurred in acquiring
the Advisor to the extent the consideration paid exceeds the fair value of the
net tangible assets received. This expense will be recorded as an operating
expense on APF's consolidated statements of earnings, but APF will not deduct
this expense for purposes of calculating funds from operations due to the non-
recurring and non-cash nature of the expense.
All significant intercompany balances and transactions between APF, CNL
Income Funds, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of APF approved an
amendment to increase the number of authorized shares to an amount necessary to
enable APF to issue the shares for the Acquisition.
(1) Represents the payment of $7,175,000 in cash and the issuance of
72,582,500 common shares in consideration for the purchase of the CNL
Income Funds, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Funds and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a
F-447
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
related party, the consideration paid in excess of the fair value of the
net tangible assets received has been accounted for as costs incurred in
acquiring the Advisor from a related party because the Advisor has not been
deemed to qualify as a "business" for purposes of applying APB Opinion No.
16 "Business Combinations." Upon consummation of the Acquisition, this
expense will be recorded as an operating expense on APF's statement of
earnings. APF will not deduct this expense for purposes of calculating
funds from operations due to the nonrecurring and non-cash nature of the
expense. As of September 30, 1998, $249,403 of transaction costs had been
incurred by APF.
<TABLE>
<S> <C>
CNL Income Funds............................................. $610,000,000
Advisor...................................................... 76,000,000
CNL Restaurant Financial Services Group...................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 733,000,000
Less cash paid to CNL Income Funds........................... (7,175,000)
------------
Share consideration........................................ 725,825,000
Transaction costs of APF..................................... 8,933,000
------------
Total costs incurred....................................... $734,758,000
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the CNL Income
Funds carrying value of land and building on operating leases by $92,857,763,
net investment in direct financing leases by $24,117,264, investment in joint
venture by $13,158,851, made downward adjustments to the carrying value of
accrued rental income of $18,089,015, made downward adjustments to other assets
of $4,673,130 and made downward adjustments to deferred income of $168,790 to
adjust historical values to fair value, iii) recorded goodwill of $39,696,874
for the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $73,545,548 for the excess consideration paid over the net
assets of the Advisor and removed the historical common stock balance of
$12,000, additional paid in capital balance of $9,602,287, retained earnings
balance of $5,297,114, and partners' capital balance of $506,238,654 of the CNL
Income Funds, Advisor and CNL Restaurant Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Funds of $945,723 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by APF of $1,208,000 in related party
payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
from liabilities assumed in the Acquisition since the Acquisition Agreement
requires that the Advisor and CNL Restaurant Financial Services Group have
no accumulated or current earnings and profits for federal income tax
purposes at the time of the Acquisition.
F-448
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by APF from January 1, 1998 through
November 30, 1998 had been placed in service on May 1, 1997 (assumes a
four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transaction by APF......... $9,635,208
Rental and earned income on Property Transactions by CNL XVIII.. 112,185
----------
$9,747,393
==========
</TABLE>
(b) Represents $836,671 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Funds as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between APF, the CNL
Income Funds, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Origination fees............................................ $ (1,569,202)
Secured equipment lease fee................................. (44,424)
Advisory fees............................................... (1,932,795)
Reimbursement of administrative costs....................... (627,662)
Acquisition fees............................................ (15,757,119)
Underwriting fees........................................... (254,945)
Administrative fees......................................... (148,493)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
Servicing fee............................................... (1,014,117)
Development fees............................................ (166,876)
Consulting fee.............................................. (1,511)
------------
Total..................................................... $(21,920,894)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
F-449
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between APF,
the CNL Income Funds, the Advisor and the CNL Restaurant Financial
Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $ (627,662)
Servicing fee................................................ (1,014,117)
-----------
$(1,641,779)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were
subject to capitalization during the entire period and 2) costs
relating to properties not developed by APF were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................. $(1,415,100)
</TABLE>
(h) Represents savings of $571,595 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between APF, the CNL Income
Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................. $(1,932,795)
Administrative fees........................................... (148,493)
Executive fee................................................. (310,000)
Guarantee fees................................................ (93,750)
-----------
$(2,485,038)
===========
</TABLE>
(j) Represents additional income taxes of $601,369 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Funds
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolios using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense............................................ $2,870,103
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,488,633
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense................................................. $(68,670)
</TABLE>
F-450
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the CNL Income Funds, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(1,569,202)
Underwriting fees............................................. (254,945)
Consulting fee................................................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. APF expects to continue to
qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the pro
forma financial statements, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of APF.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by APF from January 1, 1997 through
November 30, 1998 had been placed in service on May 1, 1997 (assumes a
four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transaction by APF...... $24,048,982
Rental and earned income on Property Transactions by CNL
XVIII....................................................... 1,232,511
-----------
$25,281,493
===========
</TABLE>
(b) Represents $1,061,687 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Funds as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between APF, the CNL
Income Funds, the Advisor and the CNL entities:
<TABLE>
<S> <C>
Origination fees............................................ $ (594,041)
Secured equipment lease fee................................. (375,219)
Advisory fees............................................... (2,039,446)
Reimbursement of administrative costs....................... (439,377)
Acquisition fees............................................ (4,337,634)
Underwriting fees........................................... (151,041)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
Arrangement fees............................................ (350,000)
Servicing fee............................................... (598,988)
Development fees............................................ (369,570)
------------
Total..................................................... $(10,087,047)
============
</TABLE>
F-451
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between APF,
the CNL Income Funds, the Advisor and the CNL Restaurant Financial
Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $ (439,377)
Servicing fee................................................ (598,988)
-----------
$(1,038,365)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were
subject to capitalization during the entire period and 2) costs
relating to properties not developed by APF were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................. $(1,619,238)
</TABLE>
(h) Represents savings of $714,640 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between APF, the CNL Income
Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................. $(2,039,446)
Administrative fees........................................... (269,231)
Executive fee................................................. (250,000)
Guarantee fees................................................ (312,500)
-----------
$(2,871,177)
===========
</TABLE>
(j) Represents additional income taxes of $110,893 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Funds
had operated under a REIT structure.
F-452
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolios using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense............................................ $5,109,705
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,984,844
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees................................ $(24,144)
Capitalization of interest during development period............ (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the CNL Income Funds, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees................................................ $(594,041)
Underwriting fees............................................... (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. APF expects to continue to
qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the pro forma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of APF.
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