-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OK+8c2R6IJETsxV+XS90HCNZXyiskzB4+7U76WfVemqM5ZQ/AmyQwT8EJLmcSK82 7r+Pt+ib1P5X5+QienVibQ== 0000817845-99-000002.txt : 19990802 0000817845-99-000002.hdr.sgml : 19990802 ACCESSION NUMBER: 0000817845-99-000002 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19990730 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNL INCOME FUND III LTD CENTRAL INDEX KEY: 0000817845 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 592809460 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-16850 FILM NUMBER: 99674475 BUSINESS ADDRESS: STREET 1: 400 E SOUTH ST STREET 2: STE 500 CITY: ORLANDO STATE: FL ZIP: 32801 BUSINESS PHONE: 4074221574 MAIL ADDRESS: STREET 1: 400 E SOUTH STREET SUITE 500 CITY: ORLANDO STATE: FL ZIP: 32801 10-K/A 1 CNL INCOME FUND III, LTD. FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A Amendment No. 1 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-16850 CNL INCOME FUND III, LTD. (Exact name of registrant as specified in its charter) Florida 59-2809460 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 East South Street Orlando, Florida 32801 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 422-1574 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of exchange on which registered: None Not Applicable Securities registered pursuant to section 12(g) of the Act: Units of limited partnership interest ($500 per Unit) (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Aggregate market value of the voting stock held by nonaffiliates of the registrant: The registrant registered an offering of units of limited partnership interest (the "Units") on Form S-11 under the Securities Act of 1933, as amended. Since no established market for such Units exists, there is no market for such Units. Each Unit was originally sold at $500 per Unit. DOCUMENTS INCORPORATED BY REFERENCE: None The Form 10-K of CNL Income Fund III, Ltd. for the year ended December 31, 1997 is being amended to provide additional disclosure under Item 1. Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources, Short-Term Liquidity and Long-Term Liquidity. PART I Item 1. Business CNL Income Fund III, Ltd. (the "Registrant" or the "Partnership") is a limited partnership which was organized pursuant to the laws of the State of Florida on June 1, 1987. The general partners of the Partnership are Robert A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida corporation (the "General Partners"). Beginning on August 10, 1987, the Partnership offered for sale up to $25,000,000 in limited partnership interests (the "Units") (50,000 Units at $500 per Unit) pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended. The offering terminated on April 29, 1988, as of which date the maximum offering proceeds of $25,000,000 had been received from investors who were admitted to the Partnership as limited partners (the "Limited Partners"). The Partnership was organized primarily to acquire both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed (the "Properties"), which are leased primarily to operators of selected national and regional fast-food restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership from its offering of Units, after deduction of organizational and offering expenses, totalled $22,125,102, and were used to acquire 32 Properties, including interests in two Properties owned by joint ventures in which the Partnership is a co-venturer. During January 1997, the Partnership sold its Properties in Chicago, Illinois; Bradenton, Florida; Kissimmee, Florida; Roswell, Georgia and Mason City, Iowa. The Partnership reinvested a portion of these net sales proceeds in a Property in Fayetteville, North Carolina. In addition, the Partnership reinvested a portion of the net sales proceeds in a Property in Englewood, Colorado and a Property in Miami, Florida, as tenants-in-common, with affiliates of the General Partners. The Partnership intends to reinvest the remaining net sales proceeds in additional Properties. As a result of the above transactions, the Partnership owned 30 Properties as of December 31, 1997. The 30 Properties include interests in two Properties owned by joint ventures in which the Partnership is a co-venturer and two Properties owned with affiliates as tenants-in-common. In January 1998, the Partnership reinvested the remaining net sales proceeds from the 1997 sales of Properties in a Property in Overland Park, Kansas, as tenants-in-common with affiliates of the General Partners. In addition, during January and February 1998, the Partnership sold its Properties in Fernandina Beach, Daytona Beach and Punta Gorda, Florida. The Partnership intends to use the net sales proceeds to acquire an additional Property, to make a special distributions to the limited partners and to pay liabilities of the Partnership. Generally, the Properties are leased on a triple-net basis with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. The Partnership will hold its Properties until the General Partners determine that the sale or other disposition of the Properties is advantageous in view of the Partnership's investment objectives. In deciding whether to sell Properties, the General Partners will consider factors such as potential capital appreciation, net cash flow and federal income tax considerations. Certain lessees have been granted options to purchase Properties, generally at a Property's then fair market value after a specified portion of the lease term has elapsed. In general, the General Partners plan to seek the sale of some of the Properties commencing seven to 15 years after their acquisition. The Partnership has no obligation to sell all or any portion of a Property at any particular time, except as may be required under Property or joint venture purchase options granted to certain lessees. Leases Although there are variations in the specific terms of the leases, the following is a summarized description of the general structure of the Partnership's leases. The leases of the Properties owned by the Partnership and joint ventures in which the Partnership is a co-venturer provide for initial terms ranging from 15 to 20 years (the average being 18 years), and expire between 2002 and 2017. Generally, leases are on a triple-net basis, with the lessees generally responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases of the Properties generally provide for minimum base annual rental payments (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, to be paid annually. In addition, some leases provide for increases in the annual base rent during the lease term. The leases of the Properties provide for two or four five-year renewal options subject to the same terms and conditions as the initial lease. Certain lessees also have been granted options to purchase Properties at each Property's then fair market value, or pursuant to a formula based on the original cost of the Property, after a specified portion of the lease term has elapsed. Additionally, certain leases provide the lessee an option to purchase up to a 49 percent interest in the Property, after a specified portion of the lease term has elapsed, at an option purchase price similar to those described above, multiplied by the percentage interest in the Property with respect to which option is being exercised. The leases also generally provide that, in the event the Partnership wishes to sell the Property subject to that lease, the Partnership must first offer the lessee the right to purchase 2 the Property on the same terms and conditions, and for the same price, as any offer which the Partnership has received for the sale of the Property. In February 1995, the tenant of the Po Folks Property in Hagerstown, Maryland, defaulted under the terms of its lease. The Partnership is currently seeking either a replacement tenant or purchaser for the Po Folks Property. In June 1997, the Partnership reinvested the majority of the net sales proceeds from the sale of the Property in Bradenton, Florida, in a Property located in Fayetteville, North Carolina. In addition, during 1997, the Partnership reinvested a portion of the net sales proceeds from the sale of the Properties located in Kissimmee, Florida and Roswell, Georgia in a Property located in Englewood, Colorado and a Property in Miami, Florida, respectively, with affiliates of the General Partners as tenants-in-common, as described below in "Joint Venture Arrangements." The lease terms for these Properties are substantially the same as the Partnership's other leases, as described above in the first three paragraphs of this section. In January 1998, the Partnership reinvested a portion of the net sales proceeds from the sale of the Properties in Kissimmee, Florida, and Mason City, Iowa, in an IHOP Property located in Overland Park, Kansas, with an affiliate of the General Partners, as tenants-in-common, as described below in "Joint Venture Arrangements." The lease terms for this Property are substantially the same as the Partnership's other leases, as described above in the first three paragraphs of this section. Major Tenants During 1997, one lessee of the Partnership and its consolidated joint venture, Golden Corral Corporation, contributed more than ten percent of the Partnership's total rental income (including rental income from the Partnership's consolidated joint venture and the Partnership's share of rental income from one Property owned by an unconsolidated joint venture and two 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 ten percent of the Partnership's total rental income in 1998 and subsequent years. In addition, five Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Denny's, Pizza Hut, KFC and Taco Bell, each accounted for more than ten percent of the Partnership's total rental income in 1997 (including rental income from the Partnership's consolidated joint venture and the Partnership's share of the rental income from one Property owned by an unconsolidated joint venture and two 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 ten percent of total rental income to which the Partnership is entitled under the terms of the leases. Any failure of Golden Corral 3 Corporation or any of these Restaurant Chains could materially affect the Partnership's income. As of December 31, 1997, no single tenant or group of affiliated tenants leased Properties with an aggregate carrying value in excess of 20 percent of the total assets of the Partnership. Joint Venture Arrangements and Tenancy in Common Arrangements The Partnership has entered into a joint venture arrangement, Tuscawilla Joint Venture, with three unaffiliated entities to purchase and hold one Property. In addition, the Partnership has entered into a joint venture arrangement, Titusville Joint Venture, with CNL Income Fund IV, Ltd., a limited partnership organized pursuant to the laws of the State of Florida, and an affiliate of the General Partners, to purchase and hold one Property. The joint venture arrangements provide for the Partnership and its joint venture partners to share in all costs and benefits associated with the joint venture in accordance with their respective percentage interests in the joint venture. The Partnership has a 69.07% interest in Tuscawilla Joint Venture and a 73.4% interest in Titusville Joint Venture. The Partnership and its joint venture partners are also jointly and severally liable for all debts, obligations and other liabilities of the joint venture. Each joint venture has an initial term of approximately 20 years (generally the same term as the initial term of the lease for the Property in which the joint venture invested) and, after the expiration of the initial term, continues in existence from year to year unless terminated at the option of any joint venture partner or by an event of dissolution. Events of dissolution include the bankruptcy, insolvency or termination of any joint venturer, sale of the Property owned by the joint venture and mutual agreement of the Partnership and its joint venture partner to dissolve the joint venture. The Partnership has management control of Tuscawilla Joint Venture and shares management control equally with an affiliate of the General Partners for Titusville Joint Venture. The joint venture agreements restrict each venturer's ability to sell, transfer or assign its joint venture interest without first offering it for sale to its joint venture partners, either upon such terms and conditions as to which the venturers may agree or, in the event the venturers cannot agree, on the same terms and conditions as any offer from a third party to purchase such joint venture interest. Net cash flow from operations of Tuscawilla Joint Venture and Titusville Joint Venture is distributed 69.07% and 73.4%, respectively, to the Partnership and the balance is distributed to each other joint venture partner in accordance with its respective percentage interest in the joint venture. Any liquidation proceeds, after paying joint venture debts and liabilities and funding reserves for contingent liabilities, will be distributed first to the joint venture partners with positive capital account balances in proportion to such balances until such balances equal zero, and thereafter in proportion to each joint venture partner's percentage interest in the joint venture. 4 In addition to the above joint venture arrangements, in 1997, the Partnership entered into an agreement to hold a Property in Englewood, Colorado , as tenants-in-common , with CNL Income Fund IX, Ltd., an affiliate of the General Partners; and entered into an agreement to hold a Property in Miami, Florida, as tenants-in-common, with CNL Income Fund VII, Ltd., CNL Income Fund X, Ltd. and CNL Income Fund XIII, Ltd., affiliates of the General Partners. The agreements provide for the Partnership and the affiliates to share in the profits and losses of the Properties in proportion to each co-venturer's percentage interest. The Partnership owns a 32.77% and 9.84% interest in the Property in Englewood, Colorado and the Property in Miami, Florida, respectively. In addition, in January 1998, the Partnership entered into an agreement to hold an IHOP Property, as tenants-in-common , with CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd., affiliates of the General Partners. The agreement provides for the Partnership and the affiliates to share in the profits and losses of the Property in proportion to each co-venturer's percentage interest. The Partnership owns a 25.84 percent interest in this Property. The affiliates are limited partnerships organized pursuant to the laws of the State of Florida. The tenancy in common agreement restricts each co-tenant's ability to sell, transfer, or assign its interest in the tenancy in common's Property without first offering it for sale to the remaining co-tenant. The use of joint venture and tenancy in common arrangements allows the Partnership to fully invest its available funds at times at which it would not have sufficient funds to purchase an additional property, or at times when a suitable opportunity to purchase an additional property is not available. The use of joint venture and tenancy in common arrangements also provides the Partnership with increased diversification of its portfolio among a greater number of properties. In addition, tenancy in common arrangements may allow the Partnership to defer the gain for federal income tax purposes upon the sale of the property if the proceeds are reinvested in an additional property. Property Management CNL Income Fund Advisors, Inc., an affiliate of the General Partners, acted as manager of the Partnership's Properties pursuant to a property management agreement with the Partnership through September 30, 1995. Under this agreement, CNL Income Fund Advisors, Inc. was responsible for collecting rental payments, inspecting the Properties and the tenants' books and records, assisting the Partnership in responding to tenant inquiries and notices and providing information to the Partnership about the status of the leases and the Properties. CNL Income Fund Advisors, Inc. also assisted the General Partners in negotiating the leases. For these services, the Partnership had agreed to pay CNL Income Fund Advisors, Inc. an annual fee of one-half of one percent of Partnership assets (valued at cost) under management, not to exceed the lesser of one percent of 5 gross rental revenues or competitive fees for comparable services. Under the management agreement, the property management fee 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"), calculated in accordance with the Partnership's limited partnership agreement (the "Partnership Agreement"). In any year in which the Limited Partners have not received the a 10% Preferred Return, no property management fee will be paid. Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its rights in, and it obligations under, the property management agreement with the Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the property management agreement, including the payment of fees, as described above, remain unchanged. The property management agreement continues until the Partnership no longer owns an interest in any Properties unless terminated at an earlier date upon 60 days' prior notice by either party. Employees The Partnership has no employees. The officers of CNL Realty Corporation and the officers and employees of CNL Fund Advisors, Inc. perform certain services for the Partnership. In addition, the General Partners have available to them the resources and expertise of the officers and employees of CNL Group, Inc., a diversified real estate company, and its affiliates, who may also perform certain services for the Partnership. Item 2. Properties As of December 31, 1997, the Partnership owned 30 Properties. Of the 30 Properties, 26 are owned by the Partnership in fee simple, two are owned through joint venture arrangements and two are owned through tenancy in common arrangements. See Item 1. Business - Joint Venture and Tenancy in Common Arrangements. The Partnership is not permitted to encumber its Properties under the terms of its partnership agreement. Reference is made to the Schedule of Real Estate and Accumulated Depreciation filed with this report for a listing of the Properties and their respective costs, including acquisition fees and certain acquisition expenses. Description of Properties Land. The Partnership's Property sites range from approximately 11,800 to 94,500 square feet depending uponbuilding size and local demographic factors. Sites purchased by the Partnership are in locations zoned for commercial use which have been reviewed for traffic patterns and volume. 7 The following table lists the Properties owned by the Partnership as of December 31, 1997 by state. More detailed information regarding the location of the Properties is contained in the Schedule of Real Estate and Accumulated Depreciation filed with this report. State Number of Properties Arizona 2 California 1 Colorado 1 Florida 8 Georgia 1 Illinois 1 Indiana 1 Kansas 1 Kentucky 1 Maryland 2 Michigan 1 Minnesota 1 Missouri 1 North Carolina 1 Nebraska 1 Oklahoma 1 Texas 5 ------ TOTAL PROPERTIES: 30 ====== Buildings. Each of the Properties owned by the Partnership includes a building that is one of a Restaurant Chain's approved designs. The buildings generally are rectangular and are constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 1,900 to 8,900 square feet. Generally, all buildings on Properties acquired by the Partnership are freestanding and surrounded by paved parking areas. Buildings are suitable for conversion to various uses, although modifications may be required prior to use for other than restaurant operations. As of December 31, 1997, the Partnership had no plans for renovation of the Properties. Depreciation expense is computed for buildings and improvements using the straight line method using depreciable lives of 31.5 and 40 years for federal income tax purposes. As of December 31, 1997, the aggregate cost basis of the Properties owned by the Partnership and joint ventures (including Properties owned through tenancy in common arrangements) for federal income tax purposes was $19,121,915 and $1,726,015, respectively. 8 The following table lists the Properties owned by the Partnership as of December 31, 1997 by Restaurant Chain. Restaurant Chain Number of Properties Burger King 1 Chevy's Fresh Mex 1 Darryl's 1 Denny's 3 Golden Corral 6 IHOP 1 KFC 4 Perkins 1 Pizza Hut 4 Po Folks 2 Popeyes 1 Red Oaks Steakhouse 1 Taco Bell 3 Wendy's 1 ------ TOTAL PROPERTIES 30 ====== The General Partners consider the Properties to be well-maintained and sufficient for the Partnership's operations. The General Partners believe that the Properties are adequately covered by insurance. In addition, the General Partners have obtained contingent liability and property coverage for the Partnership. This insurance is intended to reduce the Partnership's exposure in the unlikely event a tenant's insurance policy lapses or is insufficient to cover a claim relating to the Property. Leases. The Partnership leases the Properties to operators of selected national and regional fast-food restaurant chains. The leases are generally on a long-term "triple net" basis, meaning that the tenant is responsible for repairs, maintenance, property taxes, utilities and insurance. Generally, a lessee is required, under the terms of its lease agreement, to make such capital expenditures as may be reasonably necessary to refurbish buildings, premises, signs and equipment so as to comply with the lessee's obligations, if applicable, under the franchise agreement to reflect the current commercial image of its Restaurant Chain. These capital expenditures are required to be paid by the lessee during the term of the lease. The terms of the leases of the Properties owned by the Partnership are described in Item 1. Business - Leases. At December 31, 1997, 1996, 1995, 1994, and 1993, the Properties were 93%, 94%, 97%, 100%, and 100% occupied, respectively. The following is a schedule of the average annual rent for each of the five years ended December 31:
For the Year Ended December 31: 1997 (2) 1996 1995 1994 1993 ------------ ---------- ---------- ------------ ---------- Rental Revenues (1) $2,116,623 $2,469,718 $2,368,914 $2,516,395 $2,416,168 Properties (2) 28 31 31 32 32 Average Rent per Unit $75,594 $79,668 $76,416 $78,637 $75,505
(1) Rental revenues include the Partnership's share of rental revenues from the two Properties owned through joint venture arrangements and the two properties owned through tenancy in common arrangements. Rental revenues have been adjusted, as applicable, for any amounts for which the Partnership has established an allowance for doubtful accounts. 11 (2) Excludes Properties that were vacant at December 31 and which did not generate any rental revenues during the year ended December 31. The following is a schedule of lease expirations for leases in place as of December 31, 1997 for each of the ten years beginning with 1998 and thereafter.
Percentage of Number Annual Rental Gross Annual Expiration Year of Leases Revenues Rental Income 1998 - - - 1999 - - - 2000 - - - 2001 - - - 2002 6 432,016 22.01% 2003 - - - 2004 - - - 2005 - - - 2006 1 87,849 4.47% 2007 7 383,097 19.51% Thereafter 14 1,060,272 54.01% -------- -------------- -------------- Totals (1) 28 1,963,234 100.00% ======== ============== ==============
(1) Excludes Properties that were vacant at December 31, 1997. Leases with Major Tenant. The terms of each of the leases with the Partnership's major tenant as of December 31, 1997 (see Item 1. Business - Major Tenants), are substantially the same as those described in Item 1. Business Leases. Golden Corral Corporation leases six Golden Corral restaurants pursuant to leases, each with an initial term of 15 years (expiring in 2002) and an average minimum base annual rent of approximately $72,000 (ranging from approximately $48,000 to $110,000). Competition The fast-food and family-style restaurant business is characterized by intense competition. The restaurants on the Partnership's Properties compete with independently owned restaurants, restaurants which are part of local or regional chains, and restaurants in other well-known national chains, including those offering different types of food and service. At the time the Partnership elects to dispose of its Properties, other than as a result of the exercise of tenant options to purchase Properties, the Partnership will be in competition with other persons and entities to locate purchasers for its Properties. 12 PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership 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 restaurant Properties were to be constructed, which are leased primarily to operators of selected national and regional fast-food Restaurant Chains. The leases are triple-net leases, with the lessees generally responsible for all repairs and maintenance, property taxes, insurance and utilities. As of December 31, 1997, the Partnership owned 30 Properties, either directly or indirectly through joint venture and tenancy in common arrangements. Capital Resources The Partnership's primary source of capital for the years ended December 31, 1997, 1996 and 1995, was cash from operations (which includes cash received from tenants, distributions from joint ventures and interest received, less cash paid for expenses). Cash from operations was $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 Partnership'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 Property in Hagerstown, Maryland, ceased operations of the restaurant business located on such 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 Partnership 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 Property was $259,242; therefore, no amount was included in receivables at December 31, 1995, relating to this Property. In addition, at December 31, 1995, the balance in the allowance for doubtful accounts for the Denny's Property in Hagerstown, Maryland, (which was leased to the same tenant of the Po Folks Property) for past due rental amounts was $76,948. In September 1996, the Partnership agreed to accept $175,000 in the form of promissory notes from the new tenant of the Denny's 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 Properties. In connection therewith, during 1996, the 13 Partnership recognized approximately $118,700 in base rental income for amounts which the Partnership had previously established an allowance for doubtful accounts, and wrote off the remaining balances in the allowance for doubtful accounts. During 1996, the Partnership accepted a three year promissory note for $25,000, which bears interest at ten percent 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 Property, the Partnership established an allowance for doubtful accounts of $150,000 during the year ended December 31, 1997. The Partnership is currently seeking either a replacement tenant or purchaser for the Po Folks Property. Other sources and uses of capital included the following during the years ended December 31, 1997, 1996 and 1995. In January 1996, the Partnership entered into a promissory note with the corporate general partner for a loan in the amount of $86,200 in connection with the operations of the Partnership. The loan was uncollateralized, bore interest at a rate of prime plus 0.25% per annum and was due on demand. The Partnership repaid the loan in full, along with approximately $660 in interest, to the corporate general partner. In addition, during 1996, the Partnership entered into various promissory notes with the corporate general partners for loans totalling $575,200 in connection with the operations of the Partnership. The loans were uncollateralized, non-interest bearing and due on demand. The Partnership had repaid the loans in full to the corporate general partner as of December 31, 1996. In addition, during 1997, the Partnership entered into various promissory notes with the corporate General Partner for loans totalling $117,000 in connection with the operations of the Partnership. The loans were uncollateralized, non-interest bearing and due on demand. As of December 31, 1997, the Partnership had repaid the loans in full to the corporate General Partner. 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 nets sales proceeds to pay liabilities of the Partnership, including quarterly distributions to the Limited Partners. The balance of the funds was used to pay past due real estate taxes on this Property incurred by the Partnership as a result of the former tenant declaring bankruptcy. The Partnership will distribute amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any, (at a level reasonably assumed by the General Partners), resulting from the sale. In 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 14 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 and will make the remaining proceeds available to pay liabilities of the Partnership, including distributions to limited partners. The General Partners believe that the transaction, or a portion thereof, relating to the sale of the Property in Bradenton, Florida, and the reinvestment of the proceeds in a Property in Fayetteville, North Carolina, will qualify as a like-kind exchange transaction for federal income tax purposes. However, the Partnership will distribute amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from the sale. In 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 expenses; 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. In connection therewith, the Partnership and the affiliate entered into an agreement whereby each co-venturer will share in the profits and losses of the Property in proportion to each co-venturer's percentage interest. As of December 31, 1997, the Partnership owned a 32.77% interest in the Property. In January 1998, the Partnership reinvested the remaining net sales proceeds in an IHOP Property in Overland Park, Kansas, with affiliates of the General Partners, as tenants-in-common. The General Partners believe that the transaction, or a portion thereof, relating to the sale of the Property in Kissimmee, Florida, and the reinvestment of a portion of the proceeds in an IHOP Property in Englewood, Colorado, will qualify as a like-kind exchange transaction for federal income tax purposes. However, the Partnership will distribute amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from the sale. In 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. 15 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, 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. In December 1997, the Partnership reinvested a portion of the net sales proceeds in a Property located in Miami, Florida, as tenants-in-common with an affiliate of the General Partners. In connection therewith, the Partnership and the affiliate entered into an agreement whereby each co-venturer will share in the profits and losses of the Property in proportion to each co-venturer's percentage interest. As of December 31, 1997, the Partnership owned a 9.84 percent interest in the Property. The Partnership will distribute amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from the sale. In 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. In January 1998, the Partnership reinvested the net sales proceeds in a Property in Overland Park, Kansas, with affiliates of the General Partners, as tenants-in-common. The General Partners believe that the transaction, or a portion thereof, relating to the sale of the Property in Mason City, Iowa, and the reinvestment of the proceeds in a Property in Overland Park, Kansas, with affiliates as tenants-in-common will qualify as a like-kind exchange transaction for federal income tax purposes. However, the Partnership will distribute amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from the sale. In January 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 16 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. The Partnership intends to distribute the majority of the net sales proceeds to the Limited Partners and intends to use the remaining net sales proceeds to pay liabilities of the Partnership. In February 1998, the Partnership also sold its Property in Punta Gorda, Florida, to a third party, for $675,000 and received net sales proceeds (including $28,330 which represents prorated rent collected at closing) of $665,973, resulting in a gain of approximately $73,500 for financial reporting purposes. The Partnership anticipates that it will reinvest the net sales proceeds in an additional Property. None of the Properties owned by the Partnership, or the joint ventures or the tenancy in common arrangements in which the Partnership owns an interest, is or may be encumbered. Subject to certain restrictions on borrowings from the General Partners, however, the Partnership may borrow, in the discretion of the General Partners, for the purpose of maintaining the operations of the Partnership. The Partnership will not encumber any of the Properties in connection with any borrowings or advances. The Partnership also will not borrow under circumstances which would make the Limited Partners liable to creditors of the Partnership. Affiliates of the General Partners from time to time incur certain operating expenses on behalf of the Partnership for which the Partnership reimburses the affiliates without interest. Currently, rental income from the Partnership's Properties and net sales proceeds from the sales of Properties, pending reinvestment in an additional Property, distribution to the Limited Partners or use for the payment of Partnership liabilities, are invested in money market accounts or other short-term, highly liquid investments such as demand deposit accounts at commercial banks, CDs and money market accounts with less than a 30-day maturity date, pending the Partnership's use of such funds to pay Partnership expenses or to make distributions to the partners. At December 31, 1997, the Partnership 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 Partnership used net sales proceeds from the sales of Properties to pay a portion of the liabilities of the Partnership, including quarterly distributions to the Limited Partners. During 1996, the Partnership used cash generated from operations to pay liabilities of the Partnership. As of December 31, 1997, the average interest rate earned on the rental income deposited in demand deposit accounts at commercial banks was approximately four percent annually. The funds remaining at December 31, 1997, will be used for the payment of distributions and other liabilities. Short-Term Liquidity The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership. The Partnership's investment strategy of acquiring Properties for cash and generally leasing them under triple-net leases to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. The General Partners believe that the leases will continue to generate cash flow in excess of operating expenses. Due to low operating expenses and ongoing cash flow, the General Partners do not believe that working capital reserves are necessary at this time. In addition, because the leases for the Partnership's 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 Partnership has insufficient funds for such purposes, the General Partners will contribute to the Partnership an aggregate amount of up to one percent of the offering proceeds for maintenance and repairs. The General Partners have the right, but not the obligation, to make additional capital contributions if they deem it appropriate in connection with the operations of the Partnership. The Partnership generally distributes cash from operations remaining after the payment of the operating expenses of the Partnership, to the extent that the General Partners determine that such funds are available for distribution. Based primarily on current and anticipated cash from operations, the Partnership 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. The distributions to the Limited Partners for 1997, 1996 and 1995, were also based on loans received from the General Partners of $117,000, $575,200 and $86,200, respectively, all of which were subsequently repaid, as described above in "Capital Resources." The General Partners expect to distribute some or all of the net sales proceeds from the sales of the Properties in Fernandina Beach and Daytona Beach, Florida, to the Limited Partners. In deciding whether to sell Properties, the General Partners will consider factors such as potential capital appreciation, net cash flow, and federal income tax considerations. The reduced number of Properties for which the Partnership receives rental payments, as well as ongoing operations, is expected to reduce the Partnership's revenues. The decrease in Partnership revenues, combined with the fact that a significant portion of the Partnership'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 Partnership as a return of capital for purposes of calculating the Limited Partners return on their adjusted capital contributions. The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis. During 1997, 1996 and 1995, affiliates of the General Partners incurred on behalf of the Partnership $71,681, $108,900 and $149,252, respectively, for certain operating expenses. At December 31, 1997 and 1996, the Partnership 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 Partnership 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 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 Properties as described above, and in the event the General Partners elect to make additional contributions or loans to the Partnership, from future General Partner contributions or loans. Long-Term Liquidity The Partnership has no long-term debt or other long-term liquidity requirements. 19 Results of Operations During the years ended December 31, 1995 and 1996, the Partnership owned and leased 30 wholly owned Properties and during 1997, the Partnership owned and leased 31 wholly owned Properties (including five 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 Partnership was a co-venturer in two separate joint ventures that each owned and leased one Property and during 1997, the Partnership owned and leased two Properties, with affiliates of the General Partners, as tenants-in-common. As of December 31, 1997, the Partnership owned, either directly or through joint venture arrangements, 30 Properties which are, in general, subject to long-term, triple-net leases. The leases of the Properties provide for minimum base annual rental amounts (payable in monthly installments) ranging from approximately $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. For further description of the Partnership's leases and Properties, see Item 1. Business - Leases and Item 2. Properties, respectively. During the years ended December 31, 1997, 1996 and 1995, the Partnership and its consolidated joint 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 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 "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 Property in Fayetteville, North Carolina, in June 1997, as described above in "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 Partnership entered into a new lease with a new tenant for the Denny's Property in Hagerstown, Maryland, and in connection therewith, recognized as income approximately $118,700 for which the Partnership had previously established an allowance for doubtful accounts relating to the Denny's and Po Folks Properties in Hagerstown, Maryland, as described above in "Capital Resources." The decrease in 1997, as compared to 1996, is also partially attributable to the fact that during 1997, the Partnership established an allowance for doubtful accounts of approximately $77,100 for past due amounts for these Properties due to the uncertainty of the collectibility of these amounts. The General Partners intend to pursue collection of past due amounts relating to this Property and will recognize any such amounts as income if collected. Rental and earned income during 1997 and 1996, continued to remain at reduced amounts due to the fact that the Partnership is not receiving any rental income relating to the Po Folks Property in Hagerstown, Maryland. The General Partners are currently seeking a buyer or a new tenant for this Property. In addition, the decrease in rental and earned income during 1997, as compared to 1996, is partially attributable to the Partnership increasing its allowance for doubtful accounts by approximately $15,400 for rental amounts relating to the Property in Canton Township, Michigan, due to financial difficulties the tenant is experiencing. The General Partners intend to pursue collection of past due amounts relating to this 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 Property in Chicago, Illinois, ceased operations of the restaurant business located on such Property and the Partnership ceased recording rental revenue relating to such Property. The tenant filed for bankruptcy and in January 1997, the Partnership sold this Property to an unrelated third party, as described above in "Capital Resources." 22 During the years ended December 31, 1997, 1996 and 1995, the Partnership 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 Partnership 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 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 Properties or the use of such amounts for other Partnership 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 Property in Roswell, Georgia, in June 1997. The increase in interest and other income during 1997, was also attributable to the Partnership recognizing $15,000 in other income due to the fact that the purchase and sale agreement between the Partnership and a third party for the Po Folks 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 Partnership due to the termination of the agreement. The Partnership 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 Partnership 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 Property owned by Titusville Joint Venture vacated the Property and ceased operations. In conjunction therewith, Titusville Joint Venture (in which the Partnership 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 Property in Titusville, Florida, for approximately $147,000. The allowance 23 represents the difference between the Property's carrying value at December 31, 1997, and the estimated net realizable value of the Property. In addition, the joint venture wrote off unamortized lease costs of $23,500 in 1997 due to the tenant vacating the Property. Titusville Joint Venture is currently seeking either a replacement tenant or purchaser for this 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 Partnership reinvested the majority of the net sales proceeds it received from the sale of the Property in Kissimmee, Florida, in an IHOP Property located in Englewood, Colorado, as tenants-in-common with an affiliate of the General Partners. 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 Partnership and its consolidated joint venture, Golden Corral Corporation, contributed more than ten percent of the Partnership's total rental income (including rental income from the Partnership's consolidated joint venture and the Partnership's share of the rental income from one Property owned by an unconsolidated joint venture and two 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 ten percent of the Partnership's total rental income during 1998 and subsequent years. In addition, during at least one of the years ended December 31, 1997, 1996 or 1995, six Restaurant Chains, Golden Corral, Denny's, Perkins, Pizza Hut, KFC and Taco Bell, each accounted for more than ten percent of the Partnership's total rental income (including rental income from the Partnership's consolidated joint venture and the Partnership's share of the rental income from one Property owned by an unconsolidated joint venture and two Properties owned with affiliates as tenants-in-common). In subsequent years, it is anticipated that Golden Corral, 24 Denny's, Pizza Hut, KFC and Taco Bell each will continue to account for more than ten percent of total rental income to which the Partnership is entitled under the terms of the leases. Any failure of Golden Corral Corporation or any of these Restaurant Chains could materially affect the Partnership'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 Properties in 1997, as described above in "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 Property in Hagerstown, Maryland, due to the Partnership establishing an allowance for loss on land and building which represented the difference between the Property's carrying value at December 31, 1995, and the estimated net realizable value of the Property. This allowance reduced the depreciable basis of the 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 Partnership recorded approximately $15,000, relating to legal fees associated with the tenant of the Property in Chicago, Illinois, filing bankruptcy. The Partnership sold this Property in January 1997, as described above in "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 Partnership and its 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 Partnership 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 Properties in Hagerstown, Maryland. These amounts relate to prior year amounts due from the former tenant that the current tenant of this Property had agreed to pay, as described above in "Capital Resources." However, the Partnership recorded these amounts as expenses during 1997, due to the fact that payment of these amounts by the current tenant now appears doubtful. The General Partners intend to pursue collection of past due amounts relating to this 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 Partnership did not record real estate tax expense relating to the Denny's Property and Po Folks Property in Hagerstown, Maryland, as described above. The Partnership recorded such expenses during 1995. As a result of the former tenant of the Po Folks Property in Hagerstown, Maryland, defaulting under the terms of its lease in February 1995, the Partnership expects to continue to incur real estate tax expense and insurance expense until the Property is sold or leased to a new tenant. 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 Partnership and its Properties and an increase in insurance expense as a result of the General Partners' obtaining contingent liability and property coverage for the Partnership beginning in May 1995. As a result of the sales of the five Properties during 1997, and the sale of the parcel of land in Plant City, Florida, as described above in "Capital Resources," the Partnership recognized gains on sale of land and buildings totalling $1,027,590 during the year ended December 31, 1997. No Properties were sold during 1996 or 1995. In addition, during the years ended December 31, 1997 and 1995, the Partnership recorded an allowance for loss on land and building of $32,819 and $207,844, respectively, relating to the Po Folks Property in Hagerstown, Maryland. The allowance represented the difference between the carrying value of the Property at December 31, 1997 and 1995, and the net realizable value of the Property based on anticipated sales prices at December 31, 1997 and 1995. The General Partners of the Partnership are in the process of assessing and addressing the impact of the year 2000 on their computer package software. The hardware and built-in software are believed to be year 2000 compliant. Accordingly, the General Partners do not expect this matter to materially impact how the Partnership conducts business nor its current or future results of operations or financial position. The Partnership's leases as of December 31, 1997, are triple-net leases and, in general, contain provisions that the General Partners believe mitigate the adverse effect of inflation. Such provisions include clauses requiring the payment of percentage rent based on certain restaurant sales above a specified level and/or automatic increases in base rent at specified times during the term of the lease. Management expects that increases in restaurant sales volumes due to inflation and real sales growth should result in an increase in rental income (for certain Properties) over time. Continued inflation also may cause capital appreciation of the Partnership's Properties. Inflation and changing prices, however, also may have an adverse impact on the sales of the restaurants and on potential capital appreciation of the Properties. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of July, 1999. CNL INCOME FUND III, LTD. By: CNL REALTY CORPORATION General Partner /s/ Robert A. Bourne --------------------------- ROBERT A. BOURNE, President By: ROBERT A. BOURNE General Partner /s/ Robert A. Bourne --------------------------- ROBERT A. BOURNE By: JAMES M. SENEFF, JR. General Partner /s/ James M. Seneff, Jr. --------------------------- JAMES M. SENEFF, JR. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Robert A. Bourne President, Treasurer and Director July 29, 1999 - -------------------------- (Principal Financial and Accounting Robert A. Bourne Officer) /s/ James M. Seneff, Jr. Chief Executive Oficer and Director July 29, 1999 - -------------------------- (Principal Executive Officer) James M. Seneff, Jr.
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