-----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, MGwr6k6qCpekS7J0Nyg+/tDb/Ba/gFVUIFBlj5ztvkSfrm5d+GMv8sjqlxxzxiyk 4wfEbWjlgmLCUHHEwidsAw== 0000928385-00-000947.txt : 20000411 0000928385-00-000947.hdr.sgml : 20000411 ACCESSION NUMBER: 0000928385-00-000947 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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-K405 SEC ACT: SEC FILE NUMBER: 000-16850 FILM NUMBER: 582186 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-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (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, 1999 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) 450 South Orange Avenue Orlando, Florida 32801-3336 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 540-2000 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 50,000 units of limited partnership interest (the "Units") on Form S-11 under the Securities Act of 1933, as amended. Since no established market for such Units exists, there is no market for such Units. Each Unit was originally sold at $500 per Unit. DOCUMENTS INCORPORATED BY REFERENCE: None 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 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 these net sales proceeds in three Properties, one each in Englewood, Colorado, Miami, Florida, and Overland Park, Kansas, as tenants-in-common, with affiliates of the General Partners during 1997 and 1998. During 1998, the Partnership sold its Properties in Daytona Beach, Fernandina Beach, and Punta Gorda, Florida; Hazard, Kentucky, and a Po Folks Property in Hagerstown, Maryland. The Partnership reinvested a portion of the net sales proceeds in a joint venture arrangement, RTO Joint Venture, with an affiliate of the General Partners to purchase, construct and hold one property. During 1999, the Partnership sold its Perkins Property in Flagstaff, Arizona and its Denny's Property in Hagerstown, Maryland. The Partnership reinvested the majority of the remaining net sales proceeds from the 1998 and 1999 sales in a Property in Montgomery, Alabama; a Property in Auburn, Alabama and a Property in Baytown, Texas, as tenants-in-common, with affiliates of the General Partners. As a result of the above transactions, as of December 31, 1999, the Partnership owned 28 Properties. The 28 Properties include interests in three Properties owned by joint ventures in which the Partnership is a co-venturer and four Properties owned with affiliates of the General Partners as tenants-in-common. 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 the Property's then fair market value after a specified portion of the lease term has elapsed. The Partnership has no obligation to sell all or any portion of a Property at any particular time, except as may be required under Property or joint venture purchase options granted to certain lessees. On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the Partnership would be merged with and into a subsidiary of APF (the "Termination of Merger"). APF is a real estate investment trust whose primary business is the ownership of restaurant properties leased on a long-term, "triple-net" basis to operators of national and regional restaurant chains. On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with APF, pursuant to which the Partnership would be merged with and into a subsidiary of APF. Under the Agreement and Plan of Merger, APF was to issue shares of its common stock as consideration for the Merger. On March 1, 2000, the General Partners and APF announced that they had mutually agreed to terminate the Agreement and Plan of Merger. The agreement to terminate the Agreement and Plan of Merger was based, in large part, on the General Partners' concern that, in light of market conditions relating to publicly traded real estate investment trusts, the value of the transaction had diminished. As a 1 result of such diminishment, the General Partners' ability to unequivocally recommend voting for the transaction, in the exercise of their fiduciary duties, had become questionable. 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 2019. Generally, leases are on a triple-net basis, with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases of the Properties generally provide for minimum base annual rental payments (payable in monthly installments) ranging from approximately $23,000 to $191,900. The majority 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. Lessees of 21 of the Partnership's 28 Properties 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. Fair market value will be determined through an appraisal by an independent firm. 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 that described above, multiplied by the percentage interest in the Property with respect to which the 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 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 January 1999, the Partnership reinvested a portion of the net sales proceeds from the sales of the Properties in Hagerstown, Maryland and Hazard, Kentucky, in a Property located in Montgomery, Alabama. The lease terms for this Property are substantially the same as the Partnership's other leases, as described above. In October 1999, the Partnership reinvested a portion of the net sales proceeds from the sales of the Properties in Hagerstown, Maryland and Flagstaff, Arizona, in a Property located in Auburn, Alabama. The lease terms for this Property are substantially the same as the Partnership's other leases, as described above. In addition, in October 1999, the Partnership reinvested a portion of the net sales proceeds from the sale of the Denny's Property located in Hagerstown, Maryland, in an IHOP Property located in Baytown, Texas, with an affiliate of the General Partners, as tenants-in-common, as described below in "Joint Venture and Tenancy in Common Arrangements". The lease terms for this Property are substantially the same as the Partnership's other leases, as described above. Major Tenants During 1999, 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 two Properties owned by unconsolidated joint ventures and four Properties owned with affiliates of the General Partners as tenants-in-common). As of December 31, 1999, Golden Corral Corporation was the lessee under leases relating to five restaurants. It is anticipated that, based on the minimum rental payments required by the leases, this lessee will continue to contribute more than ten percent of the Partnership's total rental income in 2000 and subsequent years. In addition, three Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Pizza Hut, and KFC, each accounted for more than ten percent of the Partnership's total rental income in 1999 (including rental income from the Partnership's consolidated joint venture and the Partnership's share of the rental income from two Properties owned by unconsolidated joint ventures and four Properties owned with affiliates of the General Partners as tenants-in-common). In subsequent years, it is anticipated that these three Restaurant Chains each will continue to account for more than ten 2 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, if the Partnership is not able to re-lease these Properties in a timely manner. As of December 31, 1999, no single tenant or group of affiliated tenants lease Properties with an aggregate carrying value in excess of 20 percent of the total assets of the Partnership. Joint Venture and Tenancy in Common Arrangements The Partnership has entered into a joint venture arrangement, Tuscawilla Joint Venture, with three unaffiliated entities to purchase and hold one Property. In addition, the Partnership has entered into two separate joint venture arrangements: Titusville Joint Venture with CNL Income Fund IV, Ltd., an affiliate of the General Partners, to purchase and hold one Property; and RTO Joint Venture with CNL Income Fund V, Ltd., an affiliate of the General Partners, to purchase, construct and hold one Property. Construction for the Property owned by RTO Joint Venture was completed and rent commenced in December 1998. The affiliates are limited partnerships organized pursuant to the laws of the State of Florida. The joint venture arrangements provide for the Partnership and its joint venture partners to share in all costs and benefits associated with the joint venture in accordance with their respective percentage interests in the joint venture. The Partnership has a 69.07%, 73.4%, and 46.88% interest in Tuscawilla Joint Venture, Titusville Joint Venture, and RTO Joint Venture, respectively. 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 affiliates of the General Partners for Titusville Joint Venture and RTO 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 ventures may agree or, in the event the ventures 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, Titusville Joint Venture and RTO Joint Venture is distributed 69.07%, 73.4% and 46.88%, 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. In addition to the above joint venture arrangements, the Partnership has entered into three agreements to hold a Property as tenants-in common: one in Englewood, Colorado, with CNL Income Fund IX, Ltd., one in Overland Park, Kansas, with CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd., and one in Miami, Florida, with CNL Income Fund VII, Ltd., CNL Income Fund X, Ltd., and CNL Income Fund XIII, Ltd. Each of the CNL Income Funds is an affiliate 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 party's percentage interest. The Partnership owns a 33 percent, 25.87% and 9.84% interest in the Properties, respectively. In addition, in October 1999, the Partnership entered into an agreement to hold an IHOP Property, as tenants-in-common, with CNL Income Fund VI, Ltd., affiliate of the General Partners. The agreement provides for the Partnership and the affiliate to share in the profits and losses of the Property in proportion to each co-tenant's percentage interest. The Partnership owns a 20 percent interest in this Property. 3 Each of the affiliates is a limited Partnership organized pursuant to the laws of the State of Florida. The tenancy in common agreement restricts each party'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 party to the agreement. 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 Funds Advisors, Inc., an affiliate of the General Partners, acts as manager of the Partnership's Properties pursuant to a property management agreement with the Partnership. Under this agreement, CNL Fund Advisors, Inc. is responsible for collecting rental payments, inspecting the Properties and the tenants' books and records, assisting the Partnership in responding to tenant inquiries and notices and providing information to the Partnership about the status of the leases and the Properties. CNL Fund Advisors, Inc. also assists the General Partners in negotiating the leases. For these services, the Partnership has agreed to pay CNL Fund Advisors, Inc. an annual fee of one-half of one percent of Partnership assets (valued at cost) under management, not to exceed the lesser of one percent of 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 10% Preferred Return, no property management fee will be paid. 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 American Properties Fund, Inc. ("APF"), the parent Company 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 Financial Group, Inc. (formerly 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, 1999, the Partnership owned 28 Properties. Of the 28 Properties, 21 are owned by the Partnership in fee simple, three are owned through joint venture arrangements and four are owned through tenancy in common arrangements. See Item 1. Business - Joint Venture and Tenancy in Common Arrangements. The Partnership is not permitted to encumber its Properties under the terms of its partnership agreement. Reference is made to the Schedule of Real Estate and Accumulated Depreciation for a listing of the Properties and their respective costs, including acquisition fees and certain acquisition expenses. Description of Properties Land. The Partnership's Property sites range from approximately 11,800 to 74,600 square feet depending upon building size and local demographic factors. Sites purchased by the Partnership are in locations zoned for commercial use which have been reviewed for traffic patterns and volume. 4 The following table lists the Properties owned by the Partnership as of December 31, 1999 by state. More detailed information regarding the location of the Properties is contained in the Schedule of Real Estate and Accumulated Depreciation filed for the year ended December 31, 1999.
State Number of Properties ----- -------------------- Alabama 2 Arizona 1 California 1 Colorado 1 Florida 5 Georgia 1 Illinois 1 Indiana 1 Kansas 2 Maryland 1 Michigan 1 Minnesota 1 Missouri 1 Nebraska 1 North Carolina 1 Oklahoma 1 Texas 6 ----------------- TOTAL PROPERTIES 28 =================
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 7,900 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, 1999, 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, 1999, the aggregate cost of the Properties owned by the Partnership and its consolidated joint venture, and the unconsolidated joint ventures (including the Properties owned through tenancy in common arrangements) for federal income tax purposes was $9,556,868 and $5,896,448, respectively. The following table lists the Properties owned by the Partnership as of December 31, 1999 by Restaurant Chain.
Restaurant Chain Number of Properties ---------------- -------------------- Burger King 2 Chevy's Fresh Mex 1 Darryl's 1 Golden Corral 6 IHOP 4 KFC 4 Pizza Hut 4 Po Folks 1 Popeyes 1 Red Oak Steakhouse 1 Ruby Tuesday 1 Taco Bell 2 --------------- TOTAL PROPERTIES 28 ===============
5 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, 1999, 1998, 1997, 1996, and 1995, the Properties were 98%, 98%, 93%, 94%, and 97% occupied, respectively. The following is a schedule of the average rent per Property for each of the years ended December 31:
1999 1998 1997 1996 1995 --------------- --------------- ----------------- ----------------- ----------------- Rental Revenues (1) $1,939,767 $1,798,973 $2,116,623 $2,469,718 $2,368,914 Properties (2) 27 27 28 31 31 Average Rent per Property $ 71,843 $ 66,629 $ 75,594 $ 79,668 $ 76,416
(1) Rental income includes the Partnership's share of rental income from the Properties owned through joint venture arrangements and the Properties owned through tenancy in common arrangements. Rental revenues have been adjusted, as applicable, for any amounts for which the Partnership has established an allowance for doubtful accounts. (2) Excludes Properties that were vacant at December 31, and that did not generate rental revenues during the year ended December 31. The following is a schedule of lease expirations for leases in place as of December 31, 1999 for the next ten years and thereafter.
Percentage of Expiration Number Annual Rental Gross Annual Year of Leases Revenues Rental Income -------------- --------------- ---------------- ---------------- 2000 -- $ -- -- 2001 -- -- -- 2002 6 432,016 23.09% 2003 -- -- -- 2004 -- -- -- 2005 -- -- -- 2006 1 87,849 4.70% 2007 6 283,755 15.17% 2008 4 288,678 15.43% 2009 -- -- -- Thereafter 10 778,542 41.61% --------------- ---------------- ---------------- Total (1) 27 $ 1,870,840 100.00% =============== ================ ================
(1) Excludes one Property which was vacant at December 31, 1999. 6 Leases with Major Tenant. The terms of each of the leases with the Partnership's major tenant as of December 31, 1998 (see Item 1. Business - Major Tenants), are substantially the same as those described in Item 1. Business - Leases. Golden Corral Corporation leases five 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 $64,400 (ranging from approximately $48,000 to $76,400). 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. Item 3. Legal Proceedings On May 11, 1999, four limited partners in several CNL Income Funds served a derivative and purported class action lawsuit filed April 22, 1999 against the General Partners and APF in the Circuit Court of the Ninth Judicial Circuit of Orange County, Florida, alleging that the General Partners breached their fiduciary duties and violated provisions of certain of the CNL Income Fund partnership agreements in connection with the proposed Merger. The plaintiffs are seeking unspecified damages and equitable relief. On July 8, 1999, the plaintiffs filed an amended complaint which, in addition to naming three additional plaintiffs, includes allegations of aiding and abetting and conspiring to breach fiduciary duties, negligence and breach of duty of good faith against certain of the defendants and seeks additional equitable relief. As amended, the caption of the case is Jon Hale, Mary J. Hewitt, Charles A. ------------------------------------- Hewitt, Gretchen M. Hewitt Bernard J. Schulte, Edward M. and Margaret Berol - --------------------------------------------------------------------------- Trust, and Vicky Berol v. James M. Seneff, Jr., Robert A. Bourne, CNL Realty - ---------------------------------------------------------------------------- Corporation, and CNL American Properties Fund, Inc., Case No. CIO-99-0003561. - ---------------------------------------------------- On June 22, 1999, a limited partner of several CNL Income Funds served a purported class action lawsuit filed April 29, 1999 against the General Partners and APF, Ira Gaines, individually and on behalf of a class of persons similarly ---------------------------------------------------------------------- situated, v. CNL American Properties Fund, Inc., James M. Seneff, Jr., Robert A. - -------------------------------------------------------------------------------- Bourne, CNL Realty Corporation, CNL Fund Advisors, Inc., CNL Financial - ---------------------------------------------------------------------- Corporation a/k/a CNL Financial Corp., CNL Financial Services, Inc. and CNL - --------------------------------------------------------------------------- Group, Inc., Case NO. CIO-99-3796, in the Circuit Court of the Ninth Judicial - ----------- Circuit of Orange County, Florida, alleging that the General Partners breached their fiduciary duties and that APF aided and abetted their breach of fiduciary duties in connection with the proposed Merger. The plaintiff is seeking unspecified damages and equitable relief. On September 23, 1999, Judge Lawrence Kirkwood entered an order consolidating the two cases under the caption In re: CNL Income Funds ----------------------- Litigation, Case No. 99-3561. Pursuant to this order, the plaintiffs in these - ---------------------------- cases filed a consolidated and amended complaint on November 8, 1999. On December 22, 1999, the General Partners and CNL Group, Inc. filed motions to dismiss and motions to strike. On December 28, 1999, APF and CNL Fund Advisors, Inc. filed motions to dismiss. On March 6, 2000, all of the defendants filed a Joint Notice of Filing Form 8-K Reports and Suggestion of Mootness. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) As of March 15, 2000, there were 2,032 holders of record of the Units. There is no public trading market for the Units, and it is not anticipated that a public market for the Units will develop. During 1999, Limited Partners who wished to sell their Units may have offered the Units for sale pursuant to the Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners who wished to have their distributions used to acquire additional Units (to the extent Units were available for purchase), may have done so pursuant to such Plan. The General Partners had the right to prohibit transfers of Units. From inception through December 31, 1999, the price paid for any Unit transferred pursuant to the Plan ranged from $382.50 to $475 per Unit. The price paid for any Units transferred other than pursuant to the Plan was subject to negotiation by the purchaser and the selling Limited Partner. The Partnership will not redeem or repurchase Units. The following table reflects, for each calendar quarter, the high, low and average sales prices for transfers of Units during 1999 and 1998 other than pursuant to the Plan, net of commissions.
1999 (1) 1998 (1) -------------------------------- -------------------------------- High Low Average High Low Average ------ ------- ----------- ------ ------- ----------- First Quarter $400 $343 $371 $425 $420 $423 Second Quarter 389 389 389 480 379 442 Third Quarter 354 285 324 480 389 435 Fourth Quarter 352 318 345 450 375 427
(1) A total of 387 1/2 and 255 Units were transferred other than pursuant to the Plan for the years ended December 31, 1999 and 1998, respectively. The capital contribution per Unit was $500. All cash available for distribution will be distributed to the partners pursuant to the provisions of the Partnership Agreement. For the years ended December 31, 1999 and 1998, the Partnership declared cash distributions of $2,000,000 and $3,477,747, respectively, to the Limited Partners. Distributions during 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 special distribution was effectively a return of a portion of the Limited Partners' investment, although, in accordance with the Partnership agreement, it was applied to the Limited Partners' unpaid cumulative preferred return. The reduced number of Properties for which the Partnership receives rental payments, as well as ongoing operations, reduced 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, resulted in a decrease in cash distributions to the Limited Partners during 1998. No amounts distributed to partners for the years ended December 31, 1999 and 1998, 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. No distributions have been made to the General Partners to date. As indicated in the chart below, these distributions were declared at the close of each of the Partnership's calendar quarters. These amounts include monthly distributions made in arrears for the Limited Partners electing to receive such distributions on this basis.
1999 1998 ---------- ---------- First Quarter $500,000 $1,977,747 Second Quarter 500,000 500,000 Third Quarter 500,000 500,000 Fourth Quarter 500,000 500,000
8 The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis, although the General Partners, in their sole discretion, may elect to pay distributions monthly. (b) Not Applicable Item 6. Selected Financial Data
1999 1998 1997 1996 1995 --------------- --------------- --------------- --------------- --------------- Year ended December 31: Revenues (1) $ 1,994,242 $ 1,786,254 $ 2,023,495 $ 2,452,797 $ 2,358,235 Net income (2) 1,730,671 1,736,883 2,391,835 1,814,657 1,482,515 Cash distributions declared (3) 2,000,000 3,477,747 2,376,000 2,376,000 2,376,000 Net income per Unit (2) 34.28 34.44 47.47 35.93 29.37 Cash distributions declared per Unit (2)(3) 40.00 69.55 47.52 47.52 47.52 At December 31: Total assets $16,472,518 $16,701,732 $18,479,002 $18,608,907 $19,065,305 Partners' capital 15,600,943 15,870,272 17,611,136 17,595,301 18,156,644
(1) Revenues include equity in earnings of the unconsolidated joint venture and minority interest in income and losses of the consolidated joint venture. (2) Net income for the years ended December 31, 1999, 1998, and 1997, includes gains on sale of land and buildings of $293,512, $497,321, and $1,027,590, respectively. In addition, net income for the years ended December 31, 1998 and 1997, includes an impairment in carrying value of net investment in direct financing lease of $25,821 and a provision for loss on land and building of $32,819, respectively. (3) Distributions for the year ended December 31, 1998, includes a special distribution to the Limited Partners of $1,477,747, as a result of the distribution of the net sales proceeds from Property sales. The above selected financial data should be read in conjunction with the financial statements and related notes contained in Item 8 hereof. 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 generally are triple-net leases, with the lessees generally responsible for all repairs and maintenance, property taxes, insurance and utilities. As of December 31, 1999, the Partnership owned 28 Properties, either directly or indirectly through joint venture or tenancy in common arrangements. Capital Resources During the years ended December 31, 1999, 1998 and 1997, the Partnership generated cash from operations (which includes cash received from tenants, distributions from joint ventures and interest received, less cash paid for expenses) of $1,825,724, $1,821,296, and $2,021,689, respectively. The decrease in cash from operations during 1999 and 1998, each as compared to the previous year, was primarily a result of changes in income and expenses as 9 described in "Results of Operations" below and changes in the Partnership's working capital during each of the respective years. Other sources and uses of capital included the following during the years ended December 31, 1999, 1998, and 1997. 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. The Partnership had repaid the loans in full to the corporate General Partner as of December 31, 1997. 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 was used to pay past due real estate taxes on this Property incurred by the Partnership as a result of a former tenant declaring bankruptcy. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from 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 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 expense; therefore, the Partnership sold the Property for approximately $225,200 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 made the remaining proceeds available to pay liabilities of the Partnership, including distributions to Limited Partners. 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, qualified as a like-kind exchange transaction for federal income tax purposes. 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 $198,400 in excess of its original purchase price. In July 1997, the Partnership reinvested approximately $511,700 of the 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 share in the profits and losses of the Property in proportion to each co-venturer's percentage interest. As of December 31, 1999, the Partnership owned a 33 percent 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. A portion of the transaction 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, qualified as a like-kind exchange transaction for federal income tax purposes. 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. 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. During 1998, the Partnership collected the full amount of the outstanding 10 mortgage note receivable balance of $678,730. 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 share in the profits and losses of the Property in proportion to each co-venturer's percentage interest. In addition, in January 1999, the Partnership reinvested the remaining net sales proceeds in a Burger King Property in Montgomery, Alabama, at an approximate cost of $939,900. As of December 31, 1999, the Partnership owned a 9.84% interest in the Property. The Partnership used the remaining net sales proceeds for other Partnership purposes. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from 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 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 $26,200 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. A portion of the transaction, 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, qualified as a like-kind exchange transaction for federal income tax purposes. In January 1998, the Partnership sold its Property in Fernandina Beach, Florida, to the tenant, for $730,000 and received net sales proceeds of $724,172 resulting in a gain of $242,129 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 sale proceeds of $1,006,501, resulting in a gain of $267,759 for financial reporting purposes. These Properties were originally acquired by the Partnership in May 1988 and August 1988, respectively, and had a total cost of approximately $1,464,200, excluding acquisition fees and miscellaneous acquisition expenses; therefore, the Partnership sold the Properties for approximately $266,500 in excess of their original purchase price. In connection with the sale of these Properties, the Partnership incurred deferred, subordinated, real estate disposition fees of $53,400. The Partnership distributed $1,477,747 of the net sales proceeds as a special distribution to the Limited Partners and used the remaining proceeds to pay liabilities of the Partnership. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from these sales. In February 1998, the Partnership also sold its Property in Punta Gorda, Florida, to a third party, for $675,000 and received net sales proceeds of $665,973, resulting in a gain of $73,485 for financial reporting purposes. In May 1998, the Partnership contributed the net sales proceeds to a joint venture arrangement as described below. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from these sales. As described above, in May 1998, the Partnership entered into a joint venture, RTO Joint Venture, with an affiliate of the General Partners, to construct and hold one restaurant Property. As of December 31, 1999, the Partnership had contributed $676,952 to purchase land and pay for construction relating to the joint venture. Construction was completed and rent commenced in December 1998. The Partnership holds a 46.88% interest in the profits and losses of the joint venture. In June 1998, the Partnership sold its Po Folks Property in Hagerstown, Maryland, to a third party, for $825,000 and received net sales proceeds of $789,639, resulting in gain of $13,213 for financial reporting purposes. In January 1999, the Partnership reinvested the majority of the net sales proceeds in a Property in Montgomery, Alabama. The Partnership intends to use the remaining net sales proceeds to pay distributions to the Limited Partners and for other Partnership purposes. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from these sales. In September 1998, the Partnership entered into a new lease agreement for the Golden Corral Property in Stockbridge, Georgia. In connection therewith, the Partnership funded $150,000 in renovation costs. 11 In December 1998, the Partnership sold its Property in Hazard, Kentucky, to a third party for $435,000 and received net sales proceeds of $432,625, resulting in a loss of $99,265 for financial reporting purposes. The Partnership intends to use the net sales proceeds to pay distributions to the Limited Partners and for other Partnership purposes. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners). In April 1999, the Partnership sold its Property in Flagstaff, Arizona, to the tenant for $1,103,127 and received net sales proceeds of $1,091,192, resulting in a gain of $285,350 for financial reporting purposes. This Property was originally acquired by the Partnership in October 1988 and had a cost of approximately $993,500, excluding acquisition fees and miscellaneous acquisition expenses; therefore, the Partnership sold the Property for approximately $97,700 in excess of its original purchase price. In October 1999, the Partnership reinvested the net sales proceeds it received from the sale of this Property, in an IHOP Property located in Auburn, Alabama, at an approximate cost of $1,440,200. A portion of the transaction, relating to the sale of the Property in Flagstaff, Arizona, and the reinvestment of the net sales proceeds in a Property in Auburn, Alabama, qualified as a like-kind exchange transaction for federal income tax purposes. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any, (at a level reasonably assumed by the General Partners) resulting from the sale. In June 1999, the Partnership sold its Denny's Property in Hagerstown, Maryland, to the tenant for $710,000 and received net sales proceeds of $700,977, resulting in a gain of $8,162 for financial reporting purposes. In October 1999, the Partnership invested a portion of the net sales proceeds it received from the sale in a Property in Baytown, Texas, with an affiliate of the General Partners as tenants-in-common for a 20 percent interest in the Property. In addition, in October 1999, the Partnership reinvested the remaining net sales proceeds in an IHOP Property in Auburn, Alabama, as described above. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from the sale. None of the Properties owned by the Partnership, or the joint ventures or tenancy in common arrangements in which the Partnership owns an interest, is or may be encumbered. Subject to certain restrictions on 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 is invested in money market accounts or other short-term, highly liquid investments such as demand deposit accounts at commercial banks, certificates of deposit 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, 1999, the Partnership had $1,011,733 invested in such short-term investments as compared to $2,047,140 at December 31, 1998. The decrease in cash and cash equivalents was primarily attributable to the fact that during 1999, the Partnership reinvested the remaining net sales proceeds relating to the sale of several Properties during 1998, in additional Properties. As of December 31, 1999, the average interest rate earned on the rental income deposited in demand deposit accounts at commercial banks was approximately 4.03% annually. The funds remaining at December 31, 1999, will be distributed to the Limited Partners or used for other Partnership purposes. 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 12 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 to the extent that the General Partners determine that such funds are available for distribution. Based primarily on current and anticipated cash from operations and, for 1998 and 1997, a portion of the sales proceeds received from the sale of Properties during 1998 and 1997, the Partnership declared distributions to the Limited Partners of $2,000,000, $3,477,747, and $2,376,000 for the years ended December 31, 1999, 1998 and 1997, respectively. This represents distributions of $40.00, $69.55 and $47.52 per Unit for the years ended December 31, 1999, 1998, and 1997, respectively. The distribution to the Limited Partners for 1997 was also based on a loan received from the General Partners of $117,000 which was subsequently repaid, as described above in "Capital Resources." Distributions for 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 special distribution was effectively a return of a portion of the Limited Partners' investment, although, in accordance with the Partnership agreement, it was applied to the Limited Partner's unpaid cumulative 10% Preferred Return. The reduced number of Properties for which the Partnership receives rental payments, as well as ongoing operations, reduced 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, resulted 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, 1999, 1998, or 1997 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 1999, 1998, and 1997, affiliates of the General Partners incurred on behalf of the Partnership $113,002, $95,798, and $71,681, respectively, for certain operating expenses. At December 31, 1999 and 1998, the Partnership owed $53,231, and $84,337, respectively, to affiliates for such amounts and accounting and administrative services. In addition, during the years ended December 31, 1998 and 1997, the Partnership incurred $53,400 and $15,150, respectively, in real estate disposition fees due to an affiliate as a result of services provided in connection with the sale of the Properties in Chicago, Illinois; Daytona Beach and Fernandina Beach, Florida. 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. Other liabilities, including distributions payable, increased to $616,884 at December 31, 1999, from $542,868 at December 31, 1998. The increase in amounts payable to other parties was a result of the Partnership accruing transaction costs relating to the proposed merger with CNL American Properties Fund, Inc. ("APF"), as described below. The General Partners believe that the Partnership has sufficient cash on hand to meet its current working capital needs. Long-Term Liquidity The Partnership has no long-term debt or other long-term liquidity requirements. 13 Results of Operations During the year ended December 31, 1997, the Partnership and its consolidated joint venture, Tuscawilla Joint Venture, owned and leased 32 wholly owned Properties (including five Properties which were sold during 1997) and during 1998, the Partnership owned and leased 27 wholly owned Properties (including five Properties which were sold during 1998). During 1999, the Partnership owned and leased 24 wholly owned Properties (including two Properties which were sold during 1999). In addition, during the years ended December 31, 1997, 1998 and 1999, the Partnership was a co-venturer in a joint venture that owned and leased one Property. During 1997 and 1998, the Partnership also owned and leased two and three Properties, respectively, with affiliates of the General Partners, as tenants-in-common. In addition, during 1999, the Partnership owned and leased one additional Property, with affiliates of the General Partners, as tenants-in-common. As of December 31, 1999, the Partnership owned, either directly or through joint venture arrangements, 28 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. The majority 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, 1999, 1998, and 1997, the Partnership and its consolidated joint venture, earned $1,620,310, $1,554,852, and $1,930,486, respectively, in rental income from operating leases (net of adjustments to accrued rental income) and earned income from direct financing leases. The increase in rental and earned income during 1999, as compared to 1998, was partially offset by, and the decrease during 1998 as compared to 1997, was partially attributable to a decrease of approximately $140,000 and $350,300, respectively, as a result of Property sales during 1999, 1998, and 1997, as described above in "Capital Resources." The increase during 1999, as compared to 1998, was partially attributable to, and the decrease during 1998, as compared to 1997, was partially offset by, an increase of approximately $118,800 and $69,100, respectively, due to the reinvestment of the net sales proceeds received from Property sales during 1999, 1998 and 1997, as described above in "Capital Resources". Rental and earned income during 1998 and 1997 remained at reduced levels due to the fact that the Partnership did not receive any rental income relating to the Po Folks Property in Hagerstown, Maryland. In June 1998, the Partnership sold the Property to a third party, as described above in "Capital Resources." In January 1999, the Partnership reinvested the majority of the net sales proceeds in a Property in Montgomery, Alabama and intends to use the remaining net sales proceeds for other Partnership purposes. In addition, the increase in rental and earned income during 1999, as compared to 1998, and the decrease during 1998, as compared to 1997, was partially the result of the fact that, in 1998, the tenant of the Property in Canton Township, Michigan, vacated the Property and ceased operations. As a result, during 1998, the Partnership wrote off approximately $51,300 in accrued rental income (non-cash accounting adjustments relating to the straight-lining of future scheduled rent increases over the term of the lease in accordance with generally accepted accounting principles), due to financial difficulties the tenant was experiencing. Although the former tenant is continuing to pay under the lease obligation, the Partnership is currently seeking either a replacement tenant or purchaser for this Property. The increase in rental income during 1999, as compared to 1998, and the decrease during 1998, as compared to 1997, was also partially attributable to the fact that, during 1998, the Partnership terminated the lease with the tenant of the Property in Hazard, Kentucky, and wrote off approximately $29,500 of accrued rental income recognized since inception relating to the straight-lining of future scheduled rent increases in accordance with generally accepted accounting principles. In addition, the decrease during 1998 was partially attributable to the Partnership reserving approximately $41,400 in accrued rental income (non-cash accounting adjustment relating to the straight-lining of future scheduled rent increases over the term of the lease in accordance with generally accepted accounting principles). The Partnership sold the Property in Hazard, Kentucky, in December 1998, as described above in "Capital Resources." During the years ended December 31, 1999, 1998, and 1997, the Partnership also earned $116,872, $98,915, and $157,648, respectively, in contingent rental income. The increase in contingent rental income during 1999, as compared to 1998, was primarily attributable to increased gross sales of certain restaurant Properties requiring the payment of contingent rental income. The decrease in contingent rental income during 1998, as compared to 1997, was 14 primarily attributable to the sales of Properties during 1998 and 1997, for which the leases required the payment of contingent rental income. In addition, during 1999, 1998, and 1997, the Partnership earned $103,380, $127,064, and $100,816, respectively, in interest and other income. The increase in interest and other income during 1998 was primarily attributable to an increase, during 1998, in interest income as a result of the fact that in July 1998, the Partnership collected the full balance of a mortgage note receivable related to the Property in Roswell, Georgia, that the Partnership had accepted in conjunction with the sale of a Property in 1997. The Partnership recognized income of $170,966 and $22,708 for the years ended December 31, 1999 and 1998, respectively, and a loss of $148,170 for the year ended December 31, 1997, attributable to net income and net loss earned by unconsolidated joint ventures in which the Partnership is a co-venturer. The loss during 1997 was due to the fact that during 1997, the operator of the Property owned by Titusville Joint Venture vacated the Property and ceased operations. In conjunction therewith, during 1997, Titusville Joint Venture (in which the Partnership owns a 73.4% interest) established an allowance for doubtful accounts of approximately $27,000 for past due rental amounts. The joint venture wrote off unamortized lease costs of $23,500 in 1997 due to the tenant vacating the Property. In addition, during 1997, the joint venture established an allowance for loss on land and building for its Property in Titusville, Florida, of approximately $147,000. During 1998, the joint venture wrote off all uncollected balances and ceased collection efforts. In addition, during 1998, the joint venture increased the allowance for loss on land and building by approximately $125,300 for financial reporting purposes. The allowance represented the difference between the Property's carrying value at December 31, 1998 and the estimated net realizable value at December 31, 1998 for the Property. No such allowance was recorded during 1999. Titusville Joint Venture is currently seeking either a replacement tenant or purchaser for this Property. The increase in income earned from joint ventures during 1999 and 1998, was primarily attributable to the fact that the Partnership reinvested a portion of the net sales proceeds it received from Property sales during 1997, 1998 and 1999, in four Properties with affiliates of the General Partners as tenants-in-common and one Property through a joint venture arrangement with an affiliate of the General Partners in 1997, 1998 and 1999. During the year ended December 31, 1999, 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 Properties owned by unconsolidated joint ventures and Properties owned with affiliates of the General Partners as tenants-in-common). As of December 31, 1999, Golden Corral Corporation was the lessee under leases relating to five restaurants. It is anticipated that, based on the minimum rental payments required by the leases, this lessee will continue to contribute more than ten percent of the Partnership's total rental income during 2000. In addition, during the year ended December 31, 1999, three Restaurant Chains, Golden Corral, Pizza Hut, and KFC, 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 Properties owned by unconsolidated joint ventures and Properties owned with affiliates of the General Partners as tenants-in-common). It is anticipated that Golden Corral, Pizza Hut, and KFC 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, if the Partnership is not able to re-lease these Properties in a timely manner. Operating expenses, including depreciation and amortization expense, were $557,083, $520,871, and $626,431 for the years ended December 31, 1999, 1998, and 1997, respectively. The increase in operating expenses during 1999, as compared to 1998, was primarily attributable to, and the decrease during 1998, as compared to 1997, was partially offset by, the fact that the Partnership incurred $118,655 and $14,227 in 1999 and 1998, respectively, in transaction costs related to the General Partners retaining financial and legal advisors to assist them in evaluating and negotiating the proposed Merger with APF, as described below. Operating expenses included amounts that the Partnership had recognized in real estate tax expense of approximately $7,500 and $40,200, respectively, during 1998 and 1997, and bad debt expense of approximately $32,400 during 1997, relating to the Denny's and Po Folks Properties in Hagerstown, Maryland. The Partnership recorded these amounts as expenses during 1998 and 1997, due to the fact that payment of these amounts by the former 15 tenant was doubtful. The Partnership sold the Po Folks Property in June 1998 and sold the Denny's Property in June 1999. The increase in operating expenses during 1999, as compared to 1998, was partially offset by, and the decrease during 1998, as compared to 1997, was partially attributable to, a decrease in depreciation expense due to the sale of several Properties during 1999 and 1998, as described above in "Capital Resources." As a result of the Properties sales during 1999, 1998 and 1997, and the sale of a parcel of land in Plant City, Florida, as described above in "Capital Resources," the Partnership recognized gains on sale of land and buildings totalling $293,512, $497,321 and $1,027,590 during the years ended December 31, 1999, 1998 and 1997, respectively. In addition, during the years ended December 31, 1998 and 1997, the Partnership recorded an allowance for loss on land and building and impairment in carrying value of net investment in direct financing lease of $25,821 and $32,819, respectively, relating to the Denny's and Po Folks Properties in Hagerstown, Maryland. The allowance represented the difference between the carrying value of the Properties at December 31, 1998 and 1997, and the estimated net realizable value of each Property at December 31, 1998 and 1997, respectively. The Partnership's leases as of December 31, 1999, are generally 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. Termination of Merger On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with APF, pursuant to which the Partnership would be merged with and into a subsidiary of APF. Under the Agreement and Plan of Merger, APF was to issue shares of its common stock as consideration for the Merger. On March 1, 2000, the General Partners and APF announced that they had mutually agreed to terminate the Agreement and Plan of Merger. The agreement to terminate the Agreement and Plan of Merger was based, in large part, on the General Partners' concern that, in light of market conditions relating to publicly traded real estate investment trusts, the value of the transaction had diminished. As a result of such diminishment, the General Partners' ability to unequivocally recommend voting for the transaction, in the exercise of their fiduciary duties, had become questionable. Overview of Year 2000 Problem The year 2000 problem concerns the inability of information and non- information technology systems to properly recognize and process date-sensitive information beyond January 1, 2000. The failure to accurately recognize the year 2000 could result in a variety of problems from data miscalculations to the failure of entire systems. Status The Partnership generally does not directly own information technology systems. The General Partners and their affiliates generally provide all services requiring the use of information and some non-information technology systems. In early 1998, affiliates of the General Partners formed a year 2000 committee ("the Y2K Team") that assessed the readiness of any systems that are date sensitive and completed upgrades for the hardware equipment and software that was not year 2000 compliant, as necessary. The cost for these upgrades and other remedial measures is the responsibility of the General Partners and their affiliates. The General Partners and their affiliates do not expect that the Partnership will incur any costs in connection with the year 2000 remedial measures. In addition, the Y2K Team requested and received certifications of compliance from other companies with which the General Partners, their affiliates, and the Partnership have material third party relationships. 16 In assessing the risks presented by the year 2000 problem, the Y2K Team identified potential worst case scenarios involving the future of the information and non-information technology systems used by the Partnership's transfer agent, financial institutions and tenants. As of January 14, 2000, the General Partners and their affiliates have tested the information and non- information technology systems used by the Partnership and have not experienced material disruption or other significant problems. In addition, as of the same date, the General Partners are not aware of any material year 2000 problems relating to information and non-information technology systems of third parties with which the Partnership maintains material relationships, including those of the Partnership's transfer agent, financial institutions and tenants. In addition, in the Partnership's interactions with its transfer agent, financial institutions and tenants, the systems of these third parties have functioned normally. Until the Partnership's first distribution in 2000 and the delivery of the information by the transfer agent to stockholders in early 2000, the General Partners will continue to monitor the year 2000 compliance of the transfer agent. In addition, the General Partners will continue to monitor the systems used by the Partnership and to maintain contact with third parties with which the Partnership has material relationships with respect to year 2000 compliance and any year 2000 issues that may arise at a later date. The General Partners will develop contingency plans relating to ongoing year 2000 issues at the time that such issues are identified and such plans are deemed necessary. Based on the information provided to the Y2K Team, the upgrades and remedial measures by the General Partners and their affiliates, and the normal functioning to date of information and non-information technology systems used by the Partnership and those third parties, the General Partners do not foresee significant risks associated with its year 2000 compliance at this time. In addition, the General Partners and their affiliates do not expect to incur any additional costs in connection with the year 2000 remedial efforts. However, there can be no assurance that the General Partners and their affiliates or any third parties will not have ongoing year 2000 issues that may have adverse effects on the Partnership. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data 17 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) CONTENTS --------
Page ---- Report of Independent Certified Public Accountants 19 Financial Statements: Balance Sheets 20 Statements of Income 21 Statements of Partners' Capital 22 Statements of Cash Flows 23 Notes to Financial Statements 25
18 Report of Independent Certified Public Accountants -------------------------------------------------- To the Partners CNL Income Fund III, Ltd. In our opinion, the financial statements listed in the index appearing under item 14(a)(1) present fairly, in all material respects, the financial position of CNL Income Fund III, Ltd. (a Florida limited partnership) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the index appearing under item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules 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 of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Orlando, Florida February 4, 2000, except for Note 10 for which the date is March 1, 2000 19 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) BALANCE SHEETS --------------
December 31, 1999 1998 -------------- -------------- ASSETS ------ Land and buildings on operating leases, less accumulated depreciation and allowance for loss on land and buildings $ 11,772,766 $ 11,418,836 Net investment in direct financing leases, less allowance for impairment in carrying value 1,120,608 887,071 Investment in joint ventures 2,418,036 2,157,147 Cash and cash equivalents 1,011,733 2,047,140 Receivables, less allowance for doubtful accounts of $8,797 and $153,598, respectively 658 89,519 Due from related parties 2,300 -- Prepaid expenses 5,896 6,751 Accrued rental income, less allowance for doubtful accounts of $41,380 in 1998 111,167 65,914 Other assets 29,354 29,354 -------------- -------------- $ 16,472,518 $ 16,701,732 ============== ============== LIABILITIES AND PARTNERS' CAPITAL --------------------------------- Accounts payable $ 76,247 $ 2,072 Accrued and escrowed real estate taxes payable 12,872 15,217 Distributions payable 500,000 500,000 Due to related parties 121,781 152,887 Rents paid in advance and deposits 27,765 25,579 -------------- -------------- Total liabilities 738,665 695,755 Minority interest 132,910 135,705 Partners' capital 15,600,943 15,870,272 -------------- -------------- $ 16,472,518 $ 16,701,732 ============== ==============
See accompanying notes to financial statements. 20 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF INCOME --------------------
Year Ended December 31, 1999 1998 1997 ----------- ----------- ----------- Revenues: Rental income from operating leases $ 1,402,127 $ 1,500,950 $ 1,859,911 Adjustments to accrued rental income -- (80,800) -- Earned income from direct financing leases 218,183 134,702 70,575 Contingent rental income 116,872 98,915 157,648 Interest and other income 103,380 127,064 100,816 ----------- ----------- ----------- 1,840,562 1,780,831 2,188,950 ----------- ----------- ----------- Expenses: General operating and administrative 128,208 137,245 140,886 Professional services 26,642 36,591 27,314 Bad debt expense 1,239 -- 32,360 Real estate taxes -- 11,966 47,165 State and other taxes 13,541 12,249 9,924 Depreciation and amortization 268,798 308,593 368,782 Transaction costs 118,655 14,227 -- ----------- ----------- ----------- 557,083 520,871 626,431 ----------- ----------- ----------- 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 and Impairment in Carrying Value of Net Investment in Direct Financing Lease 1,283,479 1,259,960 1,562,519 Minority Interest in Income of Consolidated Joint Venture (17,286) (17,285) (17,285) Equity in Earnings (Loss) of Unconsolidated Joint Ventures 170,966 22,708 (148,170) Gain on Sale of Land and Buildings 293,512 497,321 1,027,590 Provision for Loss on Land and Building and Impairment in Carrying Value of Net Investment in Direct Financing Lease -- (25,821) (32,819) ----------- ----------- ----------- Net Income $ 1,730,671 $ 1,736,883 $ 2,391,835 =========== =========== =========== Allocation of Net Income: General partners $ 16,733 $ 15,027 $ 18,306 Limited partners 1,713,938 1,721,856 2,373,529 ----------- ----------- ----------- $ 1,730,671 $ 1,736,883 $ 2,391,835 =========== =========== =========== Net Income Per Limited Partner Unit $ 34.28 $ 34.44 $ 47.47 =========== =========== =========== Weighted Average Number of Limited Partner Units Outstanding 50,000 50,000 50,000 =========== =========== ===========
See accompanying notes to financial statements. 21 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF PARTNERS' CAPITAL ------------------------------- Years Ended December 31, 1999, 1998, and 1997
General Partners Limited Partners ------------------------------ -------------------------------------------------------------- Accumulated Accumulated Syndication Contributions Earnings Contributions Distributions Earnings Costs --------------- ------------- --------------- --------------- ------------- ------------- Balance, December 31, 1996 $ 161,500 $ 159,805 $ 25,000,000 $ (20,773,640) $ 15,912,534 $ (2,864,898) Distributions to limited partners ($47.52 per limited partner unit) -- -- -- (2,376,000) -- -- Net income -- 18,306 -- -- 2,373,529 -- --------------- ------------- --------------- --------------- ------------- ------------- Balance, December 31, 1997 161,500 178,111 25,000,000 (23,149,640) 18,286,063 (2,864,898) Distributions to limited partners ($69.55 per limited partner unit) -- -- -- (3,477,747) -- -- Net income -- 15,027 -- -- 1,721,856 -- --------------- ------------- --------------- --------------- ------------- ------------- Balance, December 31, 1998 161,500 193,138 25,000,000 (26,627,387) 20,007,919 (2,864,898) Distributions to limited partners ($40.00 per limited partner unit) -- -- -- (2,000,000) -- -- Net income -- 16,733 -- -- 1,713,938 -- --------------- ------------- --------------- --------------- ------------- ------------- Balance, December 31, 1999 $ 161,500 $ 209,871 $ 25,000,000 $ (28,627,387) $ 21,721,857 $ (2,864,898) =============== ============= =============== =============== ============= ============= Total --------------- Balance, December 31, 1996 $ 17,595,301 Distributions to limited partners ($47.52 per limited partner unit) (2,376,000) Net income 2,391,835 --------------- Balance, December 31, 1997 17,611,136 Distributions to limited partners ($69.55 per limited partner unit) (3,477,747) Net income 1,736,883 --------------- Balance, December 31, 1998 15,870,272 Distributions to limited partners ($40.00 per limited partner unit) (2,000,000) Net income 1,730,671 --------------- Balance, December 31, 1999 $ 15,600,943 ===============
See accompanying notes to financial statements. 22 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF CASH FLOWS ------------------------
Year Ended December 31, 1999 1998 1997 ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents: Cash Flows From Operating Activities: Cash received from tenants $ 1,829,906 $ 1,768,910 $ 2,268,568 Distributions from unconsolidated joint ventures 169,140 142,001 19,647 Cash paid for expenses (246,333) (202,117) (325,067) Interest received 73,011 112,502 58,541 ----------- ----------- ----------- Net cash provided by operating activities 1,825,724 1,821,296 2,021,689 ----------- ----------- ----------- Cash Flows From Investing Activities: Proceeds from sale of land and buildings 1,792,169 3,647,241 3,023,357 Investment in direct financing leases (612,920) -- -- Additions to land and buildings (1,761,236) (150,000) (1,272,960) Investment in joint ventures (259,063) (1,096,678) (703,667) Collections on mortgage note receivable -- 678,730 6,270 Decrease (increase) in restricted cash -- 245,377 (245,377) Decrease in other assets -- -- 2,135 ----------- ----------- ----------- Net cash provided by (used in) investing activities (841,050) 3,324,670 809,758 ----------- ----------- ----------- Cash Flows From Financing Activities: Proceeds from loans from corporate general partner -- -- 117,000 Repayment of loans from corporate general partner -- -- (117,000) Distributions to holder of minority interest (20,081) (20,197) (20,080) Distributions to limited partners (2,000,000) (3,571,747) (2,376,000) ----------- ----------- ----------- Net cash used in financing activities (2,020,081) (3,591,944) (2,396,080) ----------- ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents (1,035,407) 1,554,022 435,367 Cash and Cash Equivalents at Beginning of Year 2,047,140 493,118 57,751 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year $ 1,011,733 $ 2,047,140 $ 493,118 =========== =========== ===========
See accompanying notes to financial statements. 23 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF CASH FLOWS - CONTINUED ------------------------------------
Year Ended December 31, 1999 1998 1997 ------------- ------------- -------------- Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net income $ 1,730,671 $ 1,736,883 $ 2,391,835 ------------- ------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 268,798 299,355 368,182 Amortization -- 9,238 600 Bad debt expense -- -- 32,360 Minority interest in income of consolidated joint venture 17,286 17,285 17,285 Equity in earnings of unconsolidated joint ventures, net of distributions (1,826) 119,293 167,817 Gain on sale of land and buildings (293,512) (497,321) (1,027,590) Provision for loss on land and building and 25,821 32,819 impairment in carrying value of net investment in direct financing lease -- Decrease (increase) in receivables 88,861 (7,936) 182,433 Increase in due from related parties (2,300) -- -- Decrease in net investment in direct financing leases 19,234 13,970 12,056 Decrease (increase) in prepaid expenses 855 7,610 (7,463) Decrease (increase) in accrued rental income (45,253) 88,824 (40,000) Increase (decrease) in accounts payable and accrued expenses 71,830 173 (71,844) Increase (decrease) in due to related parties (31,106) 2,099 (20,621) Increase (decrease) in rents paid in advance and deposits 2,186 6,002 (16,180) ------------- ------------- -------------- Total adjustments 95,053 84,413 (370,146) ------------- ------------- -------------- Net Cash Provided by Operating Activities $ 1,825,724 $ 1,821,296 $ 2,021,689 ============= ============= ============== Supplemental Schedule on 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 end of year $ -- $ 53,400 $ 15,150 ============= ============= ============== Distributions declared and unpaid at end of year $ 500,000 $ 500,000 $ 594,000 ============= ============= ==============
See accompanying notes to financial statements. 24 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS ----------------------------- Years Ended December 31, 1999, 1998, and 1997 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. 25 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 1. Significant Accounting Policies - Continued: -------------------------------------------- Accrued rental income represents the aggregate amount of income recognized on a straight-line basis in excess of scheduled rental payments to date. Whenever a tenant defaults under the terms of its lease, or events or changes in circumstance indicate that the tenant will not lease the property through the end of the lease term, the Partnership either reserves or reverses the cumulative accrued rental income balance. When the properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, 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. 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. 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 investments in Titusville Joint Venture, RTO Joint Venture, and a property in each of Englewood, Colorado, Miami, Florida, Overland Park, Kansas, and Baytown, Texas held as tenants-in-common with affiliates of the General Partners, are accounted for using the equity method since the Partnership shares control with affiliates of the general partners. 26 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 1. Significant Accounting Policies - Continued: -------------------------------------------- Cash and Cash Equivalents - The Partnership considers all highly liquid ------------------------- investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds (some of which are backed by government securities). Cash equivalents are stated at cost plus accrued interest, which approximates market value. Cash accounts maintained on behalf of the Partnership in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Partnership has not experienced any losses in such accounts. The Partnership limits investment of temporary cash investments to financial institutions with high credit standing; therefore, the Partnership believes it is not exposed to any significant credit risk on cash and cash equivalents. Income Taxes - Under Section 701 of the Internal Revenue Code, all income, ------------ expenses and tax credit items flow through to the partners for tax purposes. Therefore, no provision for federal income taxes is provided in the accompanying financial statements. The Partnership is subject to certain state taxes on its income and property. Additionally, for tax purposes, syndication costs are included in Partnership equity and in the basis of each partner's investment. For financial reporting purposes, syndication costs are netted against partners' capital and represent a reduction of Partnership equity and a reduction in the basis of each partner's investment. Use of Estimates - The general partners of the Partnership have made a ---------------- number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. The more significant 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 1999 presentation. These reclassifications had no effect on partners' capital or net income. 27 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 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 and extended coverage. The lease options generally allow tenants to renew the leases for two or 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:
1999 1998 ------------ ------------ Land $ 5,922,149 $ 5,926,601 Buildings 8,622,136 8,231,130 ------------ ------------ 14,544,285 14,157,731 Less accumulated depreciation (2,771,519) (2,738,895) ------------ ------------ $ 11,772,766 $ 11,418,836 ============ ============
As of January 1, 1997, the Partnership had 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 aggregate allowance represented the difference between the property's carrying value at December 31, 1997, and the estimated net realizable value of the property based on the anticipated sales price relating to this property. The Partnership sold this property during the year ended December 31, 1998, as described below. 28 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 3. Land and Buildings on Operating Leases - Continued: --------------------------------------------------- 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 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 $225,200 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 expenses; therefore, the Partnership sold the property for approximately $198,400 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 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. 29 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 3. Land and Buildings on Operating Leases - Continued: --------------------------------------------------- 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. During 1998, the Partnership collected the full amount of the outstanding mortgage note receivable balance of $678,730 (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 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 $26,200 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 (see Note 5). During the year ended December 31, 1998, the Partnership sold its properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and Hagerstown, Maryland, for a total of $2,455,000 and received net sales proceeds of $2,396,646, resulting in a total gain of $583,373 for financial 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. In connection with the sale of the properties in Daytona Beach, and Fernandina Beach, Florida, the Partnership distributed $1,477,747 of the net sales proceeds as a special distribution to the limited partners and used the remaining proceeds for other Partnership purposes. In May 1998, the Partnership used the net sales proceeds received from the sale of the property in Punta Gorda, Florida, to enter into a joint venture arrangement, RTO Joint Venture, with an affiliate of the general partners (See Note 5). 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. 30 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 3. Land and Buildings on Operating Leases - Continued: --------------------------------------------------- In 1998, the Partnership sold its property in Hazard, Kentucky to a third party for $435,000, and received net sales proceeds of $432,625, resulting in a loss of $99,265 for financial reporting purposes. In June 1998, the Partnership sold its PoFolks property in Hagerstown, Maryland, to a third party for $825,000 and received net sales proceeds of $789,639, resulting in a gain of $13,213 for financial reporting purposes. In January 1999, the Partnership reinvested the majority of the net sales proceeds from the 1998 sale of a Po Folks property in Hagerstown, Maryland, along with a portion of the amounts collected in 1998 under a promissory note accepted in connection with the 1997 sale of a property in Roswell, Georgia, in a Burger King property in Montgomery, Alabama. The property had an approximate cost of $939,900. In accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases," the land portion of this property was classified as an operating lease while the building portion was classified as a direct financing lease. In April 1999, the Partnership sold its property in Flagstaff, Arizona, to the tenant for $1,103,127 and received net sales proceeds of $1,091,192, resulting in a gain of $285,350 for financial reporting purposes. This property was originally acquired by the Partnership in October 1998 and had a cost of approximately $993,500, excluding acquisition fees and miscellaneous acquisition expenses; therefore, the Partnership sold the property for approximately $97,700 in excess of its original purchase price. In October 1999, the Partnership reinvested the net sales proceeds it received from the sale of this property, in an IHOP property located in Auburn, Alabama, at an approximate cost of $1,440,200. In June 1999, the Partnership sold its Denny's property in Hagerstown, Maryland, to the tenant for $710,000 and received net sales proceeds of $700,977. Due to the fact that during 1998, the Partnership recorded an allowance for doubtful accounts of $25,821 in accrued rental income, representing income 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, the Partnership recognized a gain of $8,162 for financial reporting purposes (See Note 4). In October 1999, the Partnership invested approximately $259,100 of the net sales proceeds it received from the sale in a property in Baytown, Texas, with an affiliate of the general partners as tenants-in- common for a 20 percent interest in the property. In addition, in October 1999, the Partnership reinvested the remaining net sales proceeds it received from the sale of the property in Hagerstown, Maryland, in an IHOP Property in Auburn, Alabama, as described above. 31 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 3. Land and Buildings on Operating Leases - Continued: --------------------------------------------------- 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. The Partnership recognized income of $45,253 in 1999, a loss of $88,824 (net of $25,996 in reserves and $103,830 in reversals) during 1998 and income of $40,000 (net of $15,384 in reserves) during 1997 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, 1999: 2000 $ 1,477,000 2001 1,480,600 2002 1,455,136 2003 1,181,685 2004 1,199,230 Thereafter 8,830,047 ------------- $ 15,623,698 =============
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 lease based on a percentage of the tenants' gross sales. 32 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 4. Net Investment in Direct Financing Leases: ------------------------------------------ The following lists the components of net investment in direct financing leases at December 31:
1999 1998 ------------- ------------- Minimum lease payments receivable $ 2,343,603 $ 2,042,847 Estimated residual value 292,354 239,432 Less unearned income (1,515,349) (1,369,387) ------------- ------------- 1,120,608 912,892 Less allowance for impairment in carrying value of investment in direct financing lease -- (25,821) ------------- ------------- Net investment in direct financing leases $ 1,120,608 $ 887,071 ============= =============
The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 1999: 2000 $ 144,852 2001 144,852 2002 144,852 2003 144,852 2004 144,852 Thereafter 1,619,343 -------------- $ 2,343,603 ==============
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 3). In June 1999, the Partnership sold its Denny's property in Hagerstown, Maryland, 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 value) 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 (See Note 3). 33 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 5. Investment in Joint Ventures: ----------------------------- The Partnership has a 73.4% interest in the profits and losses of Titusville Joint Venture. The remaining interest in the Titusville Joint Venture is held by an affiliate of the Partnership which has the same general partners. In 1997, the Partnership acquired properties in Englewood, Colorado, and Miami, Florida, as tenants-in-common with affiliates of the general partners. As of December 31, 1999, the Partnership owned a 33 percent and 9.84% interest in these properties. In January 1998, the Partnership acquired a property located in Overland Park, Kansas, as tenants-in-common with affiliates of the general partners. As of December 31, 1999, the Partnership owned a 25.87% interest in this property. 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 December 31, 1998, the Partnership had contributed $676,952 to purchase land and pay for construction relating to the joint venture. Construction was completed and rent commenced in December 1998. The Partnership holds a 46.88% interest in the profits and losses of this joint venture at December 31, 1999. In October 1999, the Partnership used the net sales proceeds from the sale of the Denny's property in Hagerstown, Maryland to invest in a property in Baytown, Texas with an affiliate of the general partners as tenants-in-common. As of December 31, 1999, the Partnership owned a 20 percent interest in this property. 34 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 5. Investment in Joint Ventures - Continued: ----------------------------------------- Titusville Joint Venture, RTO Joint Venture, and the Partnership and affiliates, as tenants-in-common in four 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 ventures' condensed financial information at December 31:
1999 1998 ------------- ------------- Land and buildings on operating leases, less accumulated depreciation and allowance for loss on land and building $ 4,838,546 $ 3,598,641 Net investment in direct financing leases 3,397,358 3,418,537 Cash 83,524 19,254 Receivables 5,436 1,241 Accrued rental income 139,656 66,668 Other assets 3,248 2,679 Liabilities 100,586 59,453 Partners' capital 8,367,182 7,047,567 Revenues 739,487 604,672 Provision for loss on land and building -- 125,251 Net income 659,928 404,446
The Partnership recognized income of $170,966 and $22,708 for the years ended December 31, 1999 and 1998, respectively, and recognized a loss totaling $148,170 for the year ended December 31, 1997, relating to investment in 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, noncumulative, noncompounded annual return on their adjusted capital contributions (the "10% Preferred Return"). 35 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 6. Allocations and Distributions - Continued: ------------------------------------------ Generally, net sales proceeds from the sale of properties not in liquidation of the Partnership, to the extent distributed, will be distributed first to the limited partners in an amount sufficient to provide them with their 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 not in liquidation of the Partnership is, in general, allocated in the same manner as net sales proceeds are distributable. Any loss from the sale of a property is, in general, allocated first, on a pro rata basis, to partners with positive balances in their capital accounts; and thereafter, 95 percent to the limited partners and five percent to the general partners. Generally, net sales proceeds from a liquidating sale of properties, will be used in the following order: (i) first to pay and discharge all of the Partnership's liabilities to creditors, (ii) second, to establish reserves that may be deemed necessary for any anticipated or unforeseen liabilities or obligations of the Partnership, (iii) third, to pay all of the Partnership's liabilities, if any, to the general and limited partners, (iv) fourth, after allocations of net income, gains and/or losses, to distribute to the partners with positive capital accounts balances, in proportion to such balances, up to amounts sufficient to reduce such positive balances to zero, and (v) thereafter, any funds remaining shall then be distributed 95 percent to the limited partners and five percent to the general partners. During the years ended December 31, 1999, 1998, and 1997 the Partnership declared distributions to the limited partners of $2,000,000, $3,477,747 and $2,376,000, respectively. Distributions for the year ended December 31, 1998, included $1,477,747 as a result of distributions 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. 36 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 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:
1999 1998 1997 ------------ ------------ ------------ Net income for financial reporting purposes $ 1,730,671 $ 1,736,883 $ 2,391,835 Depreciation for tax reporting purposes in excess of depreciation for financial reporting purposes (19,827) (17,075) (21,782) Allowance for loss on land and building and impairment in carrying value of net investment in direct financing lease -- 25,821 32,819 Direct financing leases recorded as operating leases for tax reporting purposes 19,234 13,970 12,056 Gain on sale of land and buildings for financial reporting purposes in excess of gain on sale for tax reporting purposes (285,874) (115,137) (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 (41,667) 59,725 140,707 Allowance for doubtful accounts (144,802) (871) 84,326 Accrued rental income (45,253) 88,824 (40,000) Capitalization of transaction costs for tax reporting purposes 118,655 14,227 -- Rents paid in advance 2,186 6,002 (16,680) Minority interest in timing differences of consolidated joint venture (131) (35) (133) ------------ ------------ ------------ Net income for federal income tax purposes $ 1,333,192 $ 1,812,334 $ 1,893,867 ============ ============ ============
37 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 8. Related Party Transactions: --------------------------- One of the individual general partners, James M. Seneff, Jr., is one of the principal shareholders of CNL Holdings, Inc. The other individual general partner, Robert A. Bourne, serves as President and Treasurer of CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings, Inc., CNL Fund Advisors, Inc. (the "Advisor") was a majority owned subsidiary of CNL Financial Group, Inc. until it merged with CNL American Properties Fund, Inc. ("APF"), effective September 1, 1999. The individual general partners are stockholders and directors of APF. The Advisor provides certain services relating to management of the Partnership and its properties pursuant to a management agreement with the Partnership. In connection therewith, the Partnership has agreed to pay the Advisor 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 joint ventures or competitive fees for comparable services. In addition, these fees are incurred and 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, 1999, 1998, and 1997. The Advisor is also entitled to receive a deferred, subordinated real estate disposition fee, payable upon the sale of one or more properties, based on the lesser of one-half of a competitive real estate commission or three percent of the sales price if the Advisor provides 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 the receipt by the limited partners of their aggregate, cumulative 10% Preferred Return, plus their adjusted capital contributions. During the years ended December 31, 1998 and 1997, the Partnership incurred $53,400 and $15,150, respectively, in deferred, subordinated real estate disposition fees as a result of the Partnership's sale of the properties in Daytona Beach and Fernandina Beach, Florida, and the Property in Chicago, Illinois, respectively. No deferred, subordinated real estate disposition fees were incurred for the year ended December 31, 1999. 38 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 8. Related Party Transactions - Continued: --------------------------------------- The Advisor and its affiliates provided accounting and administrative services to the Partnership on a day-to-day basis including services relating to the proposed and terminated mergers as described in Note 10. The Partnership incurred $97,597, $89,756, and $87,056 for the years ended December 31, 1999, 1998, and 1997, respectively, for such services. The due to related parties consisted of the following at December 31:
1999 1998 ----------- ----------- Due to the Advisor: Expenditures incurred on behalf of the Partnership $ 42,926 $ 41,888 Accounting and administrative services 10,305 42,449 Deferred, subordinated real estate disposition fees 68,550 68,550 ----------- ----------- $ 121,781 $ 152,887 =========== ===========
9. Concentration of Credit Risk: ---------------------------- For the years ended December 31, 1999, 1998, and 1997, rental income from Golden Corral Corporation was $322,038, $454,380, and $474,553, 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 joint ventures and the properties held as tenants-in- common with affiliates of the general partners). 39 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1999, 1998, and 1997 9. 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 rental and earned income from joint ventures and the properties held as tenants-in-common with affiliates of the general partners) for each of the years ended December 31:
1999 1998 1997 ------------- ------------- ------------- Golden Corral Family Steakhouse Restaurants $ 487,590 $ 454,380 $ 474,553 KFC 260,402 277,508 261,415 Pizza Hut 213,298 211,507 255,055 Taco Bell N/A N/A 250,140 Denny's N/A N/A 229,537
The information denoted by N/A indicates that for each period presented, the chains did not represent more than ten percent of the Partnership's total rental and earned income. Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant concepts, default by any one of these lessees or restaurant chains could significantly impact the results of operations of the Partnership if the Partnership is not able to re-lease the properties in a timely manner. 10. Termination of Merger: --------------------- On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with APF, pursuant to which the Partnership would be merged with and into a subsidiary of APF. Under the Agreement and Plan of Merger, APF was to issue shares of its common stock as consideration for the Merger. On March 1, 2000, the General Partners and APF announced that they had mutually agreed to terminate the Agreement and Plan of Merger. The agreement to terminate the Agreement and Plan of Merger was based, in large part, on the General Partners' concern that, in light of market conditions relating to publicly traded real estate investment trusts, the value of the transaction had diminished. As a result of such diminishment, the General Partners' ability to unequivocally recommend voting for the transaction, in the exercise of their fiduciary duties, had become questionable. 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The General Partners of the Registrant are James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, a Florida corporation. The General Partners manage and control the Partnership's affairs and have general responsibility and the ultimate authority in all matters affecting the Partnership's business. The Partnership has available to it the services, personnel and experience of CNL Fund Advisors, Inc., CNL Financial Group, Inc. and their affiliates, all of which are affiliates of the General Partners. James M. Seneff, Jr., age 53, Since 1971, Mr. Seneff has been active in the acquisition, development, and management of real estate projects and, directly or through an affiliated entity, has served as a general partner or co- venturer in over 100 real estate ventures. These ventures have involved the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent company of CNL Financial Group, Inc. (formerly CNL Group, Inc.), a diversified real estate company, and has served as a director, Chairman of the Board and Chief Executive Officer of CNL Financial Group, Inc. since its formation in 1980. Mr. Seneff has served as a director and Chairman of the Board since inception in 1994, and served as Chief Executive Officer from 1994 through August 1999, of CNL American Properties Fund, Inc., a public, unlisted real estate investment trust. He also served as a director, Chairman of the Board and Chief Executive Officer of CNL Fund Advisors, Inc., the advisor to CNL American Properties Fund, Inc. until it merged with the company in September 1999. In addition, he serves as a director, Chairman of the Board and Chief Executive Officer of CNL Health Care Properties, Inc., as well as CNL Health Care Corp., the advisor to the company. He also serves as director, Chairman of the Board and Chief Executive Officer of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust, as well as CNL Hospitality Corp., its advisor. Since 1992, Mr. Seneff has served as Chairman of the Board and Chief Executive Officer of Commercial Net Lease Realty, Inc., a public real estate investment trust that is listed on the New York Stock Exchange. Mr. Seneff has also served as a director, Chairman of the Board and Chief Executive Officer of the following affiliated companies since formation: CNL Securities Corp., since 1979; CNL Investment Company, since 1990; and CNL Institutional Advisors, a registered investment advisor for pension plans, since 1990. Mr. Seneff formerly served as a director of First Union National Bank of Florida, N.A., and currently serves as the Chairman of the Board of CNLBank. Mr. Seneff served on the Florida State Commission on Ethics and is a former member and past Chairman of the State of Florida Investment Advisory Council, which recommends to the Florida Board of Administration investments for various Florida employee retirement funds. The Florida Board of Administration is Florida's principal investment advisory and money management agency and oversees the investment of more than $60 billion of retirement funds. Mr. Seneff received his degree in Business Administration from Florida State University in 1968. Robert A. Bourne, age 52, Since joining CNL Securities Corp. in 1979, Mr. Bourne has participated as a general partner or co-venturer in over 100 real estate ventures involved in the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Bourne is the President and Treasurer of CNL Financial Group, Inc. (formerly CNL Group, Inc.). Mr. Bourne has served as a director since inception in 1994, President from 1994 through February 1999, Treasurer from February 1999 through August 1999, and Vice Chairman of the Board since February 1999 of CNL American Properties Fund, Inc., a public, unlisted real estate investment trust. He also served in the following positions for CNL Fund Advisors, Inc., the advisor to CNL American Properties Fund, Inc. prior to its merger with CNL American Properties Fund, Inc.: director from 1994 through August 1999, Treasurer from July 1998 through August 1999, President from 1994 through September 1997, and Vice Chairman of the Board from September 1997 through August 1999. Mr. Bourne is a director and President of CNL Health Care Properties, Inc., as well as a director and President of CNL Health Care Corp., the advisor to the company. He is also a director, Vice Chairman of the Board and President of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust, as well as CNL Hospitality Corp., its advisor. Mr. Bourne also serves as a director of CNLBank. He has served as a director since 1992, Vice Chairman of the Board since February 1996, 41 Secretary and Treasurer from February 1996 through 1997, and President from July 1992 through February 1996, of Commercial Net Lease Realty Inc., a public real estate investment trust listed on the New York Stock Exchange. Mr. Bourne holds the following positions for these affiliates of CNL Financial Group, Inc.: director, President and Treasurer of CNL Investment Company; director, President, Treasurer, and Registered Principal of CNL Securities Corp., a subsidiary of CNL Investment Company and director, President, Treasurer, and Chief Investment Officer of CNL Institutional Advisors, Inc., a registered investment advisor for pension plans. Mr. Bourne began his career as a certified public accountant employed by Coopers & Lybrand, Certified Public Accountants, from 1971 through 1978, where he attained the position of tax manager in 1975. Mr. Bourne graduated from Florida State University in 1970 where he received a B.A. in Accounting, with honors. CNL Realty Corporation is a corporation organized on November 26, 1985, under the laws of the State of Florida. Its sole directors and shareholders are James M. Seneff, Jr. and Robert A. Bourne, the individual General Partners. CNL Realty Corporation was organized to serve as the corporate general partner of real estate limited partnerships, such as the Partnership, organized by one or both of the individual General Partners. CNL Realty Corporation currently serves as the corporate general partner of the CNL Income Fund Partnerships. CNL Fund Advisors, Inc. provides certain management services in connection with the Partnership and its Properties. CNL Fund Advisors, Inc. is a corporation organized in 1994 under the laws of the State of Florida, and its principal office is located at 450 South Orange Avenue, Orlando, Florida 32801. CNL Fund Advisors, Inc. was a majority owned subsidiary of CNL Financial Group, Inc., until its merger effective September 1, 1999. On September 1, 1999, CNL American Properties Fund, Inc. acquired CNL Fund Advisors, Inc. and was organized to perform property acquisition, property management and other services. CNL Financial Group, Inc., which was the parent company of CNL Fund Advisors, Inc. through August 1999, was organized in 1980 under the laws of the State of Florida. CNL Financial Group, Inc. is a diversified real estate company which provides a wide range of real estate, development and financial services to companies in the United States through the activities of its subsidiaries. These activities are primarily focused on the franchised restaurant and hospitality industries. James M. Seneff, Jr., an individual General Partner of the Partnership, is the Chairman of the Board, Chief Executive Officer, and a director of CNL Financial Group, Inc. Mr. Seneff and his wife own all of the outstanding shares of CNL Holdings, Inc., the Parent company of CNL Financial Group, Inc. The following persons serve as operating officers of CNL Financial Group, Inc. or its affiliates or subsidiaries in the discretion of the Boards of Directors of those companies, but, except as specifically indicated, do not serve as members of the Boards of Directors of those entities. The Boards of Directors have the responsibility for creating and implementing the policies of CNL Financial Group, Inc. and its affiliated companies. Curtis B. McWilliams, age 44, joined CNL Financial Group, Inc. in April 1997 and served as an Executive Vice President through August 1999. He serves as Chief Executive Officer of CNL American Properties Fund, Inc. and CNL Fund Advisors, Inc. In addition, Mr. McWilliams served as President of CNL Fund Advisors, Inc. and as President of the Restaurant and Financial Services Groups within CNL Financial Group, Inc. through August 1999. Mr. McWilliams served as President of CNL American Properties Fund, Inc. from February 1999 through August 1999 and previously served as Executive Vice President from February 1998 through February 1999. From September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch & Co., most recently as Chairman of Merrill Lynch's Private Advisory Services until March 1997. Mr. McWilliams received a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Masters of Business Administration with a concentration in finance from the University of Chicago in 1983. John T. Walker, age 41, serves as President and Chief Operating Officer of CNL American Properties Fund, Inc. and CNL Fund Advisors, Inc. He served as Executive Vice President of CNL American Properties Fund, Inc. from January 1996 through August 1999, as Chief Operating Officer since March 1995 through August 1999, and previously served as Senior Vice President from December 1994 through August 1999. In addition, Mr. Walker has served as Executive Vice President of CNL Fund Advisors, Inc. since January 1996 through August 1999, Chief Operating Officer from April 1995 through August 1999, and previously served as Senior Vice President from November 1994 through January 1996. In addition, Mr. Walker previously served as Executive Vice President of CNL Hospitality Properties, Inc. and CNL Hospitality Advisors, Inc. As of September 1, 1999, Mr. Walker serves as President for CNL American Properties Fund, Inc. From May 1992 to May 1994, Mr. Walker, a certified public accountant, was Executive Vice President for Finance and Administration and Chief Financial Officer of Z Music, Inc., a cable television network (subsequently acquired by Gaylord Entertainment), where he was responsible for overall 42 financial and administrative management and planning. From January 1990 through April 1992, Mr. Walker was Chief Financial Officer of the First Baptist Church in Orlando, Florida. From April 1984 through December 1989, he was a partner in the accounting firm of Chastang, Ferrell & Walker, P.A., where he was the partner in charge of audit and consulting services, and from 1981 to 1984, Mr. Walker was a Senior Consultant/Audit Senior at Price Waterhouse. Mr. Walker is a Cum Laude graduate of Wake Forest University with a B.S. in Accountancy and is a certified public accountant. Lynn E. Rose, age 51, Ms. Rose served as Secretary of CNL American Properties Fund, Inc., a public, unlisted real estate investment trust, from 1994 through August 1999, and served as Treasurer from 1994 through February 1999. She also served as Treasurer of CNL Fund Advisors, Inc., from 1994 through July 1998, and served as Secretary and a director from 1994 through August 1999, at which point it merged with CNL American Properties Fund, Inc. In addition, she is Secretary and Treasurer of CNL Health Care Properties, Inc., and serves as Secretary of its subsidiaries. In addition, she serves as Secretary, Treasurer and a director of CNL Health Care Corp., the advisor. to the company. Ms. Rose also serves as Secretary and Treasurer of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust, as Secretary, Treasurer and a director of CNL Hospitality Corp., its Advisor, and as Secretary of the subsidiaries of the company. Ms. Rose served as Secretary and Treasurer of Commercial Net Lease Realty, Inc., a public real estate investment trust listed on the New York Stock Exchange, from 1992 to February 1996, and as Secretary and a director of CNL Realty Advisors, Inc., its advisor, from its inception in 1991 through 1997. She also served as Treasurer of CNL Realty Advisors, Inc. from 1991 through February 1996. Ms. Rose, a certified public accountant, has served as Secretary of CNL Financial Group, Inc. (formerly CNL Group, Inc.) since 1987, served as Controller from 1987 to 1993 and has served as Chief Financial Officer since 1993. She also serves as Secretary of the subsidiaries of CNL Financial Group, Inc. and holds various other offices in the subsidiaries. In addition, she serves as Secretary for approximately 50 additional corporations affiliated with CNL Financial Group, Inc. and its subsidiaries. Ms. Rose oversees the tax and legal compliance for over 375 corporations, partnerships and joint ventures, and the accounting and financial reporting for over 200 entities. Prior to joining CNL, Ms. Rose was a partner with Robert A. Bourne in the accounting firm of Bourne & Rose, P.A., Certified Public Accountants. Ms. Rose holds a B.A. in Sociology from the University of Central Florida. She was licensed as a certified public accountant in 1979. Jeanne A. Wall, age 41, Ms. Wall served as Executive Vice President of CNL American Properties Fund, Inc., a public, unlisted real estate investment trust, from 1994 through August 1999, and as Executive Vice President of CNL Fund Advisors, Inc., its advisor, from 1994 through August 1999, at which point it merged with CNL American Properties Fund, Inc. Ms. Wall also serves as Executive Vice President of CNL Health Care Properties, Inc. and CNL Health Care Corp., the Advisor to the Company. Ms. Wall also serves as Executive Vice President of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust, and serves as Executive Vice President and a director of CNL Hospitality Corp., its advisor. She also serves as a director for CNLBank. Ms. Wall serves as Executive Vice President of CNL Financial Group, Inc. (formerly CNL Group, Inc.). Ms. Wall has served as Chief Operating Officer of CNL Investment Company and of CNL Securities Corp. since 1994 and has served as Executive Vice President of CNL Investment Company since January 1991. In 1984, Ms. Wall joined CNL Securities Corp. and in 1985, became Vice President. In 1987, she became a Senior Vice President and in July 1997, became Executive Vice President of CNL Securities Corp. In this capacity, Ms. Wall serves as national marketing and sales director and oversees the national marketing plan for the CNL investment programs. In addition, Ms. Wall oversees product development, communications and investor services for programs offered through participating brokers. Ms. Wall also served as Senior Vice President of CNL Institutional Advisors Inc., a registered investment advisor, from 1990 to 1993. Ms. Wall served as Vice President of Commercial Net Lease Realty, Inc., a public real estate investment trust listed on the New York Stock Exchange, from 1992 through 1997, and served as Vice President of CNL Realty Advisors, Inc. from its inception in 1991 through 1997. Ms. Wall currently serves as a trustee on the Board of the Investment Program Association, is a member of the Corporate Advisory Council for the International Association for Financial Planning and is a member of IWF, International Women's Forum. In addition, she previously served on the Direct Participation Program committee for the National Association of Securities Dealers, Inc. Ms. Wall holds a B.A. in Business Administration from Linfield College and is a registered principal of CNL Securities Corp. Steven D. Shackelford, age 36, a certified public accountant, serves as Senior Vice President, Chief Financial Officer, and Secretary of CNL American Properties Fund, Inc. and CNL Fund Advisors, Inc. He served as Chief Financial Officer of CNL American Properties Fund, Inc. from January 1997 and as Chief Financial Officer of CNL Fund Advisors, Inc. since September 1996 through August 1999. From March 1995 to July 1996, Mr. Shackelford was a senior manager in the national office of Price Waterhouse where he was responsible for advising foreign clients seeking to raise capital and a public listing in the United States. From August 1992 to March 1995, he served as a manager in the Price Waterhouse, Paris, France office serving several multinational clients. Mr. Shackelford was an 43 audit staff and audit senior from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a B.A. in Accounting, with honors, and a Masters of Business Administration from Florida State University. Item 11. Executive Compensation Other than as described in Item 13, the Partnership has not paid and does not intend to pay any executive compensation to the General Partners or any of their affiliates. There are no compensatory plans or arrangements regarding termination of employment or change of control. Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 15, 2000, no person was known to the Registrant to be a beneficial owner of more than five percent of the Units. The following table sets forth, as of March 15, 2000 the beneficial ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class -------------- --------------- ---------------- General Partnership Interests James M. Seneff, Jr. 45% Robert A. Bourne 45% CNL Realty Corporation 10% -------- 100% ========
Neither the General Partners, nor any of their affiliates, owns any interest in the Registrant, except as noted above. 44 Item 13. Certain Relationships and Related Transactions The table below summarizes the types, recipients, methods of computation and amounts of compensation, fees and distributions paid or payable by the Partnership to the General Partners and their affiliates for the year ended December 31, 1999, exclusive of any distributions to which the General Partners or their affiliates may be entitled by reason of their purchase and ownership of Units.
Type of Amount Incurred Compensation Method of For the Year and Recipient Computation Ended December 31, 1999 ------------- ----------- ----------------------- Reimbursement to affiliates for Operating expenses are reimbursed Operating expenses incurred on operating expenses at the lower of cost or 90 percent behalf of the Partnership: of the prevailing rate at which $113,002 comparable services could have been obtained in the same Accounting and administrative geographic area. If the General services: $97,597 Partners or their affiliates loan funds to the Partnership, the General Partners or their affiliates will be reimbursed for the interest and fees charged to them by unaffiliated lenders for such loans. 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. Annual, subordinated property One-half of one percent per year $-0- management fee to affiliates of Partnership assets under management (valued at cost), subordinated to certain minimum returns to the Limited Partners. The property management fee will not exceed the lesser of one percent of gross operating revenues or competitive fees for comparable services. 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.
45
Type of Amount Incurred Compensation Method of For the Year and Recipient Computation Ended December 31, 1999 ------------- ----------- ----------------------- Deferred, subordinated real estate A deferred, subordinated real $-0- disposition fee payable to estate disposition fee, payable affiliates upon sale of one or more Properties, in an amount equal to the lesser of (i) one-half of a competitive real estate commission, or (ii) three percent of the sales price of such Property or Properties. Payment of such fee shall be made only if affiliates of the General Partners provide a substantial amount of services in connection with the sale of a Property or Properties and shall be subordinated to certain minimum returns to the Limited Partners. However, if the net sales proceeds are reinvested in a replacement property, no such real estate disposition fee will be incurred until such replacement property is sold and the net sales proceeds are distributed. General Partners' deferred, A deferred, subordinated share $-0- subordinated share of Partnership equal to one percent of net cash flow Partnership distributions of net cash flow, subordinated to certain minimum returns to the Limited Partners. General Partners' deferred, A deferred, subordinated share $-0- sub-ordinated share of Partnership equal to five percent of net sales proceeds from a sale or Partnership distributions of such sales not in liquidation of the net sales proceeds, subordinated Partnership to certain minimum returns to the Limited Partners.
46
Type of Amount Incurred Compensation Method of For the Year and Recipient Computation Ended December 31, 1999 ------------- ----------- ----------------------- General Partners' share of Distributions of net sales $-0- Partnership net sales proceeds from proceeds from a sale or sales of a sale or sales in liquidation of substantially all of the the Partnership Partnership's assets will be distributed in the following order or priority: (i) first, to pay all debts and liabilities of the Partnership and to establish reserves; (ii) second, to Partners with positive capital account balances, determined after the allocation of net income, net loss, gain and loss, in proportion to such balances, up to amounts sufficient to reduce such balances to zero; and (iii) thereafter, 95% to the Limited Partners and 5% to the General Partners.
47 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report. 1. Financial Statements Report of Independent Certified Public Accountants Balance Sheets at December 31, 1999 and 1998 Statements of Income for the years ended December 31, 1999, 1998, and 1997 Statements of Partners' Capital for the years ended December 31, 1999, 1998, and 1997 Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 Notes to Financial Statements 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998, and 1997 Schedule III - Real Estate and Accumulated Depreciation at December 31, 1999 Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 1999 All other Schedules are omitted as the required information is inapplicable or is presented in the financial statements or notes thereto. 3. Exhibits 3.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to Registration Statement No. 33-15374 on Form S-11 and incorporated herein by reference.) 3.2 Amended and Restated Agreement and Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2 to Form 10-K filed with the Securities and Exchange Commission on April 5, 1993, and incorporated herein by reference.) 4.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to Registration Statement No. 33-15374 on Form S-11 and incorporated herein by reference.) 4.2 Amended and Restated Agreement and Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2 to Form 10-K filed with the Securities and Exchange Commission on April 5, 1993, and incorporated herein by reference.) 10.1 Property Management Agreement (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on April 5, 1993, and incorporated herein by reference.) 10.2 Assignment of Property Management Agreement from CNL Investment Company to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form 10-K filed with the Securities and Exchange Commission on March 30, 1995, and incorporated herein by reference.) 48 10.3 Assignment of Property Management Agreement from CNL Income Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 27 Financial Data Schedule (Filed herewith.) (b) The Registrant filed no reports on Form 8-K during the period from October 1, 1999 through December 31, 1999. 49 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 23rd day of March, 2000. 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. 50 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 March 23, 2000 - ------------------------------- (Principal Financial and Accounting Robert A. Bourne Officer) /s/ James M. Seneff, Jr. Chief Executive Officer and Director March 23, 2000 - ------------------------------- (Principal Executive Officer) James M. Seneff, Jr.
51 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------- Years Ended December 31, 1999, 1998, and 1997
Additions Deductions --------------------------- ------------------------------ Collected or Deter- Balance at Charged to Charged to Deemed mined to Balance Beginning of Costs and Other Uncollec- be Col- at End Year Description Year Expenses Accounts tible lectible of Year - ------ ------------- ---------------- -------------- ----------- ------------- ------------- ------------ 1997 Allowance for doubtful accounts (a) $ 70,142 $ 72,572 $ 97,281 (b) $ 70,142 (c) $ -- $ 169,853 ================ ============== =========== ============= ============= ============ 1998 Allowance for doubtful accounts (a) $ 169,853 $ 41,380 $ 3,828 (b) $ 15,384 (c) $ 4,699 $ 194,978 ================ ============== =========== ============= ============= ============ 1999 Allowance for doubtful accounts (a) $ 194,978 $ -- $ 5,199 (b) $ 191,380 (c) $ -- $ 8,797 ================ ============== =========== ============= ============= ============
(a) Deducted from receivables on the balance sheet. (b) Reduction of rental and other income. (c) Amounts written off as uncollectible. F-1 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ------------------------------------------------------- December 31, 1999
Costs Capitalized Subsequent To Gross Amount at Which Initial Cost Acquisition Carried at Close of Period (c) -------------------------- ---------------------- ----------------------------------- Encum- Buildings and Improve- Carrying Buildings and brances Land Improvements ments Costs Land Improvements Total --------- -------- --------------- ---------- ---------- -------- --------------- ---------- Properties the Partnership has Invested in Under Operating Leases: Burger King Restaurant: Kansas City, Missouri - $236,055 $ 573,739 - - $236,055 $ 573,739 $ 809,794 Montgomery, Alabama - 326,997 - - - 326,997 (e) 326,997 Darryl's Restaurant: Fayetteville, North Carolina - 688,672 584,290 - - 688,672 584,290 1,272,962 Golden Corral Family Steakhouse Restaurants: Altus, Oklahoma - 149,756 449,269 - - 149,756 449,269 599,025 Hastings, Nebraska - 110,800 332,400 23,636 - 110,800 356,036 466,836 Wichita, Kansas(f) - 147,349 442,045 - - 147,349 442,045 589,394 Stockbridge, Georgia - 384,644 685,511 150,000 - 384,644 835,511 1,220,155 Washington, Illinois - 221,680 517,833 - - 221,680 517,833 739,513 Schererville, Indiana (f) - 211,690 531,801 - - 211,690 531,801 743,491 IHOP Restaurant: Auburn, Alabama - 373,763 1,060,478 - - 373,763 1,060,478 1,434,241 KFC Restaurants: Calallen, Texas - 219,432 - 332,043 - 219,432 332,043 551,475 Katy, Texas - 266,768 - 279,486 - 266,768 279,486 546,254 Burnsville, Minnesota - 196,159 - 437,895 - 196,159 437,895 634,054 Page, Arizona - 328,729 - 270,755 - 328,729 270,755 599,484 Life on Which Depreciation in Date Latest Income Accumulated of Con- Date Statement is Depreciation struction Acquired Computed -------------- ----------- ---------- --------------- Properties the Partnership has Invested in Under Operating Leases: Burger King Restaurant: Kansas City, Missouri $231,089 1984 12/87 (b) Montgomery, Alabama (d) 1975 01/99 (d) Darryl's Restaurant: Fayetteville, North Carolina 49,758 1984 06/97 (b) Golden Corral Family Steakhouse Restaurants: Altus, Oklahoma 183,451 1987 10/87 (b) Hastings, Nebraska 144,790 1987 10/87 (b) Wichita, Kansas(f) 179,274 1987 11/87 (b) Stockbridge, Georgia 286,396 1987 11/87 (b) Washington, Illinois 210,010 1987 12/87 (b) Schererville, Indiana (f) 215,675 1987 12/87 (b) IHOP Restaurant: Auburn, Alabama 6,556 1998 10/99 (b) KFC Restaurants: Calallen, Texas 127,283 1988 12/87 (b) Katy, Texas 109,077 1988 02/88 (b) Burnsville, Minnesota 165,427 1988 02/88 (b) Page, Arizona 104,918 1988 02/88 (b)
F-1 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ------------------------------------------------------- December 31, 1999
Costs Capitalized Subsequent To Gross Amount at Which Initial Cost Acquisition Carried at Close of Period (c) -------------------------- ---------------------- ----------------------------------- Encum- Buildings and Improve- Carrying Buildings and brances Land Improvements ments Costs Land Improvements Total --------- -------- --------------- ---------- ---------- -------- --------------- ---------- Pizza Hut Restaurants: Jacksboro, Texas - 54,274 147,337 - - 54,274 147,337 201,611 Seminole, Texas - 183,284 134,531 - - 183,284 134,531 317,815 Winter Springs, Florida - 268,128 270,372 - - 268,128 270,372 538,500 Austin, Texas - 301,778 372,137 - - 301,778 372,137 673,915 Popeyes Famous Fried Chicken Restaurant: Plant City, Florida - 244,451 - 360,342 - 244,451 360,342 604,793 Red Oaks Steakhouse Restaurant: Canton Township, Michigan - 296,945 - - - 296,945 (e) 296,945 Taco Bell Restaurants: Bishop, California - 363,964 - 272,150 - 363,964 272,150 636,114 Longwood, Florida - 346,831 - 394,086 - 346,831 394,086 740,917 ---------- ---------- ---------- -------- ---------- ---------- ----------- $5,922,149 $6,101,743 $2,520,393 - $5,922,149 $8,622,136 $14,544,285 ========== ========== ========== ======== ========== ========== =========== Property of Joint Venture in Which the Partnership has a 73.4% Interest and has Invested in Under an Operating Lease: Po Folks Restaurant: Titusville, Florida (g) - $ 271,350 - $ 750,985 - $ 271,350 $ 750,985 $ 1,022,335 ========== ========== ========== ======== ========== ========== =========== Life on Which Depreciation in Date Latest Income Accumulated of Con- Date Statement is Depreciation struction Acquired Computed -------------- ----------- ---------- --------------- Pizza Hut Restaurants: Jacksboro, Texas 59,344 1983 12/87 (b) Seminole, Texas 54,186 1977 12/87 (b) Winter Springs, Florida 108,524 1987 01/88 (b) Austin, Texas 147,304 1987 02/88 (b) Popeyes Famous Fried Chicken Restaurant: Plant City, Florida 140,633 1988 11/87 (b) Red Oaks Steakhouse Restaurant: Canton Township, Michigan (d) 1988 02/88 (d) Taco Bell Restaurants: Bishop, California 101,676 1988 05/88 (b) Longwood, Florida 146,148 1988 06/88 (b) -------------- $2,771,519 ============== Property of Joint Venture in Which the Partnership has a 73.4% Interest and has Invested in Under an Operating Lease: Po Folks Restaurant: Titusville, Florida (g) $ 262,872 1988 12/88 (b) ==============
F-2 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ------------------------------------------------------- December 31, 1999
Costs Capitalized Subsequent To Gross Amount at Which Initial Cost Acquisition Carried at Close of Period (c) -------------------------- ---------------------- ----------------------------------- Encum- Buildings and Improve- Carrying Buildings and brances Land Improvements ments Costs Land Improvements Total --------- --------- --------------- ---------- ---------- -------- --------------- ---------- Property in Which the Partnership has a 33.0% Interest as Tenants-in- Common and has Invested in Under an Operating Lease: IHOP Restaurant: Englewood, Colorado - $552,590 - - - $552,590 (e) $ 552,590 ========= =============== ========== ========== ========== ========== Property in Which the Partnership has a 9.84% Interest as Tenants-in- Common and has invested in Under an Operating Lease: Chevy's Fresh Mex Restaurant: Miami, Florida - $976,357 $974,016 - - $976,357 $974,016 $1,950,373 ========= =============== ========== ========== ========== ============ ========== Property of Joint Venture in Which the Partnership has a 46.88% Interest and has Invested in Under an Operating Lease: Ruby Tuesday Restaurant: Orlando, FL - $623,496 - - - $623,496 (e) $ 623,496 ========= =============== ========== ========== ========== ========== Property in Which the Partnership has a 20% Interest as Tenants-in- Common and has Invested in Under an Operating Lease: IHOP Restaurant: Baytown, Texas - $495,847 $799,469 - - $495,847 $799,469 $1,295,316 ========= =============== ========== ========== ========== ============ ========== Life on Which Depreciation in Date Latest Income Accumulated of Con- Date Statement is Depreciation struction Acquired Computed -------------- ----------- ---------- --------------- Property in Which the Partnership has a 33.0% Interest as Tenants-in- Common and has Invested in Under an Operating Lease: IHOP Restaurant: Englewood, Colorado (d) 1996 07/97 (d) Property in Which the Partnership has a 9.84% Interest as Tenants-in- Common and has invested in Under an Operating Lease: Chevy's Fresh Mex Restaurant: Miami, Florida $65,023 1995 12/97 (b) ============== Property of Joint Venture in Which the Partnership has a 46.88% Interest and has Invested in Under an Operating Lease: Ruby Tuesday Restaurant: Orlando, FL (d) 1998 05/98 (d) Property in Which the Partnership has a 20% Interest as Tenants-in- Common and has Invested in Under an Operating Lease: IHOP Restaurant: Baytown, Texas $ 5,318 1998 10/99 (b) ==============
F-3 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ------------------------------------------------------- December 31, 1999
Costs Capitalized Subsequent To Gross Amount at Which Initial Cost Acquisition Carried at Close of Period (c) -------------------------- ---------------------- ----------------------------------- Encum- Buildings and Improve- Carrying Buildings and brances Land Improvements ments Costs Land Improvements Total --------- --------- --------------- ---------- ---------- -------- --------------- ---------- Properties the Partnership has Invested in Under Direct Financing Leases: Burger King Restaurant: Montgomery, Alabama - - $ 612,920 - - - (e) (e) --------- --------------- ---------- ---------- -------- Red Oaks Steakhouse Restaurant: Canton Township, Michigan - - $556,495 - - (e) (e) --------- --------------- ---------- ---------- -------- - $ 612,920 $556,495 - - ========= =============== ========== ========== ======== Property in Which the Partnership has a 33.0% Interest as Tenants-in- Common and has Invested in Under Direct Financing Lease: IHOP Restaurant: Englewood, Colorado - - $ 1,008,839 - - - (e) (e) ========= =============== ========== ========== ======== Property in Which the Partnership has a 25.87% Interest as Tenants-in- Common and has Invested in Under Direct Financing Lease: IHOP Restaurant: Overland Park, Kansas - - $ 1,608,508 - - - (e) (e) ========= =============== ========== ========== ======== Life on Which Depreciation in Date Latest Income Accumulated of Con- Date Statement is Depreciation struction Acquired Computed -------------- ----------- ---------- --------------- Properties the Partnership has Invested in Under Direct Financing Leases: Burger King Restaurant: Montgomery, Alabama (d) 1975 01/99 (d) Red Oaks Steakhouse Restaurant: Canton Township, Michigan (d) 1988 02/88 (d) Property in Which the Partnership has a 33.0% Interest as Tenants-in- Common and has Invested in Under Direct Financing Lease: IHOP Restaurant: Englewood, Colorado (d) 1996 07/97 (d) Property in Which the Partnership has a 25.87% Interest as Tenants-in- Common and has Invested in Under Direct Financing Lease: IHOP Restaurant: Overland Park, Kansas (d) 1997 01/98 (d)
F-4 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ------------------------------------------------------- December 31, 1999
Costs Capitalized Subsequent To Gross Amount at Which Initial Cost Acquisition Carried at Close of Period (c) -------------------------- ---------------------- ----------------------------------- Encum- Buildings and Improve- Carrying Buildings and brances Land Improvements ments Costs Land Improvements Total --------- --------- --------------- ---------- ---------- -------- --------------- ---------- Property of Joint Veture in Which the Partnership has a 46.88% Interest and has Invested in Under Direct Financing Lease: Ruby Tuesday Restaurant: Orlando, Florida - - - $820,202 - - (e) (e) ========= =============== ========== ========== ======== Life on Which Depreciation in Date Latest Income Accumulated of Con- Date Statement is Depreciation struction Acquired Computed -------------- ----------- ---------- --------------- Property of Joint Veture in Which the Partnership has a 46.88% Interest and has Invested in Under Direct Financing Lease: Ruby Tuesday Restaurant: Orlando, Florida (d) 1998 05/98 (d)
F-5 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ---------------------------------------------------------------- December 31, 1999 (a) Transactions in real estate and accumulated depreciation during 1999, 1998, and 1997, are summarized as follows:
Accumulated Cost Depreciation -------------- -------------- Properties the Partnership has Invested in Under Operating Leases: Balance, December 31, 1996 $ 20,302,299 $ 3,610,923 Acquisition 1,272,962 -- Disposition (3,357,391) (637,481) Depreciation -- 368,182 -------------- -------------- Balance, December 31, 1997 18,217,870 3,341,624 Acquisition 150,000 -- Dispositions (4,210,139) (902,084) Depreciation expense -- 299,355 -------------- -------------- Balance, December 31, 1998 14,157,731 2,738,895 Acquisition 1,761,238 -- Dispositions (1,374,684) (236,174) Depreciation expense -- 268,798 -------------- -------------- Balance, December 31, 1999 $ 14,544,285 $ 2,771,519 ============== ============== Property of Joint Venture in Which the Partnership has a 73.4% Interest and has Invested in Under an Operating Lease: Balance, December 31, 1996 $ 1,022,335 $ 200,263 Depreciation expense -- 24,944 -------------- -------------- Balance, December 31, 1997 1,022,335 225,207 Depreciation expense -- 20,099 -------------- -------------- Balance, December 31, 1998 1,022,335 245,306 Depreciation expense -- 17,566 -------------- -------------- Balance, December 31, 1999 $ 1,022,335 $ 262,872 ============== ==============
F-6 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED --------------------------------------------------- DEPRECIATION - CONTINUED ------------------------ December 31, 1999
Accumulated Cost Depreciation -------------- -------------- Property in Which the Partnership has a 33% Interest as Tenants-in-Common and has Invested in Under an Operating Lease: Balance, December 31, 1996 $ -- $ -- Acquisition 552,590 -- Depreciation expense (d) -- -- -------------- -------------- Balance, December 31, 1997 552,590 -- Depreciation expense (d) -- -- -------------- -------------- Balance, December 31, 1998 552,590 -- Depreciation expense (d) -- -- -------------- -------------- Balance, December 31, 1999 $ 552,590 $ -- ============== ============== Property in Which the Partnership has a 9.84% Interest as Tenants-in-Common and has Invested in Under an Operating Lease: Balance, December 31, 1996 $ -- $ -- Acquisition 1,950,373 -- Depreciation expense -- 89 -------------- -------------- Balance, December 31, 1997 1,950,373 89 Depreciation expense -- 32,468 -------------- -------------- Balance, December 31, 1998 1,950,373 32,557 Depreciation expense -- 32,466 -------------- -------------- Balance, December 31, 1999 $ 1,950,373 $ 65,023 ============== ============== Property of Joint Venture in Which the Partnership has a 46.88% Interest and has Invested in Under an Investment in Direct Financing Lease: Balance, December 31, 1997 $ -- $ -- Acquisition 623,496 -- Depreciation expense (d) -- -- -------------- -------------- Balance, December 31, 1998 623,496 -- Depreciation expense (d) -- -- -------------- -------------- Balance, December 31, 1999 $ 623,496 $ -- ============== ==============
F-7 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED --------------------------------------------------- DEPRECIATION - CONTINUED ------------------------ December 31, 1999
Accumulated Cost Depreciation -------------- -------------- Property in Which the Partnership has a 20% Interest as Tenants-in-Common and has Invested in Under an Operating Lease: Balance, December 31, 1998 $ -- $ -- Acquisition 1,295,316 -- Depreciation expense -- 5,318 -------------- -------------- Balance, December 31, 1999 $ 1,295,316 $ 5,318 ============== ==============
(b) Depreciation expense is computed for buildings and improvements based upon estimated lives of 30 years. (c) As of December 31, 1999, the aggregate cost of the Properties owned by the Partnership, its consolidated joint venture and the unconsolidated joint venture for federal income tax purposes was $14,698,872 and $9,419,158, respectively. All of the leases are treated as operating leases for federal income tax purposes. (d) For financial reporting purposes, the portion of the lease relating to the building has been recorded as a direct financing lease. The cost of the building has been included in the net investment in direct financing lease; therefore, depreciation is not applicable. (e) For financial reporting purposes, certain components of the lease relating to land and building have been recorded as a direct financing lease. Accordingly, costs relating to these components of this lease are not shown. (f) The tenant of this Property, Golden Corral Corporation, has subleased this Property to a local independent restaurant. Golden Corral Corporation continues to be responsible for complying with all the terms of the lease agreement and is continuing to pay rent on this Property to the Partnership. (g) For financial reporting purposes, the undepreciated cost of the Property in Titusville, Florida, was written down to net realizable value due to an impairment in value. The Partnership recognized the impairment by recording an allowance for loss on land and building in the amount of approximately $272,300 as of December 31, 1998. The cumulative allowance at December 31, 1999, represents the difference between the Property's carrying value and the current estimate of the net realizable value of the Property. The cost of the Property presented on this schedule is the gross amount at which the Property was carried at December 31, 1999, excluding the allowance for loss on land and building. F-8 EXHIBIT INDEX Exhibit Number - -------------- 3.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to Registration Statement No. 33-15374 on Form S-11 and incorporated herein by reference.) 3.2 Amended and Restated Agreement and Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.2 to Form 10-K filed with the Securities and Exchange Commission on April 5, 1993, and incorporated herein by reference.) 4.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to Registration Statement No. 33-15374 on Form S-11 and incorporated herein by reference.) 4.2 Amended and Restated Agreement and Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on April 5, 1993, and incorporated herein by reference.) 10.1 Property Management Agreement (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on April 5, 1993, and incorporated herein by reference.) 10.2 Assignment of Property Management Agreement from CNL Investment Company to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form 10-K filed with the Securities and Exchange Commission on March 30, 1995, and incorporated herein by reference.) 10.3 Assignment of Property Management Agreement from CNL Income Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 27 Financial Data Schedule (filed herewith.) i EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the balance sheet of CNL Income Fund III, Ltd. at December 31, 1999, and its statement of income for the twelve months then ended and is qualified in its entirety by reference to the Form-10K of CNL Income Fund III, Ltd. for the twelve months ended December 31, 1999. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,011,733 0 9,455 8,797 0 0 14,544,285 2,771,519 16,472,518 0 0 0 0 0 15,600,943 16,472,518 0 1,840,562 0 555,844 0 1,239 0 1,730,671 0 1,730,671 0 0 0 1,730,671 0 0 Due to the nature of its industry, CNL Income Fund III, Ltd. has an unclassified balance sheet; therefore, no values are shown above for current assets and current liabilities.
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