-----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, JhQNSaINjcfSfYpQs2se56pcm7L4eb5iYhAsNZtsnm9xG10ArRgsBG670jLCZ/Hy w+8HuyADZR4RmGytOQOugA== 0000928385-99-003179.txt : 19991101 0000928385-99-003179.hdr.sgml : 19991101 ACCESSION NUMBER: 0000928385-99-003179 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991029 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/A SEC ACT: SEC FILE NUMBER: 000-16850 FILM NUMBER: 99737376 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/A 1 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to Commission file number 0-16850 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 incorporation or organization) Identification No.) 400 East South Street Orlando, Florida 32801 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 650-1000 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of exchange on which registered: None Not Applicable Securities registered pursuant to section 12(g) of the Act: Units of limited partnership interest ($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 The Form 10-K of CNL Income Fund X, Ltd. for the year ended December 31, 1998 is being amended to revise the disclosure under Item 1. Business, Item 2. Properties, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data. PART I Item 1. Business CNL Income Fund 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; Hagerstown, Maryland, and Hazard Kentucky. 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. In January 1999, the Partnership reinvested a portion of the remaining net sales proceeds from the 1998 sales in a Property in Montgomery, Alabama. The Partnership intends to use the remaining net sales proceeds to invest in an additional Property, to pay liabilities of the Partnership, and to make a special distribution to the Limited Partners. As a result of the above transactions, as of December 31, 1998, the Partnership owned 27 Properties. This number excludes the Property purchased in January 1999. The 27 Properties include interests in three Properties owned by joint ventures in which the Partnership is a co-venturer and three Properties owned with affiliates 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. On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the Partnership would be merged with and into a subsidiary of APF (the "Merger"). APF is a real estate investment trust whose primary business is the ownership of restaurant properties leased on a long-term, "triple-net" basis to operators of national and regional restaurant chains. APF has agreed to issue shares of its common stock, par value $0.01 per share (the "APF Shares"), as consideration for the Merger. At a special meeting of the partners that is expected to be held in the fourth quarter of 1999, Limited Partners holding in excess of 50% of the Partnership's outstanding limited partnership interests must approve the Merger prior to consummation of the transaction. If the Limited Partners at the special meeting approve the Merger, APF will own the Properties and other assets of the Partnership. In the event that the Limited Partners vote against the Merger, the Partnership will hold its Properties until the General Partners determine that the sale or other disposition of the Properties is advantageous in view of the Partnership's investment objectives. In deciding whether to sell Properties, the General Partners will consider factors such as potential capital appreciation, net cash flow and federal income tax considerations. Certain lessees 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. 2 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 2018. 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. Certain lessees also have been granted options to purchase Properties at each Property's then fair market value, or pursuant to a formula based on the original cost of the Property, after a specified portion of the lease term has elapsed. 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 1998, the Partnership reinvested a portion of the net sales proceeds from the sale of the Properties in Kissimmee, Florida, and Mason City, Iowa, in an IHOP Property located in Overland Park, Kansas, with an affiliate of the General Partners, as tenants-in-common, as described below in "Joint Venture Arrangements." In addition, in May 1998, the Partnership contributed the net sales proceeds from the sale of the Property in Punta Gorda, Florida, in a joint venture arrangement, RTO Joint Venture, with an affiliate of the General Partners, as described below in "Joint Venture Arrangements." The lease terms for these Properties are substantially the same as the Partnership's other leases, as described above in the first three paragraphs of this section. In September 1998, the Partnership entered into a new lease agreement with a new tenant, for the Golden Corral Property located in Stockbridge, Georgia. The lease terms for this Property are substantially the same as the Partnership's other leases, as described above in the first three paragraphs of this section. 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 the first three paragraphs of this section. Major Tenants During 1998, one lessee of the Partnership and its consolidated joint venture, Golden Corral Corporation, contributed more than ten percent of the Partnership's total rental income (including rental income from the Partnership's consolidated joint venture and the Partnership's share of rental income from one Property owned by two unconsolidated joint ventures and three Properties owned with affiliates as tenants-in-common). As of December 31, 1998, 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 1999 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 1998 (including rental income from the Partnership's consolidated joint venture and the Partnership's share of the rental income from two Properties owned by two unconsolidated joint ventures and three Properties owned with affiliates as tenants-in-common). In subsequent years, it is anticipated that these three Restaurant Chains each will continue to account for more than ten percent of total rental income to which the partnership is entitled under the terms of the leases. Any failure of 3 Golden Corral Corporation or any of these Restaurant Chains could materially affect the Partnership's income. As of December 31, 1998, 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 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%, a 73.4%, and a 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 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 an agreement to hold a Property in Englewood, Colorado, as tenants- in-common, with CNL Income Fund IX, Ltd., an affiliate of the General Partners; and entered into an agreement to hold a Property in Miami, Florida, as tenants- in-common, with CNL Income Fund VII, Ltd., CNL Income Fund X, Ltd., and CNL Income Fund XIII, Ltd., affiliates of the General Partners. The agreements provide for the Partnership and the affiliates to share in the profits and losses of the Properties in proportion to each co-tenant's percentage interest. The Partnership owns a 33 percent and 9.84% interest in the Property in Englewood, Colorado and the Property in Miami, Florida, respectively. In addition, in January 1998, the Partnership entered into an agreement to hold an IHOP Property, as tenants-in-common, with CNL Income Fund II, Ltd. and CNL Income Fund VI, Ltd., affiliates of the General Partners. The agreement provides for the Partnership and the affiliate to share in the profits and losses of the Property in proportion to each co-tenant's percentage interest. The Partnership owns a 25.87% interest in this Property. Each of the affiliates is a limited Partnership organized pursuant to the laws of the State of Florida. The tenancy in common agreement restricts each co-tenant's ability to sell, transfer, or assign its interest in the tenancy in common's Property without first offering it for sale to the remaining co-tenant. 4 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 Fund Advisors, Inc. perform certain services for the Partnership. In addition, the General Partners have available to them the resources and expertise of the officers and employees of CNL Group, Inc., a diversified real estate company, and its affiliates, who may also perform certain services for the Partnership. Item 2. Properties As of December 31, 1998, the Partnership owned 27 Properties. Of the 27 Properties, 21 are owned by the Partnership in fee simple, three are owned through joint venture arrangements and three are owned through tenancy in common arrangements. See Item 1. Business - Joint Venture and Tenancy in Common Arrangements. The Partnership is not permitted to encumber its Properties under the terms of its partnership agreement. Reference is made to the Schedule of Real Estate and Accumulated Depreciation for a listing of the Properties and their respective costs, including acquisition fees and certain acquisition expenses. This schedule was filed with the Partnership's Form 10-K for the year ended December 31, 1998. Description of Properties Land. The Partnership's Property sites range from approximately 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. 5 The following table lists the Properties owned by the Partnership as of December 31, 1998 by state. More detailed information regarding the location of the Properties is contained in the Schedule of Real Estate and Accumulated Depreciation filed with the Partnership's Form 10-K for the year ended December 31, 1998.
State Number of Properties ----- -------------------- Arizona 2 California 1 Colorado 1 Florida 6 Georgia 1 Illinois 1 Indiana 1 Kansas 2 Maryland 1 Michigan 1 Minnesota 1 Missouri 1 North Carolina 1 Nebraska 1 Oklahoma 1 Texas 5 ---------- TOTAL PROPERTIES: 27 ==========
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, 1998, the Partnership had no plans for renovation of the Properties. Depreciation expense is computed for buildings and improvements using the straight line method using depreciable lives of 31.5 and 40 years for federal income tax purposes. As of December 31, 1998, 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 $14,523,276 and $8,123,842, respectively. The following table lists the Properties owned by the Partnership as of December 31, 1998 by Restaurant Chain.
Restaurant Chain Number of Properties ---------------- -------------------- Burger King 1 Chevy's Fresh Mex 1 Darryl's 1 Denny's 1 Golden Corral 6 IHOP 2 KFC 4 Perkins 1 Pizza Hut 4 Popeyes 1 Red Oak Steakhouse 1 Ruby Tuesday 1 Taco Bell 2 Other 1 ---------- TOTAL PROPERTIES: 27 ==========
6 The General Partners consider the Properties to be well-maintained and sufficient for the Partnership's operations. The General Partners believe that the Properties are adequately covered by insurance. In addition, the General Partners have obtained contingent liability and property coverage for the Partnership. This insurance is intended to reduce the Partnership's exposure in the unlikely event a tenant's insurance policy lapses or is insufficient to cover a claim relating to the Property. Leases. The Partnership leases the Properties to operators of selected national and regional fast-food restaurant chains. The leases are generally on a long-term "triple net" basis, meaning that the tenant is responsible for repairs, maintenance, property taxes, utilities and insurance. Generally, a lessee is required, under the terms of its lease agreement, to make such capital expenditures as may be reasonably necessary to refurbish buildings, premises, signs and equipment so as to comply with the lessee's obligations, if applicable, under the franchise agreement to reflect the current commercial image of its Restaurant Chain. These capital expenditures are required to be paid by the lessee during the term of the lease. The terms of the leases of the Properties owned by the Partnership are described in Item 1. Business - Leases. At December 31, 1998, 1997, 1996, 1995, and 1994, the Properties were 96%, 93%, 94%, 97%, and 100% occupied, respectively. The following is a schedule of the average annual rent for each of the five years ended December 31:
For the Year Ended December 31: 1998 1997 1996 1995 1994 --------------- --------------- --------------- --------------- --------------- Rental Revenues (1) $1,798,973 $2,116,623 $2,469,718 $2,368,914 $2,516,395 Properties (2) 26 28 31 31 32 Average Rent per Unit $ 69,191 $ 75,594 $ 79,668 $ 76,416 $ 78,637
(1) Rental income includes the Partnership's share of rental income from the Properties owned through joint venture arrangements and the Properties owned through a tenancy in common arrangement. 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, 1998 for each of the ten years beginning with 1999 and thereafter.
Percentage of Number Annual Rental Gross Annual Expiration Year of Leases Revenues Rental Income ---------------------- ------------------ ------------------ ------------------ 1999 -- -- -- 2000 -- -- -- 2001 -- -- -- 2002 6 432,016 24.18% 2003 -- -- -- 2004 -- -- -- 2005 -- -- -- 2006 1 87,849 4.92% 2007 5 227,608 12.74% 2008 6 494,670 27.69% Thereafter 8 544,272 30.47% ---------- ----------------- ----------------- Totals (1) 26 1,786,415 100.00% ========== ================= =================
(1) Excludes one Property which was vacant at December 31, 1998. 7 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. PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership was organized on June 1, 1987, to acquire for cash, either directly or through joint venture arrangements, both newly constructed and existing restaurant Properties as well as land upon which restaurant Properties were to be constructed, which are leased primarily to operators of selected national and regional fast-food Restaurant Chains. The leases generally are triple-net leases, with the lessees generally responsible for all repairs and maintenance, property taxes, insurance and utilities. As of December 31, 1998, the Partnership owned 27 Properties, either directly or indirectly through joint venture or tenancy in common arrangements. Capital Resources During the years ended December 31, 1998, 1997 and 1996, 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 $1,821,296, $2,021,689, and $2,091,754. The decrease in cash from operations during 1998 and 1997, each as compared to the previous year, is primarily a result of changes in income and expenses as described in "Results of Operations" below and changes in the Partnership's working capital during each of the respective years. Other sources and uses of capital included the following during the years ended December 31, 1998, 1997, and 1996. In January 1996, the Partnership entered into a promissory note with the corporate general partner for a loan in the amount of $86,200 in connection with the operations of the Partnership. The loan was uncollateralized, bore interest at a rate of prime plus 0.25% per annum and was due on demand. As of December 31, 1996, the interest rate was 8.50%. The Partnership repaid the loan in full, along with approximately $660 in interest, to the corporate General Partner. In addition, during 1996 and 1997, the Partnership entered into various promissory notes with the corporate general partner for loans totalling $575,200 and $117,000, respectively, 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 the 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. 8 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 $229,500 in excess of its original purchase price. In June 1997, the Partnership reinvested approximately $1,276,000 of the net sales proceeds received in a Property in Fayetteville, North Carolina and 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. 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 April 1997, the Partnership sold its Property in Kissimmee, Florida, to a third party for $692,400 and received net sales proceeds of $673,159, resulting in a gain of $271,929 for financial reporting purposes. This Property was originally acquired by the Partnership in March 1988 and had a cost of approximately $474,800, excluding acquisition fees and miscellaneous acquisition expense; therefore, the Partnership sold the Property for approximately $196,400 in excess of its original purchase price. In July 1997, the Partnership reinvested approximately $511,700 of these net sales proceeds in a Property located in Englewood, Colorado, as tenants-in-common with an affiliate of the General Partners. In connection therewith, the Partnership and the affiliate entered into an agreement whereby each co-venturer will share in the profits and losses of the Property in proportion to each co-venturer's percentage interest. As of December 31, 1997, the Partnership owned a 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. The transaction, or a portion thereof, relating to the sale of the Property in Kissimmee, Florida, and the reinvestment of a portion of the proceeds in an IHOP Property in Englewood, Colorado, 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 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 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 will share in the profits and losses of the Property in proportion to each co-venturer's percentage interest. As of December 31, 1998, 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 $26,700 in excess of its original purchase price. In January 1998, the Partnership reinvested the net sales proceeds in a Property in Overland Park, Kansas, with affiliates of the General Partners, as tenants-in-common. The transaction, or a portion thereof, relating to the sale of the Property in Mason City, Iowa, and the reinvestment of the proceeds in a Property in Overland Park, Kansas, with affiliates as tenants-in-common, qualified as a like-kind exchange transaction for federal income tax purposes. The Partnership distributed amounts sufficient to enable 9 the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners), resulting from the sale. In January 1998, the Partnership sold its Property in Fernandina Beach, Florida, to the tenant, for $730,000 and received net sales proceeds 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 made the remaining proceeds available 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 in a joint venture arrangement as described below. The Partnership distributed amounts sufficient to enable the Limited Partners to pay federal and state income taxes, if any (at a level reasonably assumed by the General Partners). 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, 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 the joint venture. In June 1998, the Partnership sold its 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). 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. 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. In January 1999, the Partnership reinvested the net sales proceeds in a Property in Montgomery, Alabama. 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 and net sales proceeds from the sale of Properties, pending reinvestment in additional Properties, distribution to the Limited Partners or use for the payment of Partnership liabilities, are invested in money market accounts or other short- term, highly liquid investments such as demand deposit accounts at commercial banks, CDs and money market accounts with less than a 30-day maturity date, pending the Partnership's use of such funds to pay Partnership expenses or to make distributions to the partners. At December 31, 1998, the Partnership had $2,047,140 invested in such short-term investments as compared to $493,118 at December 31, 1997. The increase in cash and cash equivalents is primarily attributable to the fact that cash and cash equivalents at December 31, 1998, included the remaining net sales proceeds relating to 10 the sale of several Properties pending reinvestment in additional Properties, and the note receivable as described above. As of December 31, 1998, the average interest rate earned on the rental income deposited in demand deposit accounts at commercial banks was approximately two percent annually. The funds remaining at December 31, 1998, will be used for investment in an additional Property and for the payment of distributions and other liabilities. Short-Term Liquidity The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership. The Partnership's investment strategy of acquiring Properties for cash and generally leasing them under triple-net leases to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. The General Partners believe that the leases will continue to generate cash flow in excess of operating expenses. Due to low operating expenses and ongoing cash flow, the General Partners do not believe that working capital reserves are necessary at this time. In addition, because the leases for the Partnership's Properties are generally on a triple-net basis, it is not anticipated that a permanent reserve for maintenance and repairs will be established at this time. To the extent, however, that the Partnership has insufficient funds for such purposes, the General Partners will contribute to the Partnership an aggregate amount of up to one percent of the offering proceeds for maintenance and repairs. The General Partners have the right, but not the obligation, to make additional capital contributions if they deem it appropriate in connection with the operations of the Partnership. The Partnership generally distributes cash from operations remaining after the payment of the operating expenses of the Partnership, to the extent that the General Partners determine that such funds are available for distribution. Based primarily on current and anticipated cash from operations 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 $3,477,747 for the year ended December 31, 1998 and $2,376,000 for each of the years ended December 31, 1997 and 1996. This represents distributions of $69.55 per unit for the year ended December 31, 1998 and $47.52 per unit for each of the years ended December 31, 1997 and 1996. The distributions to the Limited Partners for 1997 and 1996 were also based on loans received from the General Partners of $117,000 and $575,000, respectively, all of which were 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 in 1998 and is expected to reduce the Partnership's revenues in subsequent years. 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, 1998, 1997, or 1996 are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the Limited Partners return on their adjusted capital contributions. The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis. During 1998, 1997, and 1996, affiliates of the General Partners incurred on behalf of the Partnership $95,798, $71,681, and $108,900, respectively, for certain operating expenses. At December 31, 1998 and 1997, the Partnership owed $84,337 and $82,238, respectively, to affiliates for such amounts and accounting and administrative services. In addition, during the year 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, decreased to $542,868 at December 31, 1998, from $631,861 at December 31, 1997. The decrease in amounts payable to other parties was primarily attributable to a decrease in distributions payable to the Limited Partners at December 31, 1998. The General Partners believe that the Partnership has sufficient cash on hand to meet its current working capital needs. 11 Long-Term Liquidity The Partnership has no long-term debt or other long-term liquidity requirements. Results of Operations During the year ended December 31, 1996, the Partnership and its consolidated joint venture, Tuscawilla Joint Venture, owned and leased 30 wholly owned Properties and during 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). During 1998, the Partnership owned and leased 27 wholly owned Properties (including five Properties which were sold during 1998). In addition, during the years ended December 31, 1996, 1997 and 1998, the Partnership was a co-venturer in two separate joint ventures that each owned and leased one Property and during 1997 and 1998, the Partnership owned and leased two Properties, with affiliates of the General Partners, as tenants-in-common. During 1998, the Partnership and its consolidated joint venture, Tuscawilla Joint Venture, owned and leased one additional Property, with affiliates of the General Partners, as tenants-in- common and was a co-venturer in a joint venture that owned and leased one Property. As of December 31, 1998, the Partnership owned, either directly or through joint venture arrangements, 27 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, 1998, 1997, and 1996, the Partnership and its consolidated joint venture, Tuscawilla Joint Venture, earned $1,554,852, $1,930,486, and $2,273,850, respectively, in rental income from operating leases and earned income from direct financing leases. The decrease in rental and earned income during 1998 and 1997, each as compared to the previous year, is partially attributable to a decrease of approximately $350,300 and $219,700, respectively, as a result of the sales of Properties during 1998 and 1997, as described above in "Capital Resources." During 1998 and 1997, the decrease in rental income was partially offset by an increase of approximately $69,100 and $86,200, respectively, due to the reinvestment of a portion of these net sales proceeds during 1997, in a rental Property in Fayetteville, North Carolina, as described above in "Capital Resources." The decrease in rental and earned income during 1997, as compared to 1996, is partially attributable to the fact that during 1997, the Partnership entered into a new lease with a new tenant for the Denny's Property in Hagerstown, Maryland, and in connection therewith, recognized as income approximately $118,700 for which the Partnership had previously established an allowance for doubtful accounts relating to the Denny's and Po Folks Properties in Hagerstown, Maryland. During 1997, the Partnership established an allowance for doubtful accounts for these amounts due to the uncertainty of the collectibility of these amounts. The General Partners are pursuing collection of past due amounts relating to this Property and will recognize any such amounts as income if collected. Rental and earned income during 1998, 1997, and 1996, 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 decrease in rental and earned income during 1997, as compared to 1996, is partially attributable to the fact that, during 1998 and 1997, the Partnership increased its allowance for doubtful accounts by approximately $74,400 and $15,400, respectively, for accrued rental income amounts previously recorded (due to the fact that future scheduled rent increases are recognized on a straight-line basis over the term of the lease in accordance with generally accepted accounting principles) relating to the Property in Canton Township, Michigan, due to financial difficulties the tenant was experiencing. During 1998, the tenant vacated the Property and ceased operations and the Partnership wrote off all such accrued rental income amounts and is currently seeking either a replacement tenant or purchaser for this Property. The decrease during 1998, as compared to 1997, is 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 12 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 is 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). During the years ended December 31, 1998, 1997, and 1996, the Partnership also earned $98,915, $157,648, and $157,993, respectively, in contingent rental income. The decrease in contingent rental income during 1998, as compared to 1997, is 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 1998, 1997, and 1996, the Partnership earned $127,064, 100,816, and $26,496, respectively, in interest and other income. The increase in interest and other income during 1998 and 1997, was partially attributable to the interest earned on the net sales proceeds relating to the sales of Properties during 1998 and 1997, temporarily invested in short-term highly liquid investments pending reinvestment of such amounts in additional Properties or the use of such amounts for other Partnership purposes. In addition, interest and other income increased by approximately $33,700 during 1997, as a result of the interest earned on the mortgage note receivable accepted in connection with the sale of the Property in Roswell, Georgia, in June 1997. The increase in interest and other income during 1997, was also attributable to the Partnership recognizing $15,000 in other income due to the fact that the purchase and sale agreement between the Partnership and a third party for the Po Folks Property located in Hagerstown, Maryland, was terminated. Based on the agreement, the deposits received in connection with the purchase and sale agreement were retained as other income by the Partnership due to the termination of the agreement. The Partnership recognized income of $22,708, a loss of $148,170, and income of $11,740 for the years ended December 31, 1998, 1997, and 1996, respectively, 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. No such allowance was established during 1996. During 1998, the joint venture wrote off all uncollected balances and ceased collection efforts. 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 increased the allowance for loss on land and building by approximately $125,300 for financial reporting purposes. The allowance represents the difference between the Property's carrying value at December 31, 1998 and the current estimate of the net realizable value at December 31, 1998 for the Property. Titusville Joint Venture is currently seeking either a replacement tenant or purchaser for this Property. The increase in income earned from joint ventures during 1998, is partially attributable to, and the decrease during 1997, as compared to 1996, is partially offset by, an increase in net income earned by joint ventures due to the fact that the Partnership reinvested a portion of the net sales proceeds it received from the 1997 and 1998 sales of several Properties, in three 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 and 1998. During the year ended December 31, 1998, 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 as tenants-in-common). As of December 31, 1998, 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 1999. In addition, during the year ended December 31, 1998, 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 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. 13 Operating expenses, including depreciation and amortization expense, were $520,871, $626,431, and $638,140 for the years ended December 31, 1998, 1997, and 1996, respectively. The decrease in operating expenses during 1998, as compared to 1997, and 1997, as compared to 1996, was partially attributable to a decrease in depreciation expense as a result of the sales of Properties in 1998 and 1997, as described above in "Capital Resources." The decrease in operating expenses during 1998, as compared to 1997, is partially attributable to, and the decrease during 1997, as compared to 1996, is partially offset by, an increase in operating expenses during 1997, due to the fact that the Partnership recognized real estate tax expense of approximately $40,200 and bad debt expense of approximately $32,400, relating to the Denny's and Po Folks Properties in Hagerstown, Maryland. These amounts relate to prior year amounts due from the former tenant that the current tenant of this Property had agreed to pay, as described above in "Capital Resources." However, the Partnership recorded these amounts as expenses during 1997, due to the fact that payment of these amounts by the current tenant was doubtful. The General Partners intend to pursue collection of past due amounts relating to this Property and will recognize any such amounts as income if collected. In June 1998, the Partnership sold the Po Folks Property to a third party if the Partnership is unable to re-lease these Properties in a timely manner. The decrease during 1998, as compared to 1997, is partially offset by the fact that the Partnership incurred $14,227 in transaction costs related to the General Partners retaining financial and legal advisors to assist them in evaluating and negotiating the proposed Merger with APF, as described below. If the Limited Partners reject the Merger, the Partnership will bear the portion of the transaction costs based upon the percentage of "For" votes and the General Partners will bear the portion of such transaction costs based upon the percentage of "Against" votes and abstentions. As a result of the Properties sales during 1998 and 1997, and the sale of parcel of land in Plant City, Florida, as described above in "Capital Resources," the Partnership recognized gains on sale of land and buildings totalling $497,321 and $1,027,590 during the years ended December 31, 1998 and 1997, respectively. No Properties were sold during 1996. 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 represents the difference between the carrying value of the Properties at December 31, 1998 and 1997, and the net realizable value of the Properties based on the current estimated net realizable value of each Property at December 31, 1998 and 1997, respectively. The Partnership's leases as of December 31, 1998, are triple-net leases and, in general, contain provisions that the General Partners believe mitigate the adverse effect of inflation. Such provisions include clauses requiring the payment of percentage rent based on certain restaurant sales above a specified level and/or automatic increases in base rent at specified times during the term of the lease. Management expects that increases in restaurant sales volumes due to inflation and real sales growth should result in an increase in rental income (for certain Properties) over time. Continued inflation also may cause capital appreciation of the Partnership's Properties. Inflation and changing prices, however, also may have an adverse impact on the sales of the restaurants and on potential capital appreciation of the Properties. Proposed Merger On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with APF, pursuant to which the Partnership would be merged with and into a subsidiary of APF. As consideration for the Merger, APF has agreed to issue 2,082,901 APF Shares. In order to assist the General Partners in evaluating the proposed merger consideration, the General Partners retained Valuation Associates, a nationally recognized real estate appraisal firm, to appraise the Partnership's restaurant property portfolio. Based on Valuation Associates' appraisal, the fair value of the Partnership's property portfolio and other assets was $20,535,734 as of December 31, 1998. The APF Shares are expected to be listed for trading on the New York Stock Exchange concurrently with the consummation of the Merger, and, therefore, would be freely tradable at the option of the former Limited Partners. At a special meeting of the Limited Partners that is expected to be held in the fourth quarter of 1999, Limited Partners holding in excess of 50% of the Partnership's outstanding limited partnership interests must approve the Merger prior to consummation of the transaction. If the Limited Partners at the special meeting approve the Merger, APF will own the Properties and other assets of the Partnership. The General Partners intend to recommend that the Limited 14 Partners of the Partnership approve the Merger. In connection with their recommendation, the General Partners will solicit the consent of the Limited Partners at the special meeting. Year 2000 Readiness Disclosure Overview of Year 2000 Problem The year 2000 problem concerns the inability of information and non- information technology systems to properly recognize and process date sensitive information beyond January 1, 2000. The failure to accurately recognize the year 2000 could result in a variety of problems from data miscalculations to the failure of entire systems. Information and Non-Information Technology Systems The Partnership does not have any information or non-information technology systems. The General Partners and their affiliates provide all services requiring the use of information and non-information technology systems pursuant to a management agreement with the Partnership. The information technology system of the General Partners' affiliates consists of a network of personal computers and servers built using hardware and software from mainstream suppliers. The non-information technology systems of the affiliates are primarily facility related and include building security systems, elevators, fire suppressions, HVAC, electrical systems and other utilities. The affiliates have no internally generated programmed software coding to correct, because substantially all of the software utilized by the affiliates is purchased or licensed from external providers. The maintenance of non-information technology systems at the Partnership's restaurant properties is the responsibility of the tenants of such properties in accordance with the terms of the Partnership's leases. The Y2K Team In early 1998, the General Partners and their affiliates formed a Year 2000 committee (the "Y2K Team") for the purpose of identifying, understanding and addressing the various issues associated with the year 2000 problem. The Y2K Team consists of the General Partners and members from their affiliates, including representatives from senior management, information systems, telecommunications, legal, office management, accounting and property management. Assessing Year 2000 Readiness The Y2K Team's initial step in assessing year 2000 readiness consists of identifying any systems that are date-sensitive and, accordingly, could have potential year 2000 problems. The Y2K Team has conducted inspections, interviews and tests to identify which of the systems used by the Partnership could have a potential year 2000 problem. The information system of the General Partners' affiliates is comprised of hardware and software applications from mainstream suppliers. Accordingly, the Y2K Team has contacted and is evaluating documentation from the respective vendors and manufacturers to verify the year 2000 compliance of their products. The Y2K Team has also requested and is evaluating documentation from the non- information technology systems providers of the affiliates. In addition, the Y2K Team has requested and is evaluating documentation from other companies with which the Partnership has material third party relationships. Such third parties, in addition to the providers of information and non-information technology systems, consist of the Partnership's transfer agent and financial institutions. The Partnership depends on its transfer agent to maintain and track investor information and its financial institutions for availability of cash. As of September 15, 1999, the Y2K Team had received responses from approximately 60% of the third parties. All of the responses were in writing. Of the third parties responding, all indicated that they are currently year 2000 compliant or will be year 2000 compliant prior to the year 2000. Although the Y2K Team continues to receive positive responses from the companies with which the Partnership has third party relationships regarding their year 2000 compliance, the General Partners cannot be assured that the third parties have adequately considered the impact of the year 2000. 15 In addition, the Y2K Team has requested documentation from the Partnership's tenants. The Y2K Team is in the process of evaluating the responses and expects to complete this process by October 31, 1999. The Partnership has also instituted a policy of requiring any new tenants to indicate that their systems are year 2000 compliant or are expected to be year 2000 compliant prior to the year 2000. Achieving Year 2000 Compliance The Y2K Team has identified and completed upgrades of the hardware equipment that was not year 2000 compliant. In addition, the Y2K Team has identified and completed upgrades of the software applications that were not year 2000 compliant, although the General Partners cannot be assured that the upgrade solutions provided by the vendors have addressed all possible year 2000 issues. The cost for these upgrades and other remedial measures is the responsibility of the General Partners and their affiliates. The General Partners do not expect that the Partnership will incur any costs in connection with year 2000 remedial measures. Assessing the Risks to the Partnership of Non-Compliance and Developing Contingency Plans Risk of Failure of Information and Non-Information Technology Systems Used by the Partnership The General Partners believe that the reasonably likely worst case scenario with regard to the information and non-information technology systems used by the Partnership is the failure of one or more of these systems as a result of year 2000 problems. Because the Partnership's major source of income is rental payments under long-term triple-net leases, any failure of information or non- information technology systems used by the Partnership is not expected to have a material impact on the results of operations of the Partnership. Even if such systems failed, the payment of rent under the Partnership's leases would not be affected. In addition, the Y2K Team is expected to correct any Y2K problems within the control of the General Partners and their affiliates before the year 2000. The Y2K Team has determined that a contingency plan to address this risk is not necessary at this time. However, if the Y2K Team identifies additional risks associated with the year 2000 compliance of the information or non- information technology systems used by the Partnership, the Y2K Team will develop a contingency plan if deemed necessary at that time. Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records The General Partners believe that the reasonably likely worst case scenario with regard to the Partnership's transfer agent is that the transfer agent will fail to achieve year 2000 compliance of its systems and will not be able to accurately maintain the records of the Partnership. This could result in the inability of the Partnership to accurately identify its Limited Partners for purposes of distributions, delivery of disclosure materials and transfer of units. The Y2K Team has received certification from the Partnership's transfer agent of its year 2000 compliance. Despite the positive response from the transfer agent, the General Partners cannot be assured that the transfer agent has addressed all possible year 2000 issues. The Y2K Team has developed a contingency plan pursuant to which the General Partners and their affiliates would maintain the records of the Partnership manually, in the event that the systems of the transfer agent are not year 2000 compliant. The General Partners and their affiliates would have to allocate resources to internally perform the functions of the transfer agent. The General Partners do not anticipate that the additional cost of these resources would have a material impact on the results of operations of the Partnership. Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to Achieve Year 2000 Compliance The General Partners believe that the reasonably likely worst case scenario with regard to the Partnership's financial institutions is that some or all of its funds on deposit with such financial institutions may be temporarily unavailable. The Y2K Team has received responses from 93% of the Partnership's financial institutions indicating that their systems are currently year 2000 compliant or are expected to be year 2000 compliant prior to the year 2000. Despite the positive responses from the financial institutions, the General Partners cannot be assured that the financial institutions have addressed all possible year 2000 issues. The loss of short-term liquidity could affect the Partnership's ability to pay its expenses on a current basis. The General Partners do not anticipate that a loss of short-term liquidity would have a material impact on the results of operations of the Partnership. 16 Based upon the responses received from the Partnership's financial institutions and the inability of the Y2K Team to identify a suitable alternative for the deposit of funds that is not subject to potential year 2000 problems, the Y2K Team has determined not to develop a contingency plan to address this risk. Risks of Late Payment or Non-Payment of Rent by Tenants The General Partners believe that the reasonably likely worst case scenario with regard to the Partnership's tenants is that some of the tenants may make rental payments late as the result of the failure of the tenants to achieve year 2000 compliance of their systems used in the payment of rent, the failure of the tenant's financial institutions to achieve year 2000 compliance, or the temporary disruption of the tenants' businesses. The Y2K Team is in the process of requesting responses from the Partnership's tenants indicating the extent to which their systems are currently year 2000 compliant or are expected to be year 2000 compliant prior to the year 2000. The General Partners cannot be assured that the tenants have addressed all possible year 2000 issues. The late payment of rent by one or more tenants would affect the results of operations of the Partnership in the short-term. The General Partners are also aware of predictions that the year 2000 problem, if uncorrected, may result in a global economic crisis. The General Partners are not able to determine if such predictions are true. A widespread disruption of the economy could affect the ability of the Partnership's tenants to pay rent and, accordingly, could have a material impact on the results of operations of the Partnership. Because payment of rent is under the control of the Partnership's tenants, the Y2K Team is not able to develop a contingency plan to address these risks. In the event of late payment or non-payment of rent, the General Partners will assess the remedies available to the Partnership under its lease agreements. Item 8. Financial Statements and Supplementary Data 17 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) CONTENTS --------
Page ---- Report of Independent Accountants 19 Financial Statements: Balance Sheets 20 Statements of Income 21 Statements of Partners' Capital 22 Statements of Cash Flows 23 Notes to Financial Statements 25
18 Report of Independent 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement 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 generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Orlando, Florida January 14, 1999, except for Note 13 for which the date is March 11, 1999 19 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) BALANCE SHEETS --------------
December 31, 1998 1997 ---------------- ----------------- ASSETS ------ Land and buildings on operating leases, less accumulated depreciation and allowance for loss on land and building $11,418,836 $14,635,583 Net investment in direct financing leases, less allowance for impairment in carrying value 887,071 926,862 Investment in joint ventures 2,157,147 1,179,762 Mortgage note receivable -- 681,687 Cash and cash equivalents 2,047,140 493,118 Restricted cash -- 251,879 Receivables, less allowance for doubtful accounts of $153,598 and $154,469 89,519 102,420 Prepaid expenses 6,751 14,361 Lease costs, less accumulated amortization of $12,000 and $2,762 -- 9,238 Accrued rental income, less allowance for doubtful accounts of $41,380 and $15,384 65,914 154,738 Other assets 29,354 29,354 ------------------ ----------------- $16,701,732 $18,479,002 ================== ================= LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- Accounts payable $ 2,072 $ 5,219 Accrued and escrowed real estate taxes payable 15,217 11,897 Distributions payable 500,000 594,000 Due to related parties 152,887 97,388 Rents paid in advance and deposits 25,579 20,745 ------------------ ----------------- Total Liabilities 695,755 729,249 Minority interest 135,705 138,617 Partners' capital 15,870,272 17,611,136 ------------------ ----------------- $16,701,732 $18,479,002 ================== =================
See accompanying notes to financial statements. 20 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF INCOME --------------------
Year Ended December 31, 1998 1997 1996 -------------- -------------- -------------- Revenues: Rental income from operating leases $1,523,980 $1,859,911 $2,184,460 Adjustments to accrued rental income (103,830) -- -- Earned income from direct financing leases 134,702 70,575 89,390 Contingent rental income 98,915 157,648 157,993 Interest and other income 127,064 100,816 26,496 ---------------- ---------------- ---------------- 1,780,831 2,188,950 2,458,339 ---------------- ---------------- ---------------- Expenses: General operating and administrative 137,245 140,886 147,840 Professional services 36,591 27,314 50,064 Bad debt expense -- 32,360 924 Real estate taxes 11,966 47,165 1,973 State and other taxes 12,249 9,924 11,973 Depreciation and amortization 308,593 368,782 425,366 Transaction costs 14,227 -- -- ---------------- ---------------- ---------------- 520,871 626,431 638,140 ---------------- ---------------- ---------------- 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 1,259,960 1,562,519 1,820,199 Minority Interest in Income of Consolidated Joint Venture (17,285) (17,285) (17,282) Equity in Earnings (Loss) of Unconsolidated Joint Ventures 22,708 (148,170) 11,740 Gain on Sale of Land and Buildings 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 $1,736,883 $2,391,835 $1,814,657 ================ ================ ================ Allocation of Net Income: General partners $ 15,027 $ 18,306 $ 18,147 Limited partners 1,721,856 2,373,529 1,796,510 ---------------- ---------------- ---------------- $1,736,883 $2,391,835 $1,814,657 ================ ================ ================ Net Income Per Limited Partner Unit $ 34.44 $ 47.47 $ 35.93 ================ ================ ================ 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, 1998, 1997, and 1996
General Partners Limited Partners ---------------------------- ----------------------------------------------------------- Accumulated Accumulated Syndication Contributions Earnings Contributions Distributions Earnings Costs Total ------------- ------------- ------------- --------------- ----------- ------------- ----------- Balance, December 31, 1995 $161,500 $141,658 $25,000,000 $(18,397,640) $14,116,024 $(2,864,898) $18,156,644 Distributions to limited partners ($47.52 per limited partner unit) -- -- -- (2,376,000) -- -- (2,376,000) Net income -- 18,147 -- -- 1,796,510 -- 1,814,657 ---------- --------- ------------ ------------ ----------- ---------- ----------- Balance, December 31, 1996 161,500 159,805 25,000,000 (20,773,640) 15,912,534 (2,864,898) 17,595,301 Distributions to limited partners ($47.52 per limited partner unit) -- -- -- (2,376,000) -- -- (2,376,000) Net income -- 18,306 -- -- 2,373,529 -- 2,391,835 ---------- --------- ------------ ------------ ----------- ---------- ----------- Balance, December 31, 1997 161,500 178,111 25,000,000 (23,149,640) 18,286,063 (2,864,898) 7,611,136 Distributions to limited partners ($69.55 per limited partner unit) -- -- -- (3,477,747) -- -- (3,477,747) Net income -- 15,027 -- -- 1,721,856 -- 1,736,883 ---------- --------- ------------ ------------ ----------- ----------- ----------- Balance, December 31, 1998 $161,500 $193,138 $25,000,000 $(26,627,387) $20,007,919 $(2,864,898) $15,870,272 ========== ========= ============ ============ =========== ============ ===========
See accompanying notes to financial statements. 22 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF CASH FLOWS ------------------------
Year Ended December 31, 1998 1997 1996 --------------- --------------- --------------- Increase (Decrease) in Cash and Cash Equivalents: Cash Flows From Operating Activities: Cash received from tenants $ 1,768,910 $ 2,268,568 $ 2,226,794 Distributions from unconsolidated joint ventures 142,001 19,647 31,670 Cash paid for expenses (202,117) (325,067) (175,148) Interest received 112,502 58,541 8,438 --------------- --------------- --------------- Net cash provided by operating activities 1,821,296 2,021,689 2,091,754 --------------- --------------- --------------- Cash Flows From Investing Activities: Proceeds from sale of land and buildings 3,647,241 3,023,357 -- Deposit received on sale of land parcel -- -- 51,400 Additions to land and buildings (150,000) (1,272,960) -- Investment in joint ventures (1,096,678) (703,667) -- Collections on mortgage note receivable 678,730 6,270 -- Decrease (increase) in restricted cash 245,377 (245,377) -- Decrease (increase) in other assets -- 2,135 (2,135) --------------- --------------- --------------- Net cash provided by investing activities 3,324,670 809,758 49,265 --------------- --------------- --------------- Cash Flows From Financing Activities: Proceeds from loans from corporate general partner -- 117,000 661,400 Repayment of loans from corporate general partner -- (117,000) (661,400) Distributions to holder of minority interest (20,197) (20,080) (20,082) Distributions to limited partners (3,571,747) (2,376,000) (2,376,000) --------------- --------------- --------------- Net cash used in financing activities (3,591,944) (2,396,080) (2,396,082) --------------- --------------- --------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,554,022 435,367 (255,063) Cash and Cash Equivalents at Beginning of Year 493,118 57,751 312,814 --------------- --------------- --------------- Cash and Cash Equivalents at End of Year $ 2,047,140 $ 493,118 $ 57,751 =============== =============== ===============
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, 1998 1997 1996 ----------- ----------- ---------- Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net income $1,736,883 $ 2,391,835 $1,814,657 ----------- ----------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Bad debt expense -- 32,360 924 Depreciation 299,355 368,182 424,766 Amortization 9,238 600 600 Minority interest in income of consolidated joint venture 17,285 17,285 17,282 Equity in earnings of unconsolidated joint ventures, net of distributions 119,293 167,817 19,930 Gain on sale of land and buildings (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 -- Decrease (increase) in receivables (7,936) 182,433 (216,117) Decrease in net investment in direct financing leases 13,970 12,056 7,331 Decrease (increase) in prepaid expenses 7,610 (7,463) (1,297) Decrease (increase) in accrued rental income 88,824 (40,000) (32,667) Increase (decrease) in accounts payable and accrued expenses 173 (71,844) (4,732) Increase (decrease) in due to related parties 2,099 (20,621) 48,944 Increase (decrease) in rents paid in advance and deposits 6,002 (16,180) 12,133 ----------- ----------- ---------- Total adjustments 84,413 (370,146) 277,097 ----------- ----------- ---------- Net Cash Provided by Operating Activities $1,821,296 $ 2,021,689 $2,091,754 =========== =========== ========== 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 $ 594,000 $ 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, 1998, 1997, and 1996 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, 1998, 1997, and 1996 1. Significant Accounting Policies - Continued: -------------------------------------------- Accrued rental income represents the aggregate amount of income recognized on a straight-line basis in excess of scheduled rental payments to date. Whenever a tenant defaults under the terms of its lease, or events or changes in circumstance indicate that the tenant will not lease the property through the end of the lease term, the Partnership either reserves or writes-off the cumulative accrued rental income balance. When the properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, 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 investment in Titusville Joint Venture, RTO Joint Venture, and a property in each of Englewood, Colorado, Miami, Florida, and Overland Park, Kansas held as tenants-in-common with affiliates, is 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, 1998, 1997, and 1996 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 experience any losses in such accounts. The Partnership limits investment of temporary cash investments to financial institutions with high credit standing; therefore, the Partnership believes it is not exposed to any significant credit risk on cash and cash equivalents. Lease Costs - Brokerage fees associated with negotiating a new lease are ----------- amortized over the term of the new lease using the straight-line method. Lease costs are written off during the period in which a lease is terminated. 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 year's financial statements ---------------- have been reclassified to conform to 1998 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, 1998, 1997, and 1996 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:
1998 1997 ------------------ ----------------- Land $ 5,926,601 $ 7,325,960 Buildings 8,231,130 10,891,910 ------------------ ----------------- 14,157,731 18,217,870 Less accumulated depreciation (2,738,895) (3,341,624) ------------------ ----------------- 11,418,836 14,876,246 Less allowance for loss on land and building -- (240,663) ------------------ ----------------- $11,418,836 $14,635,583 ================== =================
As of January 1, 1996, 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. 28 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 3. Land and Buildings on Operating Leases - Continued: --------------------------------------------------- The 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. 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 fund 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 $229,500 in excess of its original purchase price. In June 1997, the Partnership reinvested approximately $1,276,000 of the net sales proceeds received in a property in Fayetteville, North Carolina. In April 1997, the Partnership sold its property in Kissimmee, Florida, to a third party, for $692,400 and received net sales proceeds of $673,159, resulting in a gain of $271,929 for financial reporting purposes. This property was originally acquired by the Partnership in March 1988 and had a cost of approximately $474,800, excluding acquisition fees and miscellaneous acquisition expenses; therefore, the Partnership sold the property for approximately $196,400 in excess of its original purchase price. In July 1997, the Partnership reinvested approximately $511,700 of these net sales proceeds in a property located in Englewood, Colorado, as tenants-in-common with an affiliate of the general partners (see Note 5). In April 1996, the Partnership received $51,400 as partial settlement in a right of way taking relating to a parcel of land of the property in Plant City, Florida. In April 1997, the Partnership received the remaining proceeds of $73,600 finalizing the sale of the land parcel. In connection therewith, the Partnership recognized a gain of $94,320 for financial reporting purposes. 29 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 3. Land and Buildings on Operating Leases - Continued: --------------------------------------------------- In addition, in 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 $26,700 in excess of its original purchase price. In January 1998, the Partnership reinvested the net sales proceeds in a property in Overland Park, Kansas, with affiliates of the general partners, as tenants-in-common (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 $3,280,000 and received net sales proceeds of $3,214,616, resulting in a total gain of $596,586 for financial reporting purposes. In connection with the sales of the properties in Daytona Beach and Fernandina Beach, Florida, the Partnership incurred deferred, subordinated, real estate disposition fees of $53,400 (see Note 11). 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. In addition, during the year ended December 31, 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. 30 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 3. Land and Buildings on Operating Leases - Continued: --------------------------------------------------- Some leases provide for escalating guaranteed minimum rents throughout the lease terms. Income from these scheduled rent increases is recognized on a straight-line basis over the terms of the leases. For the year ended December 31, 1998, the Partnership recognized a loss of $88,824 (net of $25,996 in reserves and $103,830 in write-offs), income during 1997 of $40,000 (net of $15,384 in reserves) and income of $32,667 during 1996, 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, 1998: 1999 $ 1,478,029 2000 1,478,029 2001 1,482,555 2002 1,459,600 2003 1,186,149 Thereafter 6,731,050 -------------------- $13,815,412 ====================
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. 31 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 4. Net Investment in Direct Financing Leases: ------------------------------------------ The following lists the components of net investment in direct financing leases at December 31:
1998 1997 ---------------- ---------------- Minimum lease payments receivable $ 2,042,847 $ 2,191,519 Estimated residual value 239,432 239,432 Less unearned income (1,369,387) (1,504,089) ---------------- ---------------- 912,892 926,862 Less allowance for impairment in carrying value of investment in direct financing lease (25,821) -- ---------------- ---------------- Net investment in direct financing leases $ 887,071 $ 926,862 ================ ================
The following is a schedule of future minimum lease payments to be received on direct financing leases at December 31, 1998: 1999 $ 148,672 200 148,672 2001 148,672 2002 148,672 2003 148,672 Thereafter 1,299,487 ----------------- $2,042,847 =================
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). During 1998, the Partnership recorded an allowance for impairment in carrying value of net investment in direct financing lease of $25,821 for financial reporting purposes relating to the property in Hagerstown, Maryland, due to financial difficulties the tenant is experiencing. The allowance represents the difference between the carrying value of the property at December 31, 1998, and the current estimated net realizable value for this property. 32 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 5. Investment in Joint Ventures: ----------------------------- The Partnership has a 73.4% interest in the profits and losses of Titusville Joint Venture which is accounted for using the equity method. The remaining interest in the Titusville Joint Venture is held by an affiliate of the Partnership which has the same general partners. In July 1997, the Partnership acquired a property in Englewood Colorado, as tenants-in-common with an affiliate of the general partners. The Partnership accounts for its investment in this property using the equity method since the Partnership shares control with an affiliate, and amounts relating to its investment are included in investment in joint ventures. As of December 31, 1998, the Partnership owned a 33 percent interest in this property. In addition, in December 1997, the Partnership acquired a property in Miami, Florida, as tenants-in-common with affiliates of the general partners. The Partnership accounts for its investment in this property using the equity method since the Partnership shares control with affiliates, and amounts relating to its investment are included in investment in joint ventures. As of December 31, 1998, the Partnership owned a 9.84% interest in this property. In January 1998, the Partnership acquired a property located in Overland Park, Kansas, as tenants-in-common with affiliates of the general partners. The Partnership accounts for its investment in this property using the equity method since the Partnership shares control with affiliates, and amounts relating to its investment are included in investment in joint ventures. As of December 31, 1998, 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, 1998. The Partnership accounts for its investment in this joint venture under the equity method since the Partnership shares control with an affiliate. 33 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 5. Investment in Joint Ventures - Continued: ----------------------------------------- Titusville Joint Venture, RTO Joint Venture, and the Partnership and affiliates, as tenants-in-common in three separate tenancy-in-common arrangements, each own and lease one property to operators of national fast-food or family-style restaurants. The following presents the joint venture's condensed financial information at December 31:
1998 1997 ---------------- ---------------- Land and buildings on operating leases, less accumulated depreciation and allowance for loss on land and building $3,598,641 $3,152,962 Net investment in direct financing leases 3,418,537 1,003,680 Cash 19,254 16,481 Receivables 1,241 -- Accrued rental income 66,668 11,621 Other assets 2,679 1,480 Liabilities 59,453 18,722 Partners' capital 7,047,567 4,167,502 Revenues 604,672 82,837 Provision for loss on land and building 125,251 147,100 Net income (loss) 404,446 (157,912)
The Partnership recognized income of $22,708 and $11,740 for the years ended December 31, 1998 and 1996, respectively, and recognized a loss totaling $148,170, for the year ended December 31, 1997, relating to investment in joint ventures. 6. Mortgage Note Receivable: ------------------------- In connection with the sale of the property in Roswell, Georgia, in June 1997, the Partnership accepted a promissory note in the principal sum of $685,000 collateralized by a mortgage on the property. The Partnership collected the full amount of the outstanding mortgage note, including interest, during the year ended December 31, 1998. 34 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 6. Mortgage Note Receivable - Continued: ------------------------------------- The mortgage note receivable consisted of the following at December 31:
1998 1997 ----------------- --------------- Principal balance $ -- $ 678,730 Accrued interest receivable -- 2,957 ----------------- --------------- $ -- $ 681,687 ================= ===============
7. Receivables: ------------ During 1996, the Partnership terminated its lease with the former tenant of its properties in Hagerstown, Maryland. In connection therewith, the Partnership wrote off approximately $238,300 included in receivables relating to both the Denny's and Po Folks properties in Hagerstown, Maryland, and the related allowance for doubtful accounts. In October 1996, the Partnership entered into a lease agreement with a new tenant to operate the Denny's property and accepted a promissory note from the current tenant whereby $25,000, which had been included in receivables for past due rents from the former tenant, was converted to a loan receivable held by the Partnership to facilitate the asset purchase agreement between the former and current tenants. The promissory note bears interest at a rate of ten percent per annum, is being collected in 36 equal monthly installments of $807 and commenced in October 1996. Receivables at December 31, 1998 and 1997, include $7,109 and $16,318, respectively, including accrued interest of $142 and $164, respectively, relating to the promissory note. 8. Restricted Cash: ---------------- As of December 31, 1997, net sales proceeds of $245,377 from the sale of the property in Bradenton, Florida and Mason City, Iowa, plus accrued interest of $6,502, were being held in interest-bearing escrow accounts pending the release of funds by the escrow agent to acquire additional properties on behalf of the Partnership. During the year ended December 31, 1998, these funds were released by the escrow agent and were used to acquire additional properties. 35 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 9. Allocations and Distributions: ------------------------------ Generally, all net income and net losses of the Partnership, excluding gains and losses from the sale of properties, are allocated 99 percent to the limited partners and one percent to the general partners. Distributions of net cash flow are made 99 percent to the limited partners and one percent to the general partners; provided, however, that the one percent of net cash flow to be distributed to the general partners is subordinated to receipt by the limited partners of an aggregate, ten percent, noncumulative, noncompounded annual return on their adjusted capital contributions (the "10% Preferred Return"). 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 will 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 year ended December 31, 1998, the Partnership declared distributions to the limited partners of $3,477,747 and during each of the years ended December 31, 1997 and 1996, the Partnership declared distributions to the limited partners of $2,376,000. Distributions for the year ended December 31, 1998, including $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, 1998, 1997, and 1996 10. Income Taxes: ------------- The following is a reconciliation of net income for financial reporting purposes to net income for federal income tax purposes for the years ended December 31:
1998 1997 1996 -------------- --------------- -------------- Net income for financial reporting purposes $1,736,883 $2,391,835 $1,814,657 Depreciation for tax reporting purposes in excess of depreciation for financial reporting purposes (17,075) (21,782) (9,754) 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 13,970 12,056 7,330 Gain on sale of land for tax reporting purposes -- -- 20,724 Gain on sale of land and buildings for financial reporting purposes in excess of gain on sale for tax reporting purposes (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 59,725 140,707 (1,329) Allowance for doubtful accounts (871) 84,326 (283,135) Accrued rental income 88,824 (40,000) (32,667) Capitalization of transaction costs for tax reporting purposes 14,227 -- -- Rents paid in advance 6,002 (16,680) 12,133 Minority interest in timing differences of consolidated joint venture (35) (133) (162) ------------ ------------ ----------- Net income for federal income tax purposes $1,812,334 $1,893,867 $1,527,797 ============ ============ ===========
37 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 11. Related Party Transactions: --------------------------- One of the individual general partners, James M. Seneff, Jr., is one of the principal shareholders of CNL Group, Inc., the majority stockholder of CNL Fund Advisors, Inc. The other individual general partner, Robert A. Bourne, serves as treasurer, director and vice chairman of the board of CNL Fund Advisors. During the years ended December 31, 1998, 1997, and 1996, CNL Fund Advisors, Inc. (hereinafter referred to as the "Affiliate") performed certain services for the Partnership, as described below. During the years ended December 31, 1998, 1997, and 1996, the Affiliate acted as manager of the Partnership's properties pursuant to a property management agreement with the Partnership. In connection therewith, the Partnership agreed to pay the Affiliate 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 will be incurred and will be payable only after the limited partners receive their aggregate, noncumulative 10% Preferred Return. Due to the fact that these fees are noncumulative, if the limited partners do not receive their 10% Preferred Return in any particular year, no property management fees will be due or payable for such year. As a result of such threshold, no property management fees were incurred during the years ended December 31, 1998, 1997, and 1996. The Affiliate is also entitled to receive a deferred, subordinated real estate disposition fee, payable upon the sale of one or more properties, based on the lesser of one-half of a competitive real estate commission or three percent of the sales price if the Affiliate provides a substantial amount of services in connection with the sales. However, if the net sales proceeds are reinvested in a replacement property, no such real estate disposition fees will be incurred until such replacement property is sold and the net sales proceeds are distributed. The payment of the real estate disposition fee is subordinated to receipt by the limited partners of their aggregate, 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, 1996. 38 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 11. Related Party Transactions - Continued: --------------------------------------- During the years ended December 31, 1998, 1997, and 1996, the Affiliates provided accounting and administrative services to the Partnership on a day-to-day basis. The Partnership incurred $89,756, $87,056, and $85,906 for the years ended December 31, 1998, 1997, and 1996, respectively, for such services. The due to related parties consisted of the following at December 31:
1998 1997 ---------- ---------- Due to Affiliates: Expenditures incurred on behalf of the Partnership $ 41,888 $38,492 Accounting and administrative services 42,449 43,746 Deferred, subordinated real estate disposition fee 68,550 15,150 ---------- ---------- $152,887 $97,388 ========== ==========
12. Concentration of Credit Risk: ---------------------------- For the years ended December 31, 1998, 1997, and 1996, rental income from Golden Corral Corporation was $454,380, $474,553, and $490,196, 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). 39 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 12. 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) for each of the years ended December 31:
1998 1997 1996 ------------- ------------- ------------- Golden Corral Family Steakhouse Restaurants $454,380 $474,553 $490,196 KFC 277,508 261,415 254,646 Pizza Hut 211,507 255,055 292,795 Taco Bell N/A 250,140 254,395 Perkins N/A N/A 276,114 Denny's N/A 229,537 355,123
The information denoted by N/A indicates that for each period presented, the tenant and the chains did not represent more than ten percent of the Partnership's total rental and earned income. Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant concepts, default by any 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. 13. Subsequent Event: ---------------- On March 11, 1999, the Partnership entered into an Agreement and Plan of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the Partnership would be merged with and into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF has agreed to issue 2,082,901 shares of its common stock, par value $0.01 per shares (the "APF Shares"). In order to assist the general partners in evaluating the proposed merger consideration, the general partners retained Valuation Associates, 40 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- Years Ended December 31, 1998, 1997, and 1996 13. Subsequent Event: ---------------- a nationally recognized real estate appraisal firm, to appraise the Partnership's restaurant property portfolio. Based on Valuation Associates' appraisal, the fair value of the Partnership's property portfolio and other assets was $20,535,734 as of December 31, 1998. The APF Shares are expected to be listed for trading on the New York Stock Exchange concurrently with the consummation of the Merger, and, therefore, would be freely tradable at the option of the former limited partners. At a special meeting of the partners, limited partners holding in excess of 50% of the Partnership's outstanding limited partnership interests must approve the Merger prior to consummation of the transaction. The general partners intend to recommend that the limited partners of the Partnership approve the Merger. In connection with their recommendation, the general partners will solicit the consent of the limited partners at the special meeting. If the limited partners reject the Merger, the Partnership will bear the portion of the transaction costs based upon the percentage of "For" votes and the general partners will bear the portion of such transaction costs based upon the percentage of "Against" votes and abstentions. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of October, 1999. CNL INCOME FUND 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. 42 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 October 28, 1999 - ------------------------------- (Principal Financial and Accounting Robert A. Bourne Officer) /s/ James M. Seneff, Jr. Chief Executive Officer and Director October 28, 1999 - ------------------------------- (Principal Executive Officer) James M. Seneff, Jr.
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