FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
-----------------------
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street, #500
Orlando, Florida 32801
- ---------------------------- -----------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number
(including area code) (407) 422-1574
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for 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
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-6
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 7-11
Part II
Other Information 12
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
June 30, December 31,
ASSETS 1996 1995
----------- --------
Land and buildings on operating leases,
less accumulated depreciation of
$3,550,056 and $3,334,676 and allowance
for loss on land and building of
$207,844 in 1996 and 1995 $17,094,153 $17,309,533
Investment in direct financing
lease 542,057 545,014
Investment in joint venture 654,853 663,842
Cash and cash equivalents 267,593 312,814
Receivables, less allowance for
doubtful accounts of $385,147
and $353,277 62,668 106,638
Prepaid expenses 9,263 5,601
Lease costs, less accumulated
amortization of $1,862 and
$1,562 10,138 10,438
Accrued rental income, less
allowance for doubtful accounts
of $35,619 and $34,830 90,573 82,071
Other assets 29,354 29,354
----------- -----------
$18,760,652 $19,065,305
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 14,734 $ 14,489
Accrued and escrowed real estate
taxes payable 83,844 77,253
Distributions payable 594,000 594,000
Due to related parties 85,787 53,915
Rents paid in advance and deposits 66,792 24,792
----------- -----------
Total liabilities 845,157 764,449
Contingency
(Note 2)
Minority interest 142,806 144,212
Partners' capital 17,772,689 18,156,644
----------- -----------
$18,760,652 $19,065,305
=========== ===========
See accompanying notes to condensed financial statements.
1
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------- -------- ---------- -------
<S> <C>
Revenues:
Rental income from
operating leases $523,323 $553,888 $1,052,807 $1,116,686
Earned income from
direct financing
lease 17,886 18,074 35,822 36,190
Contingent rental income 25,371 24,119 56,196 57,892
Interest and other income 6,769 1,111 16,706 6,513
-------- -------- ---------- ----------
573,349 597,192 1,161,531 1,217,281
-------- -------- ---------- ----------
Expenses:
General operating and
administrative 37,190 29,012 77,580 54,700
Professional services 12,943 8,375 23,779 12,444
Real estate taxes 12,670 4,507 24,938 10,488
State and other taxes 90 232 11,973 11,322
Depreciation and
amortization 107,840 108,624 215,680 217,248
-------- -------- ---------- ----------
170,733 150,750 353,950 306,202
-------- -------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture
and Equity in Earnings of
Unconsolidated Joint
Venture 402,616 446,442 807,581 911,079
Minority Interest in Income
of Consolidated Joint
Venture (4,378) (4,319) (8,578) (8,551)
Equity in Earnings of
Unconsolidated Joint Venture 2,317 3,527 5,042 6,868
-------- -------- ---------- ----------
Net Income $400,555 $445,650 $ 804,045 $ 909,396
======== ======== ========== ==========
Allocation of Net Income:
General partners $ 4,005 $ 4,457 $ 8,040 $ 9,094
Limited partners 396,550 441,193 796,005 900,302
-------- -------- ---------- ----------
$400,555 $445,650 $ 804,045 $ 909,396
======== ======== ========== ==========
Net Income Per Limited
Partner Unit $ 7.93 $ 8.82 $ 15.92 $ 18.01
======== ======== ========== ==========
Weighted Average Number
of Limited Partner
Units Outstanding 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Six Months Ended Year Ended
June 30, December 31,
1996 1995
---------------- -----------
General partners:
Beginning balance $ 303,158 $ 289,252
Net income 8,040 13,906
----------- -----------
311,198 303,158
----------- -----------
Limited partners:
Beginning balance 17,853,486 18,760,877
Net income 796,005 1,468,609
Distributions ($23.76 and
$47.52 per limited partner
unit, respectively) (1,188,000) (2,376,000)
----------- -----------
17,461,491 17,853,486
----------- -----------
Total partners' capital $17,772,689 $18,156,644
=========== ===========
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1996 1995
----------- ----------
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 1,101,363 $ 1,152,691
----------- -----------
Cash Flows from Investing
Activities:
Deposit received on sale
of land parcel 51,400 -
----------- ----------
Net cash provided by
investing activities 51,400 -
----------- ----------
Cash Flows from Financing
Activities:
Proceeds from loans from
corporate general partner 210,400 -
Repayment of loans from
corporate general partner (210,400) -
Distributions to limited
partners (1,188,000) (1,188,000)
Distributions to holders of
minority interest (9,984) (9,975)
----------- -----------
Net cash used in financing
activities (1,197,984) (1,197,975)
----------- -----------
Net Decrease in Cash and Cash
Equivalents (45,221) (45,284)
Cash and Cash Equivalents at Beginning
of Period 312,814 505,374
----------- -----------
Cash and Cash Equivalents at End of
Period $ 267,593 $ 460,090
=========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid
at end of period $ 594,000 $ 594,000
=========== ===========
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1996 and 1995
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 1996, may not be indicative of
the results that may be expected for the year ending December 31, 1996.
Amounts as of December 31, 1995, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund III, Ltd. (the "Partnership") for the year ended December
31, 1995.
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.
Effective January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
Statement requires that an entity review long-lived assets and certain
identifiable intangibles, to be held and used, for impairment whenever
events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Adoption of this standard had no
material effect on the Partnership's financial position or results of
operations.
2. Contingency:
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. The Partnership intends to petition through
mediation for additional proceeds. As of August 8, 1996, the final
amount of proceeds to be received had not been determined; therefore,
the sale had not been consummated. The proceeds of $51,400 were recorded
as a deposit as of June 30, 1996.
5
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1996 and 1995
3. Subsequent Events:
In July 1996, the Partnership entered into a promissory note with the
corporate general partner for a loan in the amount of $162,000 in
connection with the operations of the Partnership. The note is
uncollateralized, non-interest bearing and due on demand.
In August 1996, the Partnership received notice from the tenant of its
property in Fernandina Beach, Florida, that it intends to purchase the
property in accordance with the terms of its lease agreement. As of
August 8, 1996, the Partnership and the tenant had not yet entered into
a purchase and sale agreement relating to this property.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CNL Income Fund III, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on June 1, 1987, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of selected national and
regional fast-food restaurant chains. The leases generally are triple-net
leases, with the lessees responsible for all repairs and maintenance, property
taxes, insurance and utilities. As of June 30, 1996, the Partnership owned 32
Properties, including interests in two Properties owned by joint ventures in
which the Partnership is a co-venturer.
Liquidity and Capital Resources
The Partnership's primary source of capital for the six months ended
June 30, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $1,101,363 and
$1,152,691 for the six months ended June 30, 1996 and 1995, respectively. The
decrease in cash from operations for the six months ended June 30, 1996, is
primarily a result of changes in income and expenses as discussed in "Results of
Operations" below and changes in the Partnership's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1996.
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. The Partnership intends to petition through mediation for
additional proceeds. As of August 8, 1996, the final amount of proceeds to be
received had not been determined; therefore, the sale had not been consummated.
The proceeds of $51,400 were recorded as a deposit as of June 30, 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 June 30,
1996, the Partnership had repaid the loan in full along with approximately $660
in interest, to the corporate general partner.
In addition, in April 1996, the Partnership entered into a promissory
note with the corporate general partner for a loan in the amount of $124,200 in
connection with the operations of the Partnership. The note was
uncollateralized, non-interest bearing and due on demand. As of June 30, 1996,
the Partnership had repaid the loan in full to the corporate general partner.
7
<PAGE>
Liquidity and Capital Resources - Continued
In addition, in July 1996, the Partnership entered into a promissory
note with the corporate general partner for a loan in the amount of $162,000 in
connection with the operations of the Partnership. The note is uncollateralized,
non-interest bearing and due on demand.
Currently, rental income from the Partnership's Properties is invested
in money market accounts and other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At June 30, 1996, the Partnership had $267,593
invested in such short-term investments as compared to $312,814 at December 31,
1995. The funds remaining at June 30, 1996, will be used towards the payment of
distributions and other liabilities.
Total liabilities of the Partnership, including distributions payable,
increased to $845,157 at June 30, 1996, from $764,449 at December 31, 1995
primarily as a result of an increase in amounts due to related parties during
the six months ended June 30, 1996. In addition, total liabilities increased
during the six months ended June 30, 1996, due to the fact that the Partnership
received $51,400 as a deposit on the sale of the parcel of land of the Property
in Plant City, Florida, as discussed above. Liabilities at June 30, 1996, to the
extent they exceed cash and cash equivalents at June 30, 1996, will be paid from
future cash from operations, from the loan received from the corporate general
partner in July 1996, as described above, and, in the event the general partners
elect to make additional capital contributions or loans to the Partnership, from
future general partner capital contributions or loans.
In August 1996, the Partnership received notice from the tenant of its
Property in Fernandina Beach, Florida, that it intends to purchase the Property
in accordance with the terms of its lease agreement. As of August 8, 1996, the
Partnership and the tenant had not yet entered into a purchase and sale
agreement relating to this Property.
Based on current and anticipated future cash from operations, and to a
lesser extent, the loan received from the corporate general partner in July 1996
described above, the Partnership declared distributions to limited partners of
$1,188,000 for each of the six months ended June 30, 1996 and 1995 ($594,000 for
each
8
<PAGE>
Liquidity and Capital Resources - Continued
of the quarters ended June 30, 1996 and 1995). This represents distributions for
each applicable six months of $23.76 per unit ($11.88 per unit for each
applicable quarter). No distributions were made to the general partners for the
quarters and six months ended June 30, 1996 and 1995. No amounts distributed or
to be distributed to the limited partners for the six months ended June 30, 1996
and 1995, are required to be or have been treated by the Partnership as a return
of capital for purposes of calculating the limited partners' return on their
adjusted capital contributions. The Partnership intends to continue to make
distributions of cash available for distribution to the limited partners on a
quarterly basis.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
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.
Results of Operations
During the six months ended June 30, 1996 and 1995, the Partnership and
its consolidated joint venture, Tuscawilla Joint Venture, owned and leased 31
wholly owned Properties to operators of fast-food and family-style restaurant
chains. In connection therewith, during the six months ended June 30, 1996 and
1995, the Partnership and Tuscawilla Joint Venture earned $1,088,629 and
$1,152,876, respectively, in rental income from operating leases and earned
income from the direct financing lease for these Properties, $541,209 and
$571,962 of which was earned during the quarters ended June 30, 1996 and 1995,
respectively. For the six months ended June 30, 1996 and 1995, the Partnership
also earned $56,196 and $57,892, respectively, in contingent rental income
$25,371 and $24,119 of which was earned during the quarters ended June 30, 1996
and 1995, respectively.
The decrease in rental and earned income is primarily a result of the
fact that in February 1995, the tenant of the Po Folks Property in Hagerstown,
Maryland, ceased operations of the restaurant business located on such Property.
As a result of the Partnership discontinuing the recognition of rental income
relating to this Property, the Partnership recorded no rental income relating to
this Property for the six months ended June 30, 1996, as compared to
approximately $25,900 for the six months ended June 30, 1995. Currently, the
Partnership is pursuing collection of the past due amounts and will recognize
any such amounts as income if collected. The Partnership is currently seeking
either a replacement tenant or purchaser for this Property.
9
<PAGE>
Results of Operations - Continued
The decrease in rental and earned income for the six months ended June
30, 1996 was partially attributable to the fact that the Partnership established
an allowance for doubtful accounts of approximately $35,300 for the six months
ended June 30, 1996, as compared to $29,500 for the six months ended June 30,
1995. The allowance for doubtful accounts for the six months ended June 30, 1996
was for past due rental amounts. The allowance for the six months ended June 30,
1995 was for accrued rental 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 this Property. The tenant of this Property remains responsible for
compliance with the terms of the lease (including the payment of scheduled rent
increases as they become due); however, the general partners believe that
collection is doubtful due to the continued financial difficulties the tenant is
experiencing and the fact that the tenant filed for bankruptcy. If the lease is
not affirmed by the bankruptcy court, the Partnership intends to seek a
replacement tenant. The Partnership intends to pursue collection of amounts due
in accordance with the lease and will record such amounts as income if
collected.
Rental and earned income also decreased during the quarter and six
months ended June 30, 1996, as a result of the fact that during the quarter
ended June 30, 1995, the Partnership terminated its lease with the tenant of the
Property in Page, Arizona. In connection therewith, the Partnership received and
recorded as rental income approximately $40,000 during the quarter ended June
30, 1995, that related to amounts that had been previously reserved as
uncollectible. In June 1995, a new operator began operating this Property on a
month-to-month basis. The Partnership is currently negotiating a new lease for
this Property with the new operator and anticipates executing such lease in
1996.
Rental income for 1996 and subsequent years is expected to remain at
reduced amounts until such time as the Partnership executes a new lease for the
Po Folks Property in Hagerstown, Maryland, or until the lease for the Property
in Chicago, Illinois is affirmed by the bankruptcy court, or if not affirmed,
until the Partnership locates a replacement tenant.
For the six months ended June 30, 1996 and 1995, the Partnership also
owned and leased one Property indirectly through another joint venture
arrangement. In connection therewith, during the six months ended June 30, 1996
and 1995, the Partnership earned $5,042 and $6,868, respectively, attributable
to net income earned by this joint venture, $2,317 and $3,527 of which was
earned during the quarters ended June 30, 1996 and 1995, respectively.
Operating expenses, including depreciation and amortization expense,
were $353,950 and $306,202 for the six months ended June 30, 1996 and 1995,
respectively, of which $170,733 and $150,750
10
<PAGE>
Results of Operations - Continued
were incurred for the quarters ended June 30, 1996 and 1995, respectively. The
increase in operating expenses is primarily the result of an increase in
accounting and administrative expenses associated with operating the Partnership
and its Properties and insurance expense as a result of the general partners'
obtaining contingent liability and property coverage for the Partnership,
effective May 1995. This insurance policy 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.
The increase in operating expenses during the quarter and six months
ended June 30, 1996, is also partially attributable to the Partnership accruing
real estate taxes of approximately $7,200 and $14,300, respectively, relating to
the Denny's and Po Folks Properties in Hagerstown, Maryland. Payment of these
taxes remains the responsibility of the tenant of these Properties; however,
because of the current financial difficulties the tenant is experiencing, the
general partners believe the tenant's ability to pay these expenses is doubtful.
The Partnership expects to continue to incur real estate tax expense for the two
Properties in Hagerstown, Maryland, until such time as replacement tenants are
located. The Partnership intends to pursue collection from the tenant of any
such amounts paid by the Partnership and will recognize such amounts as income
if collected.
In addition, the increase in operating expenses during the six months
ended June 30, 1996, is partially attributable to the Partnership incurring
approximately $8,800 in legal fees associated with the tenant of the Property in
Chicago, Illinois, filing bankruptcy. The Partnership also continued to accrue
real estate taxes during the quarter and six months ended June 30, 1996,
relating to this Property. The Partnership anticipates incurring additional
expenses relating to this Property until such time as the bankruptcy court
affirms the lease, or if not affirmed, until the Partnership locates a new
tenant for this Property. The Partnership intends to pursue collection from the
tenant of any such amounts paid by the Partnership and will recognize such
amounts as income if collected.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 12th day of August, 1996.
CNL INCOME FUND III, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet of CNL Income Fund III, Ltd. at June 30, 1996, and its
statement of income for the six months then ended and is qualified
in its entirety by reference to the Form 10-Q of CNL Income Fund III,
Ltd. for the six months ended June 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 267,593
<SECURITIES> 0
<RECEIVABLES> 447,815
<ALLOWANCES> 385,147
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 20,644,109
<DEPRECIATION> 3,550,056
<TOTAL-ASSETS> 18,760,652
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,772,689
<TOTAL-LIABILITY-AND-EQUITY> 18,760,652
<SALES> 0
<TOTAL-REVENUES> 1,161,531
<CGS> 0
<TOTAL-COSTS> 353,950
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 804,045
<INCOME-TAX> 0
<INCOME-CONTINUING> 804,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 804,045
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
Due to the nature of its industry, CNL Income Fund III, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for
current assets and current liabilities.
</FN>
</TABLE>
