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 September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
0-16850
CNL Income Fund III, Ltd.
(Exact name of registrant as specified in its charter)
Florida 59-2809460
(State or other juris- (I.R.S. Employer
diction of incorporation Identification No.)
or organization)
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 4-5
Notes to Condensed Financial Statements 6-10
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 11-18
Part II
Other Information 19
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
ASSETS 1997 1996
------------- --------
Land and buildings on operating
leases, less accumulated
depreciation and allowance for
loss on land and building $ 14,883,938 $16,483,532
Investment in direct financing
leases 930,045 938,918
Investment in joint venture 1,126,883 643,912
Mortgage note receivable 684,540 -
Cash and cash equivalents 630,658 57,751
Restricted cash 165,119 -
Receivables, less allowance for
doubtful accounts of $17,816
and $70,142 209,295 321,831
Prepaid expenses 20,686 6,898
Lease costs, less accumulated
amortization of $2,612 and
$2,162 9,388 9,838
Accrued rental income 143,380 114,738
Other assets 29,355 31,489
----------- -----------
$18,833,287 $18,608,907
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 1,867 $ 14,183
Accrued and escrowed real estate
taxes payable 14,008 72,827
Distributions payable 594,000 594,000
Due to related parties 78,520 102,859
Rents paid in advance and deposits 31,448 88,325
----------- -----------
Total liabilities 719,843 872,194
Commitment (Note 6)
Minority interest 139,314 141,412
Partners' capital 17,974,130 17,595,301
----------- -----------
$18,833,287 $18,608,907
=========== ===========
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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- ---------- -------
<S> <C>
Revenues:
Rental income from operating
leases $450,596 $523,579 $1,403,922 $1,576,386
Earned income from direct
financing leases 34,101 17,837 102,631 53,659
Contingent rental income 10,098 8,235 86,614 64,431
Interest and other income 37,122 7,851 82,031 24,557
-------- -------- ---------- ----------
531,917 557,502 1,675,198 1,719,033
-------- -------- ---------- ----------
Expenses:
General operating and
administrative 31,361 34,485 104,699 112,065
Professional services 4,583 10,229 19,983 34,008
Bad debt expense - 1,794 - 1,794
Real estate taxes 4,229 3,308 11,789 28,246
State and other taxes - - 9,924 11,973
Depreciation and amortization 90,917 107,844 278,778 323,524
-------- -------- ---------- ----------
131,090 157,660 425,173 511,610
-------- -------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated
Joint Venture, Equity in
Earnings (Loss) of Unconsoli-
dated Joint Venture, Gain on
Sale of Land and Buildings
and Provision for Loss on
Land and Building 400,827 399,842 1,250,025 1,207,423
Minority Interest in Income of
Consolidated Joint Venture (4,352) (4,352) (12,933) (12,930)
Equity in Earnings (Loss) of
Unconsolidated Joint Venture (9,494) 3,330 (12,496) 8,372
Gain on Sale of Land and
Buildings - - 969,052 -
Provision for Loss on Land and
Building - - (32,819) -
-------- -------- ---------- ---------
Net Income $386,981 $398,820 $2,160,829 $1,202,865
======== ======== ========== ==========
Allocation of Net Income:
General partners $ 3,870 $ 3,988 $ 16,113 $ 12,029
Limited partners 383,111 394,832 2,144,716 1,190,836
-------- -------- ---------- ----------
$386,981 $398,820 $2,160,829 $1,202,865
======== ======== ========== ==========
Net Income Per Limited
Partner Unit $ 7.66 $ 7.90 $ 42.89 $ 23.82
======== ======== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1997 1996
---------------- --------
<S> <C>
General partners:
Beginning balance $ 321,305 $ 303,158
Net income 16,113 18,147
----------- -----------
337,418 321,305
----------- -----------
Limited partners:
Beginning balance 17,273,996 17,853,486
Net income 2,144,716 1,796,510
Distributions ($35.64 and
$47.52 per limited partner
unit, respectively) (1,782,000) (2,376,000 )
----------- -----------
17,636,712 17,273,996
----------- -----------
Total partners' capital $17,974,130 $17,595,301
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
----------- ----------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 1,500,218 $ 1,614,892
----------- -----------
Cash Flows from Investing
Activities:
Proceeds from sale of land and
buildings 2,811,159 -
Addition to land and building
on operating lease (1,272,960) -
Investment in joint venture (511,667) -
Collections on mortgage note
receivable 3,100 -
Increase in restricted cash (159,912) -
Increase in other assets - (2,135)
Deposit received on sale of
land parcel - 51,400
----------- -----------
Net cash provided by
investing activities 869,720 49,265
----------- -----------
Cash Flows from Financing
Activities:
Proceeds from loans from
corporate general partner 37,000 372,400
Repayment of loans from
corporate general partner (37,000) (372,400)
Distributions to limited
partners (1,782,000) (1,782,000)
Distributions to holders of
minority interest (15,031) (15,033)
----------- -----------
Net cash used in
financing activities (1,797,031) (1,797,033)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 572,907 (132,876)
Cash and Cash Equivalents at Beginning
of Period 57,751 312,814
----------- -----------
Cash and Cash Equivalents at End of
Period $ 630,658 $ 179,938
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---------- ----------
<S> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted in exchange
for sale of land and building $ 685,000 $ -
=========== ==========
Distributions declared and unpaid
at end of period $ 594,000 $ 594,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1997
and 1996
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1997, may not be
indicative of the results that may be expected for the year ending
December 31, 1997. Amounts as of December 31, 1996, 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, 1996.
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.
2. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
<S> <C>
Land $ 7,385,673 $ 7,835,279
Buildings 11,037,510 12,467,020
----------- -----------
18,423,183 20,302,299
Less accumulated
depreciation (3,298,582) (3,610,923 )
----------- -----------
15,124,601 16,691,376
Less allowance for loss
on land and building (240,663) (207,844 )
----------- -----------
$14,883,938 $16,483,532
=========== ===========
</TABLE>
6
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS -
CONTINUED Quarters and Nine Months Ended September
30, 1997 and 1996
2. Land and Buildings on Operating Leases - Continued:
As of December 31, 1996, the Partnership continued to record 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, as of September 30, 1997, the Partnership had
increased the allowance for loss on land and building by an additional
$32,819 for such property. The allowance represents the difference
between the (i) property's carrying value and (ii) the general
partners' estimate of the net realizable value of the property based on
the general partners' anticipated sales price relating to this
property.
In January 1997, the Partnership sold its property in Chicago,
Illinois, to an unrelated third party, for $505,000 and received net
sales proceeds of $481,268, resulting in a gain of $3,827 for financial
reporting purposes.
In March 1997, the Partnership sold its property in Bradenton, Florida,
to the tenant, for $1,332,154 and received net sales proceeds (net of
$4,330 which represents real estate tax amounts due from the tenant) of
$1,305,671, resulting in a gain of $361,368 for financial reporting
purposes. This property was originally acquired by the Partnership in
June 1988 and had a cost of approximately $1,080,500, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $225,200 in excess of
its original purchase price. In June 1997, the Partnership reinvested
approximately $1,276,000 of the net sales proceeds received in a
Darryl's property in Fayetteville, North Carolina.
In April 1997, the Partnership sold its property in Kissimmee, Florida,
for $692,400 and received net sales proceeds of $671,209, resulting in
a gain of $271,929 for financial reporting purposes. This property was
originally acquired by the Partnership in February 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 an IHOP property located in Englewood, Colorado,
as tenants-in-common, with an affiliate of the general partners.
(see Note 3).
7
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS -
CONTINUED Quarters and Nine Months Ended September
30, 1997 and 1996
2. Land and Buildings on Operating Leases - Continued:
In addition, 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 an unrelated 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 (Note 5).
3. Investment in Joint Ventures:
In July 1997, the Partnership acquired an approximate 33 percent
interest in an IHOP property located in Englewood, Colorado, as
tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investment in this property using the
equity method since the Partnership shares control with an affiliate,
and amounts relating to its investment are included in investment in
joint ventures.
8
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS -
CONTINUED Quarters and Nine Months Ended September
30, 1997 and 1996
3. Investment in Joint Ventures - Continued:
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures at:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- -----------
<S> <C>
Land and building on
operating leases, less
accumulated depreciation $1,355,887 $ 822,072
Net investment in direct
financing lease 1,006,523 -
Cash 16,481 9,677
Receivables 3,595 11,233
Accrued rental income 20,970 17,700
Lease costs 25,000 -
Other assets - 29,631
Liabilities 23,708 9,665
Partners' capital 2,404,748 880,648
Revenues 39,767 51,778
Net income 3,089 15,995
</TABLE>
The Partnership recognized a loss totalling $12,496 and income
totalling $8,372 for the nine months ended September 30, 1997 and 1996,
respectively, from these joint ventures, a loss totalling $9,494 and
income totalling $3,330 of which was recorded during the quarters ended
September 30, 1997 and 1996, respectively.
4. Restricted Cash:
As of September 30, 1997, net sales proceeds of $159,912 from the sale
of the property in Kissimmee, Florida, plus accrued interest of $5,207,
were being held in an interest-bearing escrow account pending the
release of funds by the escrow agent to acquire an additional property
on behalf of the Partnership.
5. Mortgage Note Receivable:
In connection with the sale of the property in Roswell, Georgia, in
June 1997, the Partnership accepted a promissory note in the principal
sum of $685,000 collateralized by a mortgage on the property. The
promissory note bears interest at a rate of nine percent per annum and
is being collected in 36 monthly installments of $6,163, including
interest, with a balloon payment of $642,798 due in July 2000.
9
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS -
CONTINUED Quarters and Nine Months Ended September
30, 1997 and 1996
5. Mortgage Note Receivable - Continued:
The mortgage note receivable consisted of the following at September
30:
1997 1996
------------ ----------
Principal balance $ 681,900 $ -
Accrued interest
receivable 2,640 -
------------ ----------
$ 684,540 $ -
============ ==========
The general partners believe that the estimated fair value of the
mortgage note receivable at September 30, 1997 approximates the
outstanding principal amount based on estimated current rates at which
similar loans would be made to borrowers with similar credit and for
similar maturities.
6. Commitment:
In September 1997, the Partnership entered into a purchase and sale
agreement with the tenant to sell the Wendy's property located in Mason
City, Iowa. The general partners believe that the anticipated sales
price for this property exceeds the carrying cost associated with the
property. The sale of this property had not occurred as of September
30, 1997.
7. Subsequent Event:
In October 1997, the Partnership entered into a promissory note with
the corporate general partner for a loan in the amount of $80,000 in
connection with the operations of the Partnership. The loan is
uncollateralized, non-interest bearing and due on demand.
10
<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 September 30, 1997, the Partnership owned
30 Properties, including interests in two Properties owned by joint ventures in
which the Partnership is a co-venturer and one Property owned with an affiliate
as tenants-in-common.
Liquidity and Capital Resources
The Partnership's primary source of capital for the nine months ended
September 30, 1997 and 1996, 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). In addition, another source of
capital for the nine months ended September 30, 1997, included proceeds from the
sales of Properties, as discussed below. Cash from operations was $1,500,218 and
$1,614,892 for the nine months ended September 30, 1997 and 1996, respectively.
The decrease in cash from operations for the nine months ended September 30,
1997, is primarily a result of changes in the Partnership's working capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1997.
In January 1997, the Partnership sold its Property in Chicago,
Illinois, to an unrelated third party, for $505,000 and received net sales
proceeds of $481,268, resulting in a gain of $3,827 for financial reporting
purposes. The Partnership used $452,000 of the net sales proceeds to pay
liabilities of the Partnership, including quarterly distributions to the limited
partners. The balance of the funds were used to pay delinquent prior year real
estate taxes on this Property accrued by the Partnership as a result of the
former tenant declaring bankruptcy.
In March 1997, the Partnership sold its Property in Bradenton, Florida,
to the tenant, for $1,332,154 and received net sales proceeds (net of $4,330
which represents real estate tax amounts due from tenant) of $1,305,671,
resulting in a gain of $361,368 for financial reporting purposes. This Property
was originally acquired by the Partnership in June 1988 and had a cost of
approximately $1,080,500, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $225,200 in excess of its original purchase price. In June 1997,
the Partnership reinvested approximately $1,276,000 of the net sales proceeds
received in a Darryl's Property in Fayetteville, North Carolina. The Partnership
11
<PAGE>
Liquidity and Capital Resources - Continued
intends to use the remaining net sales proceeds for other Partnership purposes.
The general partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Bradenton, Florida, and the reinvestment
of the proceeds in a Darryl's Property in Fayetteville, North Carolina, will
qualify as a like-kind exchange transaction for federal income tax purposes.
In April 1997, the Partnership sold its Property in Kissimmee, Florida,
to an unrelated third party, for $692,400 and received net sales proceeds of
$671,209, 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
an IHOP 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 September 30, 1997, the Partnership owned an
approximate 33 percent interest in the Property. As of September 30, 1997 the
remaining net sales proceeds of $159,912 plus accrued interest of $5,207, were
being held in an interest-bearing escrow account pending the release of funds by
the escrow agent to acquire an additional Property. The general partners believe
that the transaction, or a portion thereof, relating to the sale of the Property
in Kissimmee, Florida, and the reinvestment of the proceeds in an IHOP Property
in Englewood, Colorado, will qualify as a like-kind exchange transaction for
federal income tax purposes.
In addition, 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 an unrelated 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,
12
<PAGE>
Liquidity and Capital Resources - Continued
collateralized by a mortgage on the Property. The promissory note bears interest
at a rate of nine percent per annum and is being collected in 36 monthly
installments of $6,163, including interest, with a balloon payment of $642,798
due in July 2000. Net sales proceeds of $257,981 received in cash and proceeds
received from the collection of this promissory note will be used to pay
liabilities of the Partnership, including quarterly distributions to the Limited
Partners, reinvested in an additional Property, or used for other Partnership
purposes.
In April 1997, the Partnership entered into a promissory note with the
corporate general partner for a loan in the amount of $37,000 in connection with
the operations of the Partnership. The note was uncollateralized, non-interest
bearing and due on demand. As of September 30, 1997, the Partnership had repaid
the loan in full to the corporate general partner. In addition, in October 1997,
the Partnership entered into a promissory note with the corporate general
partner for a loan in the amount of $80,000 in connection with the operations of
the Partnership. The loan 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 September 30, 1997, the Partnership had
$630,658 invested in such short-term investments, as compared to $57,751 at
December 31, 1996. The increase in cash and cash equivalents for the nine months
ended September 30, 1997, is primarily attributable to the receipt of a portion
of the net sales proceeds relating to the sale of the Properties in Roswell,
Georgia, Bradenton, Florida, and a land parcel sale in Plant City, Florida, as
described above. The funds remaining at September 30, 1997, will be used towards
the payment of distributions and other liabilities.
Total liabilities of the Partnership, including distributions payable,
decreased to $719,843 at September 30, 1997, from $872,194 at December 31, 1996,
partially as a result of a decrease in amounts due to related parties and rents
paid in advance during the nine months ended September 30, 1997. In addition,
total liabilities decreased during the nine months ended September 30, 1997, due
to the fact that the Partnership paid amounts previously accrued for real estate
taxes relating to the Denny's and Po Folks Properties in Hagerstown, Maryland,
and the Wendy's Property in Chicago, Illinois. Liabilities at September 30,
1997, to the extent they exceed cash and cash equivalents at September 30, 1997,
will be paid from future cash from operations and net sales proceeds from the
sales of Properties, as described above, the loan received from the general
partner in October 1997, 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.
13
<PAGE>
Liquidity and Capital Resources - Continued
In September 1997, the Partnership entered into a purchase and sale
agreement with the tenant to sell the Wendy's Property located in Mason City,
Iowa. The general partners believe that the anticipated sales price for this
Property exceeds the carrying cost associated with the Property. The sale of
this Property had not occurred as of September 30, 1997.
Based on current and anticipated future cash from operations, the loans
received from the corporate general partner in April and October 1997, and, for
the nine months ended September 30, 1997, proceeds received from the sales of
the Properties in Chicago, Illinois, and Roswell, Georgia, and proceeds from the
right of way taking relating to the Property in Plant City, Florida, the
Partnership declared distributions to limited partners of $1,782,000 for each of
the nine months ended September 30, 1997 and 1996 ($594,000 for each of the
quarters ended September 30, 1997 and 1996). This represents distributions for
each applicable nine months of $35.64 per unit ($11.88 per unit for each
applicable quarter). No distributions were made to the general partners for the
quarters and nine months ended September 30, 1997 and 1996. No amounts
distributed or to be distributed to the limited partners for the nine months
ended September 30, 1997 and 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.
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 nine months ended September 30, 1996, the Partnership and
its consolidated joint venture, Tuscawilla Joint Venture, owned and leased 31
wholly owned Properties and during the nine months ended September 30, 1997, the
Partnership and its consolidated joint venture owned and leased 32 wholly owned
Properties (including four Properties in Chicago, Illinois, Bradenton, Florida,
Kissimmee, Florida, and Roswell, Georgia, which were sold in January, March,
April and June 1997, respectively) to operators of fast-food and family-style
restaurant chains. In connection therewith, during the nine months ended
September 30, 1997 and 1996, the Partnership and Tuscawilla Joint Venture earned
$1,506,553 and $1,630,045, respectively, in rental income from operating leases
and earned income from the direct financing leases
14
<PAGE>
Results of Operations - Continued
for these Properties, $484,697 and $541,416 of which was earned during the
quarters ended September 30, 1997 and 1996, respectively. The decrease in rental
and earned income during the quarter and nine months ended September 30, 1997,
as compared to the quarter and nine months ended September 30, 1996, is
primarily attributable to a decrease of approximately $76,600 and $144,500,
respectively, as a result of the sales of the Properties in Chicago, Illinois,
Bradenton, Florida, Kissimmee, Florida, and Roswell, Georgia, in January, March,
April and June 1997, respectively.
In addition, the decrease in rental and earned income during the
quarter and nine months ended September 30, 1997, as compared to the quarter and
nine months ended September 30, 1996, is partially attributable to the
Partnership increasing its allowance for doubtful accounts by approximately
$11,500 for rental amounts relating to the Red Oaks Steakhouse Property in
Canton Township, Michigan, due to financial difficulties the tenant is
experiencing. No such allowance was established during the quarter and nine
months ended September 30, 1996.
The decrease in rental and earned income during the quarter and nine
months ended September 30, 1997, was partially offset by an increase during the
quarter and nine months ended September 30, 1997, of approximately $33,500 and
$40,800, respectively, as a result of the purchase of the Darryl's Property in
Fayetteville, North Carolina, in June 1997, from the majority of the sales
proceeds of the Property in Bradenton, Florida. The general partners believe
that the decrease in rental and earned income will be further offset by an
increase in rental and earned income resulting from the reinvestment of the net
sales proceeds received from the sales of the Properties in Kissimmee, Florida
and Roswell, Georgia, and the remaining net sales proceeds from the sale of the
Property in Bradenton, Florida.
Rental and earned income during the quarters ended September 30, 1997
and 1996, continued to remain at reduced amounts due to the fact that the
Partnership is not receiving any rental income relating to the Po Folks Property
in Hagerstown, Maryland. The Partnership is currently seeking a buyer or a
replacement tenant for this Property.
During the nine months ended September 30, 1997 and 1996, the
Partnership also earned $86,614 and $64,431, respectively, in contingent rental
income, $10,098 and $8,235 of which was earned during the quarters ended
September 30, 1997 and 1996, respectively. The increase in contingent rental
income during the nine months ended September 30, 1997, is primarily
attributable to increases in gross sales relating to certain restaurant
Properties required to pay contingent rent.
15
<PAGE>
Results of Operations - Continued
In addition, during the nine months ended September 30, 1997 and 1996,
the Partnership earned $82,031 and $24,557, respectively, in interest and other
income, $37,122 and $7,851 of which was earned during the quarters ended
September 30, 1997 and 1996, respectively. The increase in interest and other
income during the quarter and nine months ended September 30, 1997, was
partially attributable to an increase of approximately $1,600 and $14,700, for
the quarter and nine months ended September 30, 1997, respectively, relating to
interest earned on the sales proceeds held in escrow relating to the Properties
in Bradenton and Kissimmee, Florida. The increase in interest and other income
during the nine months ended September 30, 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 an unrelated third party
for the Po Folks Property located in Hagerstown, Maryland, was terminated. Based
on the agreement, all deposits received in conjunction with the purchase and
sale agreement were to be recognized as other income by the Partnership at such
time as the agreement was terminated. In addition, interest and other income
increased by approximately $16,600 and $18,300 during the quarter and nine
months ended September 30, 1997, respectively, 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.
For the nine months ended September 30, 1997 and 1996, the Partnership
also owned and leased one Property indirectly through another joint venture
arrangement and during the nine months ended September 30, 1997, the Partnership
owned and leased one Property as tenants-in-common with an affiliate of the
general partners. In connection therewith, during the nine months ended
September 30, 1997 and 1996, the Partnership recognized a loss of $12,496 and
income of $8,372, respectively, attributable to net income and losses recorded
by these joint ventures, including a loss of $9,494 and income of $3,330 during
the quarters ended September 30, 1997 and 1996, respectively. The decrease in
the net income earned by these joint ventures is primarily attributable to the
fact that, during July 1997, the operator of Titusville Joint Venture vacated
the Property and ceased operations. In conjunction therewith, the joint venture
established an allowance for doubtful accounts of approximately $13,500 and
$25,900 during the quarter and nine months ended September 30, 1997,
respectively. No such allowance was established during the quarter and nine
months ended September 30, 1996. In addition, the joint venture recorded real
estate tax expense of approximately $9,300 during the quarter and nine months
ended September 30, 1997. No such real estate taxes were incurred during the
quarter and nine months ended September 30, 1996. The joint venture intends to
pursue collection of these amounts from the former tenant and will recognize
such amounts as income if collected. The joint venture is currently seeking
either a replacement tenant or purchaser for this Property. The loss
attributable to Titusville Joint Venture was partially offset by an increase in
net income earned by joint ventures due to the fact
16
<PAGE>
Results of Operations - Continued
that in July 1997, the Partnership reinvested the majority of the net sales
proceeds it received from the sale of the Property in Kissimmee, Florida, in an
IHOP Property located in Englewood, Colorado, as tenants-in-common with an
affiliate of the general partners.
Operating expenses, including depreciation and amortization expense,
were $425,173 and $511,610 for the nine months ended September 30, 1997 and
1996, respectively, of which $131,090 and $157,660 were incurred for the
quarters ended September 30, 1997 and 1996, respectively. The decrease in
operating expenses during the quarter and nine months ended September 30, 1997,
as compared to the quarter and nine months ended September 30, 1996, is
partially attributable to a decrease in depreciation expense of approximately
$16,900 and $44,700, respectively, due to the sales of the Properties in
Chicago, Illinois, Bradenton, Florida, Kissimmee, Florida, and Roswell, Georgia,
as discussed above in "Liquidity and Capital Resources."
Operating expenses also decreased during the quarter and nine months
ended September 30, 1997, due to the fact that during the quarter and nine
months ended September 30, 1996, the Partnership recorded approximately $4,600
and $15,200, respectively, for real estate taxes relating to the Partnership's
Property in Chicago, Illinois, due to continued financial difficulties of the
tenant. The Partnership sold this Property in January 1997, as discussed above
in "Liquidity and Capital Resources." Operating expenses also decreased due to
the fact that during the nine months ended September 30, 1996, the Partnership
recorded approximately $4,800 in real estate tax expense for the Denny's
Property in Hagerstown, Maryland, due to continued financial difficulties of the
former tenant. The current tenant is responsible for real estate taxes;
therefore, no such expense was recorded during the nine months ended September
30, 1997.
As a result of the former tenant of the Po Folks Property in
Hagerstown, Maryland, defaulting under the terms of its lease in February 1995,
the Partnership incurred real estate tax expense and insurance expense during
the nine months ended September 30, 1997, relating to this Property. The
Partnership expects to continue to incur these expenses until the Property is
sold or leased to a new tenant.
As a result of the sales of the Properties in Chicago, Illinois,
Bradenton, Florida, Kissimmee, Florida, Roswell, Georgia, and the sale of a
parcel of land in Plant City, Florida, as discussed above in "Liquidity and
Capital Resources," the Partnership recognized a gain of $969,052 for financial
reporting purposes during the nine months ended September 30, 1997. No
Properties were sold during the nine months ended September 30, 1996.
17
<PAGE>
Results of Operations - Continued
In addition, during the nine months ended September 30, 1997, the
Partnership recorded an allowance for loss on land and building of $32,819, for
financial reporting purposes, relating to the Po Folks Property in Hagerstown,
Maryland. The loss represents the difference between the Property's carrying
value and the estimated net realizable value, based on the anticipated sales
price of this Property.
18
<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 September 30, 1997.
19
<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 day of October, 1997.
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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund III, Ltd. at September 30, 1997, and its statement
of income for the nine months then ended and is qualified in its entirety
by reference to the Form 10-Q of CNL Income Fund III, Ltd. for the nine
months ended September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 795,777
<SECURITIES> 0
<RECEIVABLES> 227,111
<ALLOWANCES> 17,816
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 18,182,520
<DEPRECIATION> 3,298,582
<TOTAL-ASSETS> 18,833,287
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 17,974,130
<TOTAL-LIABILITY-AND-EQUITY> 18,833,287
<SALES> 0
<TOTAL-REVENUES> 1,675,198
<CGS> 0
<TOTAL-COSTS> 425,173
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,160,829
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,160,829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,160,829
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>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>
