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, 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 (I.R.S. Employer
of incorporation or organiza- Identification No.)
tion)
400 E. South Street
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 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-15
Part II
Other Information 16
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
June 30, December 31,
ASSETS 1998 1997
----------- -----------
Land and buildings on operating
leases, less accumulated
depreciation of $2,749,281 and
$3,341,624 and allowance for
loss on land and building of
$240,663 in 1997 $11,945,000 $14,635,583
Investment in direct financing
leases 920,135 926,862
Investment in joint ventures 1,961,584 1,179,762
Mortgage note receivable 674,944 681,687
Cash and cash equivalents 1,512,898 493,118
Restricted cash - 251,879
Receivables, less allowance for
doubtful accounts of $176,452
and $154,469 74,139 102,420
Prepaid expenses 9,998 14,361
Lease costs, less accumulated
amortization of $2,762 in 1997 - 9,238
Accrued rental income, less
allowance for doubtful accounts
of $15,384 in 1997 122,580 154,738
Other assets 29,354 29,354
----------- -----------
$17,250,632 $18,479,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 2,079 $ 5,219
Accrued and escrowed real estate
taxes payable 22,128 11,897
Distributions payable 500,000 594,000
Due to related parties 157,451 97,388
Rents paid in advance and deposits 26,992 20,745
----------- -----------
Total liabilities 708,650 729,249
Minority interest 137,099 138,617
Partners' capital 16,404,883 17,611,136
----------- -----------
$17,250,632 $18,479,002
=========== ===========
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,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C>
Revenues:
Rental income from
operating leases $ 318,276 $ 454,599 $ 739,401 $ 953,326
Earned income from direct
financing leases 33,743 34,212 67,609 68,530
Contingent rental income 21,053 24,725 33,886 76,516
Interest and other income 39,489 33,754 80,671 44,909
---------- ---------- ---------- ----------
412,561 547,290 921,567 1,143,281
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative 38,942 37,223 70,722 73,338
Professional services 20,446 7,346 25,056 15,400
Real estate taxes 3,306 4,532 7,535 7,560
State and other taxes 204 644 11,720 9,924
Depreciation and
amortization 83,902 90,155 164,319 187,861
---------- ---------- ---------- ----------
146,800 139,900 279,352 294,083
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of Con-
solidated 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 265,761 407,390 642,215 849,198
Minority Interest in Income
of Consolidated Joint
Venture (4,236) (4,352) (8,581) (8,581)
Equity in Earnings (Loss) of
Unconsolidated Joint Ventures 18,523 (1,488) 41,274 (3,002)
Gain on Sale of Land and
Buildings 13,213 603,857 596,586 969,052
Provision for Loss on Land
and Building - - - (32,819)
---------- ---------- ---------- ----------
Net Income $ 293,261 $1,005,407 $1,271,494 $1,773,848
========== ========== ========== ==========
Allocation of Net Income:
General partners $ 2,932 $ 6,253 $ 11,490 $ 12,243
Limited partners 290,329 999,154 1,260,004 1,761,605
---------- ---------- ---------- ----------
$ 293,261 $1,005,407 $1,271,494 $1,773,848
========== ========== ========== ==========
Net Income Per Limited
Partner Unit $ 5.81 $ 19.98 $ 25.20 $ 35.23
========== ========== ========== ==========
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
Six Months Ended Year Ended
June 30, December 31,
1998 1997
---------------- -------------
General partners:
Beginning balance $ 339,611 $ 321,305
Net income 11,490 18,306
----------- -----------
351,101 339,611
----------- -----------
Limited partners:
Beginning balance 17,271,525 17,273,996
Net income 1,260,004 2,373,529
Distributions ($49.55 and
$47.52 per limited partner
unit, respectively) (2,477,747) (2,376,000)
----------- -----------
16,053,782 17,271,525
----------- -----------
Total partners' capital $16,404,883 $17,611,136
=========== ===========
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,
1998 1997
----------- -----------
Increase (Decrease) in Cash and
Cash Equivalents:
Net Cash Provided by
Operating Activities $ 936,758 $ 976,409
----------- -----------
Cash Flows from Investing
Activities:
Proceeds from sale of land
and buildings 3,214,616 2,811,159
Addition to land and
buildings on operating
lease - (1,272,960)
Investment in joint ventures (801,682) -
Collections on note
receivable 6,557 -
Decrease (increase) in
restricted cash 245,377 (666,541)
----------- -----------
Net cash provided by
investing activities 2,664,868 871,658
----------- -----------
Cash Flows from Financing
Activities:
Proceeds from loans from
corporate general partner - 37,000
Repayment of loans from
corporate general partner - (37,000)
Distributions to limited
partners (2,571,747) (1,188,000)
Distributions to holders of
minority interest (10,099) (9,982)
----------- -----------
Net cash used in
financing activities (2,581,846) (1,197,982)
----------- -----------
Net Increase in Cash and Cash
Equivalents 1,019,780 650,085
Cash and Cash Equivalents at
Beginning of Period 493,118 57,751
----------- -----------
Cash and Cash Equivalents at End
of Period $ 1,512,898 $ 707,836
=========== ===========
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
Six Months Ended
June 30,
1998 1997
----------- -----------
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage note accepted in exchange
for sale of land and building $ - $ 685,000
=========== ===========
Deferred real estate disposition
fees incurred and unpaid at end
of period $ 53,400 $ 15,150
=========== ===========
Distributions declared and unpaid
at end of period $ 500,000 $ 594,000
=========== ===========
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 Six Months Ended June 30, 1998 and 1997
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, 1998, may not be indicative
of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, 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, 1997.
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:
During the six months ended June 30, 1998, the Partnership sold its
properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida,
and Hagerstown, Maryland, for a total of approximately $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 5).
3. Investment in Joint Ventures:
In January 1998, the Partnership acquired a 25.84% interest in 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.
6
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1998 and 1997
3. Investment in Joint Ventures - Continued:
In May 1998, the Partnership entered into a joint venture arrangement,
RTO Joint Venture, with an affiliate of the Partnership which has the
same general partners, to construct and hold one restaurant property.
As of June 30, 1998, the Partnership and its co-venture partner had
contributed $386,096 and $437,308, respectively, to purchase land and
pay for construction relating to the property owned by the joint
venture. The Partnership and its co-venture partner have agreed to
contribute approximately $279,900 and $317,100, respectively, in
additional construction costs to the joint venture. When construction
is completed, the Partnership expects to have an approximate 47 percent
interest in the profits and losses of the joint venture. The
Partnership accounts for its investment in this joint venture under the
equity method since the Partnership shares control with an affiliate.
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures and
properties held as tenants-in-common at:
June 30, December 31,
1998 1997
Land and buildings on
operating leases, less
accumulated depreciation
and allowance for loss
on land and building $3,944,654 $3,152,962
Net investment in direct
financing leases 2,606,750 1,003,680
Cash 11,242 16,481
Accrued rental income 34,150 11,621
Other assets 4,970 1,480
Liabilities 33,482 18,722
Partners' capital 6,568,284 4,167,502
Revenues 272,972 82,837
Net income (loss) 233,001 (157,912)
The Partnership recognized income totalling $41,274 and a loss of
$3,002 for the six months ended June 30, 1998 and 1997, respectively,
from these joint ventures, and recognized income totalling $18,523 and
a loss of $1,488 during the quarters ended June 30, 1998 and 1997,
respectively.
7
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1998 and 1997
4. 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, 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 is, in general,
allocated in the same manner as net sales proceeds are distributable.
Any loss from the sale of a property is, in general, allocated first,
on a pro rata basis, to partners with positive balances in their
capital accounts; and thereafter, 95 percent to the limited partners
and five percent to the general partners.
During the six months ended June 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $2,477,747 and
$1,188,000, respectively ($500,000 and $594,000 for each of the
quarters ended June 30, 1998 and 1997, respectively). This represents
distributions of $49.55 and $23.76 per unit for the six months ended
June 30, 1998 and 1997, respectively ($10.00 and $11.88 per unit for
each of the quarters ended June 30, 1998 and 1997, respectively).
Distributions for the six months ended June 30, 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 amount was applied toward the limited partners' 10%
Preferred Return. No distributions have been made to the general
partners to date.
8
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1998 and 1997
5. Related Party Transactions:
An affiliate of the Partnership is 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 sale. Payment of the real estate disposition fee is subordinated to
receipt by the limited partners of their aggregate 10% Preferred
Return, plus their adjusted capital contributions. For the six months
ended June 30, 1998 and 1997, the Partnership incurred $53,400 and
$15,150, respectively, in deferred, subordinated, real estate
disposition fees as a result of the sale of properties in 1998 and
1997.
9
<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, 1998, the Partnership owned 27
Properties, including 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.
Liquidity and Capital Resources
During the six months ended June 30, 1998 and 1997, the Partnership
generated cash from operations (which includes cash received from tenants,
distributions from joint ventures, and interest and other income received, less
cash paid for expenses) of $936,758 and $976,409, respectively. The decrease in
cash from operations for the six months ended June 30, 1998, 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.
Other sources and uses of capital included the following during the six
months ended June 30, 1998.
In January 1998, the Partnership used the net sales proceeds from the
1997 sale of the Property in Mason City, Iowa to acquire a Property located in
Overland Park, Kansas, as tenants-in-common with affiliates of the general
partners. In connection therewith, the Partnership and the affiliates entered
into an agreement whereby each co-venturer will share in the profits and losses
of the Property in proportion to its applicable percentage interest. As of June
30, 1998, the Partnership owned an approximate 25.84% interest in this Property.
In May 1998, the Partnership entered into a joint venture arrangement,
RTO Joint Venture, with an affiliate of the Partnership which has the same
general partners, to construct and hold one restaurant Property. As of June 30,
1998, the Partnership and its co-venture partner had contributed $386,096 and
$437,308, respectively, to purchase land and pay for construction relating to
the Property owned by the joint venture. The Partnership and its co-venture
partner have agreed to contribute approximately $279,900 and $317,100,
respectively, in construction costs to the joint venture. When construction is
completed, the Partnership expects to have an approximate 47 percent interest in
the profits and losses of the joint venture.
10
<PAGE>
Liquidity and Capital Resources - Continued
During the six months ended June 30, 1998, the Partnership sold its
Properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and
Hagerstown, Maryland, for a total of approximately $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. The Partnership
distributed $1,477,747 of the net sales proceeds as a special distribution to
the limited partners, used a portion of the net sales proceeds to acquire an
interest in RTO Joint Venture, as described above, and intends to use the
remaining net sales proceeds to reinvest in additional Properties.
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, 1998, the Partnership had $1,512,898
invested in such short-term investments, as compared to $493,118 at December 31,
1997. The increase in cash and cash equivalents at June 30, 1998, is primarily
attributable to the receipt of net sales proceeds relating to the sale of the
Properties in Daytona Beach, Punta Gorda and Fernandina Beach, Florida, and
Hagerstown, Maryland, as described above. The funds remaining at June 30, 1998,
will be used to pay distributions and other liabilities, to make additional
contributions to RTO Joint Venture to pay for additional construction costs
relating to the Property owned by the joint venture and to acquire additional
Properties.
Total liabilities of the Partnership, including distributions payable,
decreased to $708,650 at June 30, 1998, from $729,249 at December 31, 1997,
primarily as a result of a decrease in distributions payable to the limited
partners at June 30, 1998, as compared to December 31, 1997. The decrease in
liabilities is partially offset by an increase in amounts due to related parties
at June 30, 1998, as compared to December 31, 1997, from the Partnership
accruing a deferred, subordinated real estate disposition fee as described below
in "Results of Operations." The general partners believe that the Partnership
has sufficient cash on hand to meet its current working capital needs.
Based on current and anticipated future cash from operations, proceeds
received from the sales of several Properties during 1998 and 1997, and for the
six months ended June 30, 1997, the loan received from the corporate general
partner in April 1997, the Partnership declared distributions to limited
partners of $2,477,747 and $1,188,000 for the six months ended June 30, 1998
11
<PAGE>
Liquidity and Capital Resources - Continued
and 1997, respectively ($500,000 and $594,000 for each of the quarters ended
June 30, 1998 and 1997, respectively). This represents distributions of $49.55
and $23.76 per unit for the six months ended June 30, 1998 and 1997,
respectively ($10.00 and $11.88 per unit for each of the quarters ended June 30,
1998 and 1997, respectively). Distributions for the six months ended June 30,
1998, include $1,477,747 as a result of the distribution of net sales proceeds
from the sale of the Properties in Fernandina Beach and Daytona Beach, Florida.
This special distribution was effectively a return of a portion of the limited
partners' investment, although, in accordance with the Partnership agreement, it
was applied to the limited partners' unpaid preferred return. As a result of the
sale of the Properties, the Partnership's total revenue was reduced, while the
majority of the Partnership's operating expenses remained fixed. Therefore,
distributions of net cash flow were adjusted for the six months ended June 30,
1998. No distributions were made to the general partners for the quarter and six
months ended June 30, 1998 and 1997. No amounts distributed to the limited
partners for the six months ended June 30, 1998 and 1997, are required to be or
have been treated by the Partnership as a return of capital for purposes of
calculating the limited partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the limited partners on a quarterly basis.
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, 1997, the Partnership and its
consolidated joint venture, Tuscawilla Joint Venture, owned and leased 32 wholly
owned Properties (including five Properties which were sold in 1997) and during
the six months ended June 30, 1998, the Partnership and its consolidated joint
venture owned and leased 31 wholly owned Properties (including four Properties
sold in 1998) to operators of fast-food and family-style restaurant chains. In
connection therewith, during the six months ended June 30, 1998 and 1997, the
Partnership and Tuscawilla Joint Venture earned $807,010 and $1,021,856,
respectively, in rental income from operating leases and earned income from the
direct financing leases for these Properties, $352,019 and $488,811 of which was
earned during the quarters ended June 30, 1998 and 1997, respectively. The
decrease in rental and earned income during the quarter and six months ended
June 30, 1998, as compared to the quarter and six months ended June
12
<PAGE>
Results of Operations - Continued
30, 1997, is partially attributable to a decrease of approximately $90,500 and
$206,800, respectively, as a result of the sales of Properties during 1997 and
1998. The decrease in rental income was partially offset by an increase of
approximately $30,400 and $69,200, respectively, for the quarter and six months
ended June 30, 1998, due to the reinvestment of the majority of the net sales
proceeds from the 1997 sale of the Property in Bradenton, Florida, in a Property
in Fayetteville, North Carolina in June 1997. The Partnership reinvested the net
sales proceeds from the sales of the Properties in Kissimmee, Florida, Roswell,
Georgia and Mason City, Iowa, in Properties held as tenants-in-common with
affiliates of the general partners resulting in an increase in equity in
earnings of joint venture as described below.
Rental and earned income also decreased during the quarter and six
months ended June 30, 1998 due to the fact that the Partnership terminated its
lease with the tenant of the Property in Canton Township, Michigan. Due to the
fact that the Partnership had recognized accrued rental income since the
inception of the lease relating to the straight lining of future scheduled rent
increases in accordance with generally accepted accounting principles, the
Partnership wrote off approximately $59,000 of such accrued rental income
relating to this Property during the quarter and six months ended June 30, 1998.
In June 1998, the Partnership entered into a new lease for this Property with a
new tenant to operate the Property as a Shell's Seafood Restaurant. The tenant
has agreed to fund all costs to renovate this Property and rent is expected to
commence no later than December 1998.
Rental and earned income during the six months ended June 30, 1998 and
1997, continued to remain at reduced amounts 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. The Partnership intends to reinvest the net sales proceeds in an
additional Property.
During the six months ended June 30, 1998 and 1997, the Partnership
also earned $33,886 and $76,516, respectively, in contingent rental income,
$21,053 and $24,725 of which was earned during the quarters ended June 30, 1998
and 1997, respectively. The decrease in contingent rental income during the six
months ended June 30, 1998, as compared to the six months ended June 30, 1997,
is primarily attributable to the sale of three Properties, subsequent to June
30, 1997, the leases of which require the payment of contingent rent.
In addition, during the six months ended June 30, 1998 and 1997, the
Partnership earned $80,671 and $44,909, respectively, in interest and other
income, $39,489 and $33,754 of which was earned during the quarters ended June
30, 1998 and 1997, respectively. The increase in interest and other income
during the
13
<PAGE>
Results of Operations - Continued
six months ended June 30, 1998, was primarily attributable to the interest
earned on the mortgage note receivable accepted in connection with the sale of
the Property in Roswell, Georgia, in 1997.
During the six months ended June 30, 1997, the Partnership owned and
leased one Property indirectly through a joint venture arrangement. During the
six months ended June 30, 1998, the Partnership owned and leased three
Properties as tenants-in-common with affiliates of the general partners and
three Properties indirectly through joint venture arrangements. In connection
therewith, during the six months ended June 30, 1998 and 1997, the Partnership
earned income of $41,274 and recorded a loss of $3,002, respectively,
attributable to net income and losses recorded by these joint ventures, and
recognized income totalling $18,523 and a loss of $1,488 during the quarters
ended June 30, 1998 and 1997, respectively. The increase in net income earned by
joint ventures during the six months ended June 30, 1998, as compared to the six
months ended June 30, 1997, is partially due to the fact that subsequent to June
30, 1997, the Partnership reinvested a portion of the net sales proceeds it
received from the 1997 sales of several Properties in two Properties with
affiliates of the general partners as tenants-in-common. In addition, the
increase in net income earned by joint ventures during the six months ended June
30, 1998, is partially attributable to the fact that during the six months ended
June 30, 1998, the Partnership reinvested net sales proceeds from sales of
Properties in 1997 and 1998, in a Property in Overland Park, Kansas, with
affiliates of the general partners as tenants-in-common and in RTO Joint
Venture, with an affiliate of the Partnership which has the same general
partners, as described above in "Liquidity and Capital Resources."
The increase in net income earned by joint ventures during the quarter
and six months ended June 30, 1998, was partially offset by, and the losses
during the quarter and six months ended June 30, 1997, was primarily
attributable to the fact that, during July 1997, the operator of the Property
owned by Titusville Joint Venture vacated the Property and ceased operations. In
conjunction therewith, the joint venture established an allowance for doubtful
accounts during the quarter and six months ended June 30, 1997, for past due
rental amounts. In addition, the joint venture recorded real estate tax expense
during the six months ended June 30, 1998. No such expense was incurred during
the six months ended June 30, 1997. The joint venture is currently seeking
either a replacement tenant or purchaser for this Property.
Operating expenses, including depreciation and amortization expense,
were $279,352 and $294,083 for the six months ended June 30, 1998 and 1997,
respectively, of which $146,800 and $139,900 were incurred for the quarters
ended June 30, 1998 and 1997, respectively. The decrease in operating expenses
during the six months ended June 30, 1998, as compared to the six months ended
14
<PAGE>
Results of Operations - Continued
June 30, 1997, is partially attributable to, and the increase during the quarter
ended June 30, 1998 as compared to the quarter ended June 30, 1997, is partially
offset by, a decrease in depreciation expense due to the sales of several
Properties during 1998 and 1997.
As a result of the sales of three Properties during the six months
ended June 30, 1998, as described above in "Liquidity and Capital Resources,"
and as a result of the sales of three Properties during the six months ended
June 30, 1997, the Partnership recognized total gains during the six months
ended June 30, 1998 and 1997, of $596,586 and $969,052, respectively, for
financial reporting purposes, $13,213 and $603,857 of which were recognized
during the quarters ended June 30, 1998 and 1997, respectively.
In addition, during the six months ended June 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 represented the difference between the Property's carrying value at
June 30, 1997 and the estimated net realizable value, based on the estimated
sales price of this Property. This Property was sold in June 1998.
15
<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, 1998.
16
<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 28th day of July, 1998.
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 June 30, 1998, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10Q of CNL Income Fund III, ltd. for the six months ended June 30,
1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,512,898
<SECURITIES> 0
<RECEIVABLES> 250,591
<ALLOWANCES> 176,452
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 14,694,281
<DEPRECIATION> 2,749,281
<TOTAL-ASSETS> 17,250,632
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,404,883
<TOTAL-LIABILITY-AND-EQUITY> 17,250,632
<SALES> 0
<TOTAL-REVENUES> 921,567
<CGS> 0
<TOTAL-COSTS> 279,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,271,494
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,271,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,271,494
<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>
