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, 1998
-------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
0-16850
----------------------------
CNL Income Fund III, Ltd.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2809460
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
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 11-17
Part II
Other Information 18
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- -----------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance
for loss on land and buildings $11,923,109 $14,635,583
Investment in direct financing leases 916,580 926,862
Investment in joint ventures 2,093,452 1,179,762
Mortgage note receivable -- 681,687
Cash and cash equivalents 1,726,345 493,118
Restricted cash -- 251,879
Receivables, less allowance for doubtful
accounts of $152,230 and $154,469 40,088 102,420
Prepaid expenses 8,310 14,361
Lease costs, less accumulated
amortization of $2,762 in 1997 -- 9,238
Accrued rental income, less allowance for
doubtful accounts of $14,735 and $15,384 85,729 154,738
Other assets 29,354 29,354
---------------- ----------------
$16,822,967 $18,479,002
================ ================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 1,192 $ 5,219
Accrued and escrowed real estate taxes payable 11,011 11,897
Distributions payable 500,000 594,000
Due to related parties 146,825 97,388
Rents paid in advance and deposits 37,763 20,745
---------------- ----------------
Total liabilities 696,791 729,249
Minority interest 136,402 138,617
Partners' capital 15,989,774 17,611,136
---------------- ----------------
$16,822,967 $18,479,002
================ ================
</TABLE>
See accompanying notes to 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,
1998 1997 1998 1997
---------- --------- ------------ ------------
<S> <C>
Revenues:
Rental income from operating leases $351,021 $460,694 $1,175,634 $1,490,536
Adjustments to accrued rental income (29,474 ) -- (80,800 ) --
Earned income from direct
financing leases 33,613 34,101 101,222 102,631
Interest and other income 22,875 37,122 103,546 82,031
---------- ---------- ------------ -------------
378,035 531,917 1,299,602 1,675,198
---------- ---------- ------------ -------------
Expenses:
General operating and administrative 32,218 31,361 102,940 104,699
Professional services 6,650 4,583 31,706 19,983
Real estate taxes 1,886 4,229 9,421 11,789
State and other taxes 530 -- 12,250 9,924
Depreciation and amortization 72,026 90,917 236,345 278,778
---------- ---------- ------------ -------------
113,310 131,090 392,662 425,173
---------- ---------- ------------ -------------
Income Before Minority Interest in
Income of Consolidated Joint Venture,
Equity in Losses of Unconsolidated
Joint Ventures, Gain on Sale of Land
and Buildings and Provision for Loss
on Land and Buildings 264,725 400,827 906,940 1,250,025
Minority Interest in Income of
Consolidated Joint Venture (4,352 ) (4,352 ) (12,933 ) (12,933 )
Equity in Losses of Unconsolidated
Joint Ventures (75,617 ) (9,494 ) (34,343 ) (12,496 )
Gain on Sale of Land and Buildings -- -- 596,586 969,052
Provision for Loss on Land and Buildings (99,865 ) -- (99,865 ) (32,819 )
---------- ---------- ------------ -------------
Net Income $ 84,891 $386,981 $1,356,385 $2,160,829
========== ========== ============ =============
Allocation of Net Income:
General partners $ (11) $ 3,870 $ 11,479 $ 16,113
Limited partners 84,902 383,111 1,344,906 2,144,716
---------- ---------- ------------ -------------
$ 84,891 $386,981 $1,356,385 $2,160,829
========== ========== ============ =============
Net Income Per Limited Partner Unit $ 1.70 $ 7.66 $ 26.90 $ 42.89
========== ========== ============ =============
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
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
--------------------------- -----------------
<S> <C>
General partners:
Beginning balance $ 339,611 $ 321,305
Net income 11,479 18,306
---------------- ---------------
351,090 339,611
---------------- ---------------
Limited partners:
Beginning balance 17,271,525 17,273,996
Net income 1,344,906 2,373,529
Distributions ($59.55 and
$47.52 per limited partner
unit, respectively) (2,977,747 ) (2,376,000 )
---------------- ---------------
15,638,684 17,271,525
---------------- ---------------
Total partners' capital $15,989,774 $17,611,136
================ ===============
</TABLE>
See accompanying notes to 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,
1998 1997
--------------- ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 1,376,910 $ 1,500,218
---------------- ----------------
Cash Flows from Investing Activities:
Proceeds from sale of land
and buildings 3,214,616 2,811,159
Additions to land and buildings
on operating leases (150,000 ) (1,272,960 )
Investment in joint ventures (1,045,511 ) (511,667 )
Collections on mortgage note
receivable 678,730 3,100
Decrease (increase) in restricted cash 245,377 (159,912 )
---------------- ----------------
Net cash provided by
investing activities 2,943,212 869,720
---------------- ----------------
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 (3,071,747 ) (1,782,000 )
Distributions to holders of minority
interest (15,148 ) (15,031 )
---------------- ----------------
Net cash used in financing
activities (3,086,895 ) (1,797,031 )
---------------- ----------------
Net Increase in Cash and Cash Equivalents 1,233,227 572,907
Cash and Cash Equivalents at Beginning
of Period 493,118 57,751
---------------- ----------------
Cash and Cash Equivalents at End of
Period $ 1,726,345 $ 630,658
================ ================
</TABLE>
See accompanying notes to 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,
1998 1997
--------------- ----------------
<S> <C>
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
=============== ===============
</TABLE>
See accompanying notes to 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, 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 nine months ended September 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.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
Interim Financial Periods." Adoption of this consensus did not have a
material effect on the Partnership's financial position or results of
operations.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications
had no effect on partners' capital or net income.
6
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- -----------------
<S> <C>
Land $ 6,123,402 $ 7,325,960
Buildings 8,720,879 10,891,910
--------------- ---------------
14,844,281 18,217,870
Less accumulated depreciation (2,821,307 ) (3,341,624 )
--------------- ---------------
12,022,974 14,876,246
Less allowance for loss on
land and building (99,865 ) (240,663 )
--------------- ---------------
$11,923,109 $14,635,583
=============== ===============
</TABLE>
During the nine months ended September 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 6).
In September 1998, the Partnership entered into a new lease agreement
for the Golden Corral property located in Stockbridge, Georgia. In
connection therewith, the Partnership funded $150,000 in renovation
costs.
As of December 31, 1997, the Partnership had established an allowance
for loss on land and building of $240,663 for the property in
Hagerstown, Maryland. The allowance represented the difference between
the net carrying value at December 31, 1997 and the estimate of net
realizable value of the property. The Partnership sold this property
during the nine months ended September 30, 1998, as described above.
In addition, during the nine months ended September 30, 1998, the
Partnership established an allowance for loss on land and building of
$99,865, for financial reporting purposes, relating to the property
located in Hazard, Kentucky. The allowance represents the difference
between the net carrying value of the property at September 30, 1998
and the current estimate of net realizable value for the property.
7
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
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.
In May 1998, the Partnership entered into a joint venture arrangement,
RTO Joint Venture, with an affiliate of the general partners, to
construct and hold one restaurant property. As of September 30, 1998,
the Partnership had contributed $629,925 to purchase land and pay for
construction relating to the joint venture. The Partnership has agreed
to contribute approximately $36,100 in additional construction costs to
the joint venture. When construction is completed, the Partnership will
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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ ------------------
<S> <C>
Land and buildings on
operating leases, less
accumulated depreciation
and allowance for loss
on land and building $3,580,196 $3,152,962
Net investment in direct
financing leases 3,406,017 1,003,680
Cash 18,304 16,481
Accrued rental income 48,509 11,621
Other assets 3,368 1,480
Liabilities 123,346 18,722
Partners' capital 6,933,048 4,167,502
Revenues 423,873 82,837
Provision for loss on land
and building (139,266 ) (147,039 )
Net income (loss) 222,725 (157,912 )
</TABLE>
8
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Investment in Joint Ventures - Continued:
The Partnership recognized losses totalling $34,343 and $12,496 for the
nine months ended September 30, 1998 and 1997, respectively, from these
joint ventures, of which losses totaling $75,617 and $9,494 were
incurred during the quarters ended September 30, 1998 and 1997,
respectively.
4. 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. During
the nine months ended September 30, 1998, the Partnership collected the
full amount of the outstanding mortgage note receivable balance.
The mortgage note receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- ------------------
<S> <C>
Principal balance $ -- $ 678,730
Accrued interest receivable -- 2,957
---------------- ----------------
$ -- $ 681,687
================ ================
</TABLE>
5. 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, noncompounded annual return on their adjusted
capital contributions (the "10% Preferred Return") on a noncumulative
basis.
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 the 10% Preferred Return
on a cumulative basis, 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.
9
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
5. Allocations & Distributions - Continued:
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 nine months ended September 30, 1998 and 1997, the
Partnership declared distributions to the limited partners of
$2,977,747 and $1,782,000, respectively ($500,000 and $594,000 for the
quarters ended September 30, 1998 and 1997, respectively). This
represents distributions of $59.55 and $35.64 per unit for the nine
months ended September 30, 1998 and 1997, respectively ($10.00 and
$11.88 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 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' cumulative 10% Preferred Return. No distributions have been
made to the general partners to date.
6. 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 cumulative 10%
Preferred Return, plus their adjusted capital contributions. For the
nine months ended September 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.
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, 1998, the Partnership owned
28 Properties which included 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 nine months ended September 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 $1,376,910 and $1,500,218,
respectively. The decrease in cash from operations for the nine months ended
September 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
nine months ended September 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
September 30, 1998, the Partnership owned a 25.84% interest in this Property.
During the nine months ended September 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 below, and intends to use the
remaining net sales proceeds to reinvest in additional Properties or use for
other Partnership purposes. The Partnership anticipates that it will distribute
amounts sufficient to enable the limited partners to pay federal and state
income taxes, if any (at a level reasonably assumed by the general partners),
resulting from these sales.
11
<PAGE>
Liquidity and Capital Resources - Continued
As described above, in May 1998, the Partnership entered into a joint
venture, RTO Joint Venture, with an affiliate of the same general partners, to
construct and hold one restaurant Property. As of September 30, 1998, the
Partnership had contributed $629,925 to purchase land and pay for construction
relating to the joint venture. The Partnership has agreed to contribute
approximately $36,100 in additional construction costs to the joint venture.
When construction is completed, the Partnership will have an approximate 47
percent interest in the profits and losses of the joint venture.
In September 1998, the Partnership entered into a new lease agreement
for the Golden Corral Property located in Stockbridge, Georgia. In connection
therewith, the Partnership funded $150,000 in renovation costs.
In 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. During the nine months
ended September 30, 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance. The Partnership intends to use the
mortgage note proceeds to invest in an additional Property or for other
Partnership purposes.
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, 1998, the Partnership had
$1,726,345 invested in such short-term investments, as compared to $493,118 at
December 31, 1997. The increase in cash and cash equivalents at September 30,
1998, is primarily attributable to the remaining net sales proceeds relating to
the sale of the Properties in Daytona Beach, Punta Gorda and Fernandina Beach,
Florida, and Hagerstown, Maryland, at September 30, 1998, and the receipt of the
balance of the mortgage note receivable as described above. The funds remaining
at September 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 an additional Property.
Total liabilities of the Partnership, including distributions payable,
decreased to $696,791 at September 30, 1998, from $729,249 at December 31, 1997.
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 and
proceeds received from the sales of several Properties during 1998 and 1997, the
Partnership declared distributions to limited partners of $2,977,747 and
$1,782,000 for the nine months ended September 30, 1998 and 1997, respectively
($500,000 and $594,000 for the quarters ended September 30, 1998 and 1997,
respectively). This represents distributions of $59.55 and $35.64 per unit for
the nine months ended September 30, 1998 and 1997, respectively ($10.00 and
$11.88 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 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
special distribution was effectively a return of a portion of the limited
partners' investment, although, in accordance with the
12
<PAGE>
Liquidity and Capital Resources - Continued
Partnership agreement, it was applied to the limited partners' unpaid cumulative
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 nine months ended September 30, 1998. No distributions were made to the
general partners for the quarter and nine months ended September 30, 1998 and
1997. No amounts distributed to the limited partners for the nine months ended
September 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 general partners have been informed by CNL American Properties
Fund, Inc. ("APF"), an affiliate of the general partners, that it intends to
significantly increase its asset base by proposing to acquire affiliates of the
general partners which have similar restaurant property portfolios, including
the Partnership. APF is a real estate investment trust whose primary business is
the ownership of restaurant properties leased on a long-term, "triple-net" basis
to operators of national and regional restaurant chains. Accordingly, the
general partners anticipate that APF will make an offer to acquire the
Partnership in exchange for securities of APF. The general partners have
recently retained financial and legal advisors to assist them in evaluating and
negotiating any offer that may be proposed by APF. However, at this time, APF
has made no such offer. In the event that an offer is made, the general partners
will evaluate it and if the general partners believe that the offer is worth
pursuing, the general partners will promptly inform the limited partners. Any
agreement to sell the Partnership would be subject to the approval of the
limited partners in accordance with the terms of the partnership agreement.
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, 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 nine months ended September 30, 1998, the Partnership and its
consolidated joint venture owned and leased 27 wholly owned Properties
(including four Properties which were sold in 1998), to operators of fast-food
and family-style restaurant chains. In connection therewith, during the nine
months ended September 30, 1998 and 1997, the Partnership and Tuscawilla Joint
Venture earned $1,196,056 and $1,593,167, respectively, in rental income from
operating leases (net of adjustments to accrued rental income), earned income
from direct financing leases and contingent rental income for these Properties,
$355,160 and $494,795 of which was earned during the quarters ended September
30, 1998 and
13
<PAGE>
Results of Operations - Continued
1997, respectively. The decrease in rental, earned and contingent rental income
during the quarter and nine months ended September 30, 1998, as compared to the
quarter and nine months ended September 30, 1997, is partially attributable to a
decrease of approximately $73,500 and $325,200, 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 $69,100 for the nine months
ended September 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 1997 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, earned and contingent rental income also decreased during the
nine months ended September 30, 1998 due to the fact that, during the nine
months ended September 30, 1998, (i) the tenant of the Property in Canton
Township, Michigan, vacated the Property and ceased operations and (ii) the
Partnership terminated the lease with the tenant of the Property in Hazard,
Kentucky. Due to the fact that the Partnership had recognized accrued rental
income since the inception of these leases relating to the straight lining of
future scheduled rent increases in accordance with generally accepted accounting
principles, the Partnership wrote off approximately $80,800 of such accrued
rental income relating to these Properties during the nine months ended
September 30, 1998 approximately $29,500 of which was written off during the
quarter ended September 30, 1998. The Partnership is currently seeking either
replacement tenants or purchasers for these Properties. Rental and earned income
are expected to remain at reduced amounts until the Partnership executes new
leases for these Properties or until the Properties are sold and the proceeds
from such sales are reinvested in additional Properties.
Rental and earned income during the nine months ended September 30,
1998 and 1997, remained 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 nine months ended September 30, 1997, the Partnership owned
and leased one Property indirectly through a joint venture arrangement and one
Property as tenants-in-common with an affiliate of the general partners. During
the nine months ended September 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 nine months ended September 30, 1998 and 1997, the
Partnership recorded a loss of $34,343 and $12,496, respectively, attributable
to losses recorded by these joint ventures, a loss of $75,617 and $9,494 during
the quarters ended September 30, 1998 and 1997, respectively. The losses
recorded during the quarter and nine months ended September 30, 1998 and 1997
are 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 nine months ended September 30,
1997, for past due rental amounts. During the nine months ended September 30,
1998, the joint venture wrote off all uncollected balances and established an
allowance for loss
14
<PAGE>
Results of Operations - Continued
on land and building for its Property in Titusville, Florida of approximately
$139,300. The allowance represents the difference between the Property's net
carrying value at September 30, 1998, and the current estimated net realizable
value of the Property. The joint venture is currently seeking either a
replacement tenant or purchaser for this Property. The losses recorded by
Titusville Joint Venture during the quarter and nine months ended September 30,
1998 and 1997, were partially offset by the fact that the Partnership reinvested
a portion of the net sales proceeds it received from the 1997 and 1998 sales of
several Properties, in three Properties with affiliates of the general partners
as tenants-in-common and one Property through a joint venture arrangement with
an affiliate of the general partners.
Operating expenses, including depreciation and amortization expense,
were $392,662 and $425,173 for the nine months ended September 30, 1998 and
1997, respectively, of which $113,310 and $131,090 were incurred for the
quarters ended September 30, 1998 and 1997, respectively. The decrease in
operating expenses during the quarter and nine months ended September 30, 1998,
as compared to the quarter and nine months ended September 30, 1997, is
primarily attributable to 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 nine months
ended September 30, 1998, as described above in "Liquidity and Capital
Resources," and as a result of the sales of four Properties during the nine
months ended September 30, 1997, the Partnership recognized total gains during
the nine months ended September 30, 1998 and 1997, of $583,373 and $969,052,
respectively, for financial reporting purposes.
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 represented the difference between the Property's net carrying value at
September 30, 1997 and the estimated net realizable value of this Property.
During June 1998, the Partnership sold this Property and recognized a gain of
$13,213 for financial reporting purposes.
In addition, during the nine months ended September 30, 1998, the
Partnership recorded an allowance for loss on land and building of $99,865 for
financial reporting purposes, relating to the Property in Hazard, Kentucky. The
loss represents the difference between the Property's net carrying value and the
current estimated net realizable value of the Property.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim
Financial Periods." Adoption of this consensus did not have a material effect on
the Partnership's financial position or results of operations.
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
15
<PAGE>
Results of Operations - Continued
The Partnership does not have any information technology systems.
Affiliates of the general partners provide all services requiring the use of
information technology systems pursuant to a management agreement with the
Partnership. The maintenance of embedded systems, if any, at the Partnership's
properties is the responsibility of the tenants of the properties in accordance
with the terms of the Partnership's leases. The general partners and affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Partnership, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Partnership's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of the affiliates of the
general partners consists of a network of personal computers and servers that
were obtained from major suppliers. The affiliates utilize various
administrative and financial software applications on that infrastructure to
perform the business functions of the Partnership. The inability of the general
partners and affiliates to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of the Partnership's business activities
or operations. Accordingly, the general partners and affiliates have requested
and are evaluating documentation from the suppliers of the affiliates regarding
the Year 2000 compliance of their products that are used in the business
activities or operations of the Partnership. The costs expected to be incurred
by the general partners and affiliates to become Year 2000 compliant will be
incurred by the general partners and affiliates; therefore, these costs will
have no impact on the Partnership's financial position or results of operations.
The Partnership has material third party relationships with its
tenants, financial institutions and transfer agent. The Partnership depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash and its transfer agent to maintain and track investor
information. If any of these third parties are unable to meet their obligations
to the Partnership because of the Year 2000 deficiencies, such a failure may
have a material impact on the Partnership. Accordingly, the general partners
have requested and are evaluating documentation from the Partnership's tenants,
financial institutions, and transfer agent relating to their Year 2000
compliance plans. At this time, the general partners have not yet received
sufficient certifications to be assured that the tenants, financial
institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, the general
partners do not, at this time, know of the potential costs to the Partnership of
any adverse impact or effect of any Year 2000 deficiencies by these third
parties.
The general partners currently expect that all year 2000 compliance
testing and any necessary remedial measures on the information technology
systems used in the business activities and operations of the Partnership will
be completed prior to June 30, 1999. Based on the progress the general partners
and affiliates have made in identifying and addressing the Partnership's Year
2000 issues and the plan and timeline to complete the compliance program, the
general partners do not foresee significant risks associated with the
Partnership's Year 2000 compliance at this time. Because the general partners
and affiliates are still evaluating the status of the systems used in business
activities and operations of the Partnership and the systems of the third
parties with which
16
<PAGE>
Results of Operations - Continued
the Partnership conducts its business, the general partners have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As the general partners
identify significant risks related to the Partnership's Year 2000 compliance or
if the Partnership's Year 2000 compliance program's progress deviates
substantially from the anticipated timeline, the general partners will develop
appropriate contingency.
17
<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, 1998.
18
<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 10th day of November, 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 September 30, 1998, 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, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,726,345
<SECURITIES> 0
<RECEIVABLES> 192,318
<ALLOWANCES> 152,230
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 14,744,416
<DEPRECIATION> 2,821,307
<TOTAL-ASSETS> 16,822,967
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,989,774
<TOTAL-LIABILITY-AND-EQUITY> 16,822,967
<SALES> 0
<TOTAL-REVENUES> 1,299,602
<CGS> 0
<TOTAL-COSTS> 392,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,356,385
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,356,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,356,385
<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>
