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
--------------------------- --------------------------
Commission file number
0-17549
----------------------------
CNL Income Fund IV, Ltd.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2854435
(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) 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 11-17
Part II
Other Information 18
<PAGE>
CNL INCOME FUND IV, 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 building $15,587,830 $18,097,997
Net investment in direct financing leases 1,241,326 1,269,389
Investment in joint ventures 2,883,497 2,708,012
Cash and cash equivalents 765,359 876,452
Restricted cash 533,019 --
Receivables, less allowance for doubtful
accounts of $258,741 and $295,580 18,718 37,669
Prepaid expenses 12,197 11,115
Lease costs, less accumulated
amortization of $20,681 and $17,956 18,863 21,588
Accrued rental income 270,472 287,466
Other assets -- 200
----------------- -----------------
$21,331,281 $23,309,888
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 6,687 $ 8,576
Accrued construction costs payable -- 250,000
Accrued and escrowed real estate
taxes payable 76,311 65,176
Distributions payable 600,000 690,000
Due to related parties 138,193 93,854
Rents paid in advance and deposits 81,329 49,983
----------------- -----------------
Total liabilities 902,520 1,157,589
Commitment (Note 7)
Partners' capital 20,428,761 22,152,299
----------------- -----------------
$21,331,281 $23,309,888
================= =================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
CNL INCOME FUND IV, 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 $547,853 $508,852 $1,598,854 $1,558,963
Earned income from direct
financing leases 31,630 32,564 95,611 98,344
Contingent rental income -- 20,661 37,207 65,265
Interest and other income 24,951 17,509 46,143 28,980
---------- ---------- ------------ ------------
604,434 579,586 1,777,815 1,751,552
---------- ---------- ------------ ------------
Expenses:
General operating and administrative 46,096 33,940 121,811 113,606
Bad debt expense -- -- -- 12,794
Professional services 5,999 4,110 38,644 18,200
Real estate taxes 26,225 3,487 46,980 31,514
State and other taxes -- 25 15,747 16,476
Depreciation and amortization 104,058 113,230 326,835 339,692
---------- ---------- ------------ ------------
182,378 154,792 550,017 532,282
---------- ---------- ------------ ------------
Income Before Equity in Earnings (Loss)
of Joint Ventures and Gain on Sale of
Land and Buildings 422,056 424,794 1,227,798 1,219,270
Equity in Earnings (Loss) of Joint
Ventures 5,276 52,359 (143,612 ) 172,340
Gain on Sale on Land and Buildings 170,281 -- 226,024 --
---------- ---------- ------------ ------------
Net Income $597,613 $477,153 $1,310,210 $1,391,610
========== ========== ============ ============
Allocation of Net Income:
General partners $ 5,195 $ 4,772 $ 7,612 $ 13,916
Limited partners 592,418 472,381 1,302,598 1,377,694
---------- ---------- ------------ ------------
$597,613 $477,153 $1,310,210 $1,391,610
========== ========== ============ ============
Net Income Per Limited Partner Unit $ 9.87 $ 7.87 $ 21.71 $ 22.96
========== ========== ============ ============
Weighted Average Number of Limited
Partner Units Outstanding 60,000 60,000 60,000 60,000
========== ========== ============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CNL INCOME FUND IV, 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 $ 756,354 $ 446,657
Contribution -- 294,000
Net income 7,612 15,697
---------------- ---------------
763,966 756,354
---------------- ---------------
Limited partners:
Beginning balance 21,395,945 22,450,974
Net income 1,302,598 1,704,971
Distributions ($50.56 and
$46.00 per limited partner
unit, respectively) (3,033,748 ) (2,760,000 )
---------------- ---------------
19,664,795 21,395,945
---------------- ---------------
Total partners' capital $20,428,761 $22,152,299
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CNL INCOME FUND IV, 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 $ 1,794,173 $ 1,746,810
---------------- ----------------
Cash Flows from Investing Activities:
Additions to land and building on
operating leases (275,000 ) --
Proceeds from sale of land
and buildings 2,526,354 --
Investment in joint ventures (499,274 ) --
Increase in restricted cash (533,598 ) --
Other -- 7,338
---------------- ----------------
Net cash provided by
investing activities 1,218,482 7,338
---------------- ----------------
Cash Flows from Financing Activities:
Contributions from general partner -- 225,000
Distributions to limited partners (3,123,748 ) (2,070,000 )
---------------- ----------------
Net cash used in financing
activities (3,123,748 ) (1,845,000 )
---------------- ----------------
Net Decrease in Cash and Cash Equivalents (111,093 ) (90,852 )
Cash and Cash Equivalents at Beginning
of Period 876,452 554,593
---------------- ----------------
Cash and Cash Equivalents at End of
Period $ 765,359 $ 463,741
================ ================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CNL INCOME FUND IV, 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:
Deferred real estate disposition fees
incurred and unpaid at end of
period $ 45,663 $ --
=============== ===============
Distributions declared and unpaid at
end of period $ 600,000 $ 690,000
=============== ===============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CNL INCOME FUND IV, 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 the Form 10-K of
CNL Income Fund IV, Ltd. (the "Partnership")for the year ended December
31, 1997.
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.
2. Land and Building 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 $ 7,244,513 $ 8,328,572
Buildings 11,986,558 13,684,194
---------------- ---------------
19,231,071 22,012,766
Less accumulated
depreciation (3,643,241 ) (3,844,432 )
---------------- ---------------
15,587,830 18,168,334
Less allowance for loss on
land and building -- (70,337 )
---------------- ---------------
$15,587,830 $18,097,997
================ ===============
</TABLE>
6
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Land and Building on Operating Leases - Continued:
In March 1998, the Partnership sold its property in Fort Myers,
Florida, to a third party for $842,100 and received net sales proceeds
of $794,690, resulting in a gain of $225,902 for financial reporting
purposes. This property was originally acquired by the Partnership in
December 1988 and had a cost of approximately $598,000 excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $196,700 in excess of
its original purchase price.
In March 1998, the Partnership sold its property in Union Township,
Ohio, to a third party for $680,000 and received net sales proceeds of
$674,135, resulting in a loss of $104,987 for financial reporting
purposes.
In connection with the sale of the properties described above, the
Partnership incurred deferred, subordinated, real estate disposition
fees of $45,663 (see Note 4).
In July 1998, the Partnership sold its property in Leesburg, Florida,
for $565,000 and received net sales proceeds of $523,931, resulting in
a total loss for financial reporting purposes of $135,509. Due to the
fact that at December 31, 1997, the Partnership had recorded a
provision for loss on land and building in the amount of $70,337 for
this property, the Partnership recognized the remaining loss of $65,172
for financial reporting purposes in July 1998, relating to the sale.
In September 1998, the Partnership sold its property in Naples,
Florida, to a third party for $563,000 and received net sales proceeds
of $533,598, resulting in a gain of $170,281 for financial reporting
purposes. This property was originally acquired by the Partnership in
December 1988 and had a cost of approximately $410,500 excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $123,100 in excess of
its original purchase price.
3. Investment in Joint Ventures:
In September 1998, the Partnership entered into a joint venture
arrangement, Warren Joint Venture, with an affiliate of the general
partners to hold one restaurant property. As of September 30, 1998, the
Partnership had contributed $498,953 to the joint venture to acquire
the restaurant property. As of September 30, 1998, the Partnership
owned approximately a 36 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 the affiliate.
7
<PAGE>
CNL INCOME FUND IV, 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 following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures and the
property 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 $4,418,423 $3,338,372
Net investment in direct financing lease,
less allowance for loss on building 631,673 842,633
Cash 21,864 12,331
Receivables 20,713 40,456
Accrued rental income 162,507 177,567
Other assets 2,513 2,029
Liabilities 37,488 16,283
Partners' capital 5,220,205 4,397,105
Revenues 236,627 434,177
Provision for loss on land and buildings (455,379 ) (147,039 )
Net income (loss) (306,969 ) 126,271
</TABLE>
The Partnership recognized a loss totalling $143,612 and income
totalling $172,340 for the nine months ended September 30, 1998 and
1997, respectively, from these joint ventures, and recognized income
totalling $5,276 and $52,359 during the quarters ended September 30,
1998 and 1997, respectively.
4. Restricted Cash:
As of September 30, 1998, the net sales proceeds of $533,598 from the
sale of the property in Naples, Florida, plus accrued interest of
$1,371, less escrow fees of $1,950, 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.
8
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
5. Allocations and Distributions:
Generally, all net income and net losses of the Partnership, excluding
gains and losses from the sale of property, 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, cumulative, 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 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 nine months ended September 30, 1998 and 1997, the
Partnership declared distributions to the limited partners of
$3,033,748 and $2,070,000, respectively ($600,000 and $690,000 for the
quarters ended September 30, 1998 and 1997, respectively). This
represents distributions for the nine months ended September 30, 1998
and 1997, of $50.56 and $34.50 per unit, respectively ($10.00 and
$11.50 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30,
1998, included $1,233,748 as a result of the distribution of net sales
proceeds from the sale of the properties in Fort Myers, Florida and
Union Township, Ohio. This amount was applied toward the limited
partners' 10% Preferred Return. No distributions have been made to the
general partners to date.
9
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
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 10% Preferred
Return, plus their adjusted capital contributions. For the nine months
ended September 30, 1998, the Partnership incurred $45,663 in deferred,
subordinated, real estate disposition fees as a result of the sales of
properties. No deferred, subordinated, real estate disposition fees
were incurred for the nine months ended September 30, 1997.
7. Commitment:
During August 1998, the Partnership entered into an agreement with an
unrelated third party to sell the Taco Bell property in Edgewood,
Maryland. The general partners believe that the anticipated sales price
will exceed the Partnership's cost attributable to the property;
however, as of November 6, 1998, the sale had not occurred.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund IV, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on November 18, 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 national and regional
fast-food and family-style restaurant chains (collectively, the "Properties").
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 37 Properties, which included
interests in six Properties owned by joint ventures in which the Partnership is
a co-venturer and one Property 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 $1,794,173 and $1,746,810,
respectively. The increase in cash from operations for the nine months ended
September 30, 1998, 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, 1998.
In July 1997, the Partnership entered into new leases for the
Properties in Portland and Winchester, Indiana, with a new tenant to operate the
Properties as Arby's restaurants. In connection therewith, the Partnership paid
a total of $250,000 in renovation costs during the nine months ended September
30, 1998, which had been incurred and accrued as construction costs payable at
December 31, 1997.
In March 1998, the Partnership sold its Property in Fort Myers,
Florida, to a third party for $842,100 and received net sales proceeds of
$794,690, resulting in a gain of $225,902 for financial reporting purposes. This
Property was originally acquired by the Partnership in December 1988 and had a
cost of approximately $598,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $196,700 in excess of its original purchase price. 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 the sale. In addition, in March
1998, the Partnership sold its Property in Union Township, Ohio, to an unrelated
third party for $680,000 and received net sales proceeds of $674,135, resulting
in a loss of $104,987 for financial reporting purposes. In connection with the
sale of these Properties, the Partnership incurred deferred, subordinated, real
estate disposition fees of $45,663. In April 1998, the Partnership distributed
$1,233,748 of the net sales proceeds from these Properties as a special
distribution to the limited partners.
11
<PAGE>
Liquidity and Capital Resources - Continued
In addition, in July 1998, the Partnership sold its Property in
Leesburg, Florida for $565,000 and received net sales proceeds of $523,931,
resulting in a total loss for financial reporting purposes of $135,509. Due to
the fact that at December 31, 1997, the Partnership recorded a provision for
loss on the land and building in the amount of $70,337 for this Property, the
Partnership recognized the remaining loss of $65,172 for financial reporting
purposes at July 1998, relating to the sale. In September 1998, the Partnership
contributed $498,953 of the net sales proceeds from the sale of the Property in
Leesburg, Florida, to a joint venture, Warren Joint Venture, to purchase and
hold one restaurant property. The Partnership has an approximate 36 percent
interest in the profits and losses of Warren Joint Venture and the remaining
interest in this joint venture is held by an affiliate of the general partners.
In September 1998, the Partnership sold its Property in Naples,
Florida, to a third party for $563,000 and received net sales proceeds of
$533,598, resulting in a gain of $170,281 for financial reporting purposes. This
Property was originally acquired by the Partnership in December 1988 and had a
cost of approximately $410,500 excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $123,100 in excess of its original purchase price. The Partnership
intends to reinvest the net sales proceeds in a replacement Property. As of
September 30, 1998, the net sales proceeds were being held in an
interest-bearing escrow account. The general partners believe that the
transaction, or a portion thereof, relating to the sale of the Property in
Naples, Florida will be structured to qualify as a like-kind exchange
transaction for federal income tax purposes. However, the Partnership 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 the sale.
Currently, rental income from the Partnership's Properties and net
sales proceeds are 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 $765,359 invested in such short-term investments as
compared to $876,452 at December 31, 1997. The decrease in cash and cash
equivalents during the nine months ended September 30, 1998 is primarily
attributable to the payment of construction costs accrued at December 31, 1997
relating to the Partnership's Properties located in Winchester and Portland,
Indiana, as described above. The decrease in cash and cash equivalents was
partially offset by an increase in rents paid in advance at September 30, 1998,
as compared to December 31, 1997. The funds remaining at September 30, 1998 will
be used toward the payment of distributions and other liabilities.
Total liabilities of the Partnership, including distributions payable,
decreased to $902,520 at September 30, 1998, from $1,157,589 at December 31,
1997, primarily as a result of the payment during the nine months ended
September 30, 1998 of construction costs accrued at December 31, 1997 relating
to the Partnership's Properties located in Winchester and Portland, Indiana, as
described above. Total liabilities at September 30, 1998, to the extent they
exceed cash and cash equivalents at September 30, 1998, will be paid from future
cash from operations, and in the event the general partners elect to make
additional contributions, from future general partner contributions.
12
<PAGE>
Liquidity and Capital Resources - Continued
During August 1998, the Partnership entered into an agreement with an
unrelated third party to sell the Taco Bell property in Edgewood, Maryland. The
general partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the Property; however, as of November 6,
1998, the sale had not occurred.
Based on (i) current and anticipated future cash from operations (ii)
for the nine months ended September 30, 1998, net sales proceeds from the sale
of the Properties in Fort Myers, Florida, and Union Township, Ohio, and (iii) to
a lesser extent, for the nine months ended September 30, 1997, additional
capital contributions from the corporate general partner received in April,
July, and October 1997, the Partnership declared distributions to limited
partners of $3,033,748 and $2,070,000 for the nine months ended September 30,
1998 and 1997, respectively ($600,000 and $690,000 for the quarters ended
September 30, 1998 and 1997, respectively). This represents distributions for
the nine months ended September 30, 1998 and 1997, of $50.56 and $34.50 per
unit, respectively ($10.00 and $11.50 per unit for the quarters ended September
30, 1998 and 1997, respectively). Distributions for the nine months ended
September 30, 1998 included $1,233,748 as a result of the distribution of net
sales proceeds from the sale of the Properties in Fort Myers, Florida and Union
Township, Ohio. 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
nine months ended September 30, 1998. No distributions were made to the general
partners for the quarters 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.
13
<PAGE>
Liquidity and Capital Resources - Continued
The Partnership's investment strategy of acquiring Properties for cash
and generally leasing them under triple-net leases to operators who generally
meet specified financial standards minimizes the Partnership's operating
expenses. The general partners believe that the leases will continue to generate
cash flow in excess of operating expenses.
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 owned
and leased 35 wholly owned Properties (including one Property in Douglasville,
Georgia, which was sold in November 1997), and during the nine months ended
September 30, 1998, the Partnership owned and leased 34 wholly owned Properties
(including four Properties, which were sold during 1998), generally 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 earned
$1,694,465 and $1,657,307, respectively, in rental income from operating leases
and earned income from direct financing leases from these Properties, $579,483
and $541,416 of which was earned during the quarters ended September 30, 1998
and 1997, respectively. The increase in rental and earned income for the quarter
and nine months ended September 30, 1998, was partially due to the fact that
during the quarter and nine months ended September 30, 1997, the Partnership
increased its allowance for doubtful accounts for the Property located in Palm
Bay, Florida due to financial difficulties the tenant was experiencing. No such
allowance was established during the quarter and nine months ended September 30,
1998, due to the fact that the Partnership re-leased this Property to a new
tenant for which rent commenced subsequent to September 30, 1997. In addition,
the Partnership collected and recognized as income past due rental amounts for
which the Partnership had previously established an allowance for doubtful
accounts during the quarter and nine months ended September 30, 1998.
In addition, the increase in rental and earned income for the quarter
and nine months ended September 30, 1998 was partially due to the fact that
during the quarter and nine months ended September 30, 1997, the Partnership
increased its allowance for doubtful accounts for the Properties located in
Portland and Winchester, Indiana due to financial difficulties the tenants were
experiencing. No such allowance was established during the quarter and nine
months ended September 30, 1998, due to the fact that the Partnership re-leased
these Properties to new tenants for which rent commenced subsequent to September
30, 1997.
The increase in rental and earned income for the quarter and nine
months ended September 30, 1998 was partially offset by a decrease in rental and
earned income due to the sale of the Property in Douglasville, Georgia in
November 1997, the sale of the Properties in Fort Myers, Florida and Union
Township, Ohio in March 1998, and the sale of the Property in Naples, Florida in
September 1998. During the nine months ended September 30, 1998, the Partnership
used the net sales proceeds from the sale of the Property in Douglasville,
Georgia to
14
<PAGE>
Results of Operations - Continued
fund renovation costs for two Properties and for other Partnership purposes.
Rental and earned income are expected to remain at reduced amounts as a result
of distributing the net sales proceeds from the 1998 sales of the Properties in
Fort Myers, Florida and Union Township, Ohio to the limited partners, as
described above in "Liquidity and Capital Resources."
For the nine months ended September 30, 1998 and 1997, the Partnership
also earned $37,207 and $65,265, respectively, in contingent rental income,
$20,661 of which was earned during the quarter ended September 30, 1997. The
decrease in contingent rental income during the nine months ended September 30,
1998, as compared to the nine months ended September 30, 1997, is primarily
attributable to the Partnership adjusting estimated contingent rental amounts
accrued at December 31, 1997, to actual amounts during the nine months ended
September 30, 1998. The decrease in contingent rental income for the quarter
ended September 30, 1998 was primarily due to the fact that no contingent rents
were recorded during the quarter ended September 30, 1998 as a result of the
Partnership adopting EITF 98-9, a consensus reached by the Financial Accounting
Standards Board entitled "Accounting for Contingent Rent in the Interim
Financial Periods," which states that a lessor should defer recognition of
contingent rental income in interim periods until the specified target that
triggers the contingent rental income is achieved. Adoption of this consensus
did not have a material effect on the Partnership's financial position or
results of operations.
In October 1998, the tenant of one Boston Market Property filed for
bankruptcy. If the lease is eventually rejected, the Partnership anticipates
that rental income relating to this Property will terminate until a new tenant
is located or until the Property is sold and the proceeds from such a sale are
reinvested in an additional Property. However, the general partners do not
anticipate that any decrease in rental income due to lost revenues relating to
this Property will have a material effect on the Partnership's financial
position or results of operations.
During the nine months ended September 30, 1998 and 1997, the
Partnership also owned and leased five Properties indirectly through joint
venture arrangements and one Property as tenants-in-common with affiliates of
the general partners. In addition, during the nine months ended September 30,
1998, the Partnership owned and leased one additional Property indirectly
through a joint venture arrangement. In connection therewith, during the nine
months ended September 30, 1998 and 1997, the Partnership recognized a loss of
$143,612 and income of $172,340, respectively, attributable to net income and
net loss earned by these joint ventures, income of $5,276 and $52,359 of which
was recognized during the quarters ended September 30, 1998 and 1997,
respectively. The decrease in net income is primarily due to the fact that
Kingsville Real Estate Joint Venture (in which the Partnership owns a 68.87%
interest) established an allowance for loss on the land and net investment in
the direct financing lease for its Property for approximately $316,000 during
the nine months ended September 30, 1998. The allowance represents the
difference between the Property's carrying value at September 30, 1998 and the
estimated net realizable value of the Property. In addition, the joint venture
established an allowance for doubtful accounts of approximately $21,900 and
$87,800 during the quarter and nine months ended September 30, 1998,
respectively, in accordance with its collection policy. No such allowance was
established during the quarter and nine months ended September 30, 1997.
Kingsville Real Estate Joint Venture is currently seeking either a new tenant or
purchaser for this Property.
15
<PAGE>
Results of Operations - Continued
The decrease during the quarter and nine months ended September 30,
1998 in net income earned by joint ventures is also due to the fact that during
July 1997, the operator of the Property owned by Titusville Joint Venture
vacated the Property and ceased operations. During the quarter and nine months
ended September 30, 1998, Titusville Joint Venture (in which the Partnership
owns a 26.60% interest) established an allowance for loss on the land and
building for its Property, of approximately $139,300. The allowance represents
the difference between the Property's net carrying value at September 30, 1998
and the estimated net realizable value of the Property. Titusville Joint Venture
is currently seeking either a replacement tenant or purchaser for this Property.
Operating expenses, including depreciation and amortization expense,
were $550,017 and $532,282 for the nine months ended September 30, 1998 and
1997, respectively, of which $182,378 and $154,792 were incurred for the
quarters ended September 30, 1998 and 1997, respectively. The increase 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 the fact that during the quarter and nine months ended
September 30, 1998, the Partnership recorded approximately $21,600 in real
estate tax expense due to the fact that in October 1998, the tenant of the
Boston Market Property in Richmond, Virginia filed for bankruptcy, as described
above. As a result, if the tenant decides to reject the lease the Partnership
will continue to incur certain expenses, such as real estate taxes, insurance
and maintenance until a replacement tenant or buyer for the Property is located.
As a result of the former tenant of the Property in Leesburg, Florida
defaulting under the terms of its lease, the Partnership incurred certain
expenses, such as real estate taxes, insurance and maintenance during the
quarters and nine months ended September 30, 1998 and 1997. The Partnership sold
this Property in July 1998, as described above, therefore the Partnership does
not anticipate incurring such expenses in future periods.
As a result of the sales of the Properties in Fort Myers, Florida,
Union Township, Ohio, and Leesburg, Florida the Partnership recognized a gain of
$55,742 for financial reporting purposes during the nine months ended September
30, 1998. In addition, during the quarter and nine months ended September 30,
1998, the Partnership recognized a gain of $170,281 for financial reporting
purposes as a result of the sale of its Property in Naples, Florida. No
Properties were sold during the quarter and nine months ended September 30,
1997.
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.
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
16
<PAGE>
Results of Operations - Continued
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 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 plans.
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 IV, 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 IV, 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 10Q of CNL Income Fund IV, 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> 1,298,378<F2>
<SECURITIES> 0
<RECEIVABLES> 277,459
<ALLOWANCES> 258,741
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 19,231,071
<DEPRECIATION> 3,643,241
<TOTAL-ASSETS> 21,331,281
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20,428,761
<TOTAL-LIABILITY-AND-EQUITY> 21,331,281
<SALES> 0
<TOTAL-REVENUES> 1,777,815
<CGS> 0
<TOTAL-COSTS> 550,017
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,310,210
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,310,210
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,310,210
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund IV, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
<F2>Includes $533,019 in restricted cash.
</FN>
</TABLE>
