UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-17549
CNL INCOME FUND IV, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2854435
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 422-1574
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
The Form 10-K of CNL Income Fund IV, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
PART I
Item 1. Business
CNL Income Fund IV, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on November 18, 1987. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on May 6, 1988, the Partnership
offered for sale up to $30,000,000 in limited partnership interests (the
"Units") (60,000 Units at $500 per Unit) pursuant to a registration statement on
Form S-11 under the Securities Act of 1933, as amended. The offering terminated
on December 30, 1988, as of which date the maximum offering proceeds of
$30,000,000 had been received from investors who were admitted to the
Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of selected national and regional fast-food and family-style
restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership
from its offering of Units, after deduction of organizational and offering
expenses, totalled $26,550,000, and were used to acquire 40 Properties,
including interests in five Properties owned by joint ventures in which the
Partnership is a co-venturer. During the year ended December 31, 1994, the
Partnership sold its Property in York, Pennsylvania, and reinvested the majority
of the net sales proceeds in two Checkers Properties, consisting of only land,
located in Miami, Florida, and Douglasville, Georgia. The remaining net sales
proceeds were used to pay Partnership liabilities. The lessee of the two
Properties consisting of only land owns the buildings currently on the land and
has the right, if not in default under the lease, to remove the buildings from
the land at the end of the lease terms. During the year ended December 31, 1995,
the Partnership sold its Property in Hastings, Michigan, and during 1996,
reinvested the net sales proceeds in a Property located in Clinton, North
Carolina, with affiliates of the General Partners as tenants-in-common. Also,
during the year ended December 31, 1996, the Partnership sold its Property in
Tampa, Florida, and reinvested the majority of the net sales proceeds in a
Boston Market in Richmond, Virginia. During the year ended December 31, 1997,
the Partnership sold its Property in Douglasville, Georgia. As a result of the
above transactions, as of December 31, 1997, the Partnership owned 40
Properties. The 40 Properties include interests in five Properties owned by
joint ventures in which the Partnership is a co-venturer and one Property owned
with affiliates as tenants-in-common. Generally, the Properties are leased on a
triple-net basis with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities.
The Partnership will hold its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed. In general, the General Partners plan to seek the sale of some of
the Properties commencing seven to 15 years after their acquisition. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property or joint venture
purchase options granted to certain lessees.
1
<PAGE>
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
joint ventures in which the Partnership is a co-venturer provide for initial
terms, ranging from five to 20 years (the average being 18 years), and expire
between 2003 and 2014. Generally, the leases are on a triple-net basis, with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities. The leases of the Properties provide for minimum base annual
rental payments (payable in monthly installments) ranging from approximately
$18,100 to $135,800. Generally, the leases provide for percentage rent, based on
sales in excess of a specified amount, to be paid annually. In addition, some of
the leases provide that commencing in the sixth lease year the percentage rent
will be an amount equal to the greater of the percentage rent calculated under
the lease formula or a specified percentage (ranging from one-half to two
percent) of the purchase price.
Generally, the leases of the Properties provide for two or four
five-year renewal options subject to the same terms and conditions as the
initial lease. Certain lessees also have been granted options to purchase
Properties at the Property's then fair market value, or pursuant to a formula
based on the original cost of the Property, after a specified portion of the
lease term has elapsed. Additionally, certain leases provide the lessee an
option to purchase up to a 49 percent interest in the Property, after a
specified portion of the lease term has elapsed, at an option purchase price
similar to those described above, multiplied by the percentage interest in the
Property with respect to which the option is being exercised.
2
<PAGE>
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to the lease, the Partnership must first
offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
In September 1994, the tenant of the Property in Leesburg, Florida,
ceased operations of the restaurant business located at the Property. Currently,
the Partnership is not receiving rental payments for this Property and is
seeking a replacement tenant.
In June 1997, the Partnership terminated the leases with the tenant of
the Properties in Portland and Winchester, Indiana. 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 October 1997, the tenant of the Property in Palm Bay, Florida,
vacated the Property. In February 1998, the Partnership entered into a new lease
for this Property with a new tenant. The lease terms for these Properties are
substantially the same as the Partnership's other leases as described above in
the first three paragraphs of this section.
Major Tenants
During 1997, two lessees of the Partnership, Shoney's, Inc. and Tampa
Foods, L. P., each contributed more than ten percent of the Partnership's total
rental income (including the Partnership's share of the rental income from five
Properties owned by joint ventures and one Property owned with affiliates as
tenants-in-common). As of December 31, 1997, Shoney's, Inc. was the lessee under
leases relating to six restaurants and Tampa Foods, L. P. was the lessee under
leases relating to two restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, Shoney's, Inc. will continue to
contribute more than ten percent of the Partnership's total rental income in
1998 and subsequent years. In addition, four Restaurant Chains, Shoney's,
Denny's, Wendy's Old Fashioned Hamburger Restaurants ("Wendy's") and Taco Bell,
each accounted for more than ten percent of the Partnership's total rental
income in 1997 (including the Partnership's share of the rental income from five
Properties owned by joint ventures and one Property owned with affiliates as
tenants-in-common). In subsequent years, it is anticipated that these four
Restaurant Chains each will continue to account for more than ten percent of the
total rental income to which the Partnership is entitled under the terms of the
leases. Any failure of these lessees or Restaurant Chains could materially
affect the Partnership's income. No single tenant or group of affiliated tenants
lease Properties with an aggregate carrying value in excess of 20 percent of the
total assets of the Partnership.
3
<PAGE>
Joint Venture Arrangements and Tenancy in Common Arrangements
The Partnership has entered into five separate joint venture
arrangements: Holland Joint Venture with CNL Income Fund II, Ltd., an affiliate
of the General Partners, to purchase and hold one Property; Titusville Joint
Venture with CNL Income Fund III, Ltd., an affiliate of the General Partners, to
purchase and hold one Property; Cocoa Joint Venture with CNL Income Fund V,
Ltd., an affiliate of the General Partners, to purchase and hold one Property;
Auburn Joint Venture with CNL Income Fund VI, Ltd., an affiliate of the General
Partners, to purchase and hold one Property; and Kingsville Real Estate Joint
Venture with CNL Income Fund XII, Ltd., an affiliate of the General Partners, to
purchase and hold one Property. The affiliates are limited partnerships
organized pursuant to the laws of the State of Florida.
Each joint venture arrangement provides for the Partnership and its
joint venture partners to share in all costs and benefits associated with the
joint venture in accordance with their respective percentage interests in the
joint venture. The Partnership has a 51.0% interest in Holland Joint Venture, a
26.6% interest in Titusville Joint Venture, a 57.0% interest in Cocoa Joint
Venture, a 96.1% interest in Auburn Joint Venture, and a 68.87% interest in
Kingsville Real Estate Joint Venture. The Partnership and its joint venture
partners are also jointly and severally liable for all debts, obligations and
other liabilities of the joint venture.
Each joint venture has an initial term of approximately 20 to 30 years
and, after the expiration of the initial term, continues in existence from year
to year unless terminated at the option of either joint venturer or by an event
of dissolution. Events of dissolution include the bankruptcy, insolvency or
termination of any joint venturer, sale of the Property owned by the joint
venture and mutual agreement of the Partnership and its joint venture partner to
dissolve the joint venture.
The Partnership shares management control of each joint venture equally
with affiliates of the General Partners. The joint venture agreements restrict
each venturer's ability to sell, transfer or assign its joint venture interest
without first offering it for sale to its joint venture partner, either upon
such terms and conditions as to which the venturers may agree or, in the event
the venturers cannot agree, on the same terms and conditions as any offer from a
third party to purchase such joint venture interest.
Net cash flow from operations of Holland Joint Venture, Titusville
Joint Venture, Cocoa Joint Venture, Auburn Joint Venture and Kingsville Real
Estate Joint Venture is distributed 51.0%, 26.6%, 57.0%, 96.1% and 68.87%,
respectively, to the Partnership and the balance is distributed to each of the
other joint venture partners. Any liquidation proceeds, after paying joint
venture debts and liabilities and funding reserves for contingent liabilities,
will be distributed first to the joint venture partners with positive capital
account balances in proportion to such balances until such balances equal zero,
and thereafter in proportion to each joint venture partner's percentage interest
in the joint venture.
4
<PAGE>
In addition to the above joint venture agreements, in January 1996, the
Partnership entered into an agreement to hold a Golden Corral Property as
tenants-in-common , with CNL Income Fund VI, Ltd., CNL Income Fund X, Ltd., and
CNL Income Fund XV, Ltd., each of which is a limited partnership organized
pursuant to the laws of the State of Florida and each of which is an affiliate
of the General Partners. The agreement provides for the Partnership and the
affiliates to share in the profits and losses of the Property in proportion to
each co- tenant's percentage interest. The Partnership owns a 53.68% interest in
this Property. The tenancy in common agreement restricts each co-tenant's
ability to sell, transfer, or assign its interest in the tenancy in common's
Property without first offering it for sale to the remaining co-tenant.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the property if the proceeds are reinvested in an additional property.
Certain Management Services
CNL Income Fund Advisors, Inc., an affiliate of the General Partners,
provided certain services relating to management of the Partnership and its
Properties pursuant to a management agreement with the Partnership through
September 30, 1995. Under this agreement, CNL Income Fund Advisors, Inc. was
responsible for collecting rental payments, inspecting the Properties and the
tenants' books and records, assisting the Partnership in responding to tenant
inquiries and notices and providing information to the Partnership about the
status of the leases and the Properties. CNL Income Fund Advisors, Inc. also
assisted the General Partners in negotiating the leases. For these services, the
Partnership had agreed to pay CNL Income Fund Advisors, Inc. an annual fee equal
to one percent of the sum of gross rental revenues from Properties wholly owned
by the Partnership plus the Partnership's allocable share of gross revenues of
joint ventures in which the Partnership is a co-venturer, but not in excess of
competitive fees for comparable services. Under the management agreement, the
management fee 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"), calculated in
accordance with the Partnership's limited partnership agreement (the
"Partnership Agreement").
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and its obligations under, the management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
management agreement, including the payment of fees, as described above, remain
unchanged.
5
<PAGE>
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL Fund Advisors, Inc. perform
certain services for the Partnership. In addition, the General Partners have
available to them the resources and expertise of the officers and employees of
CNL Group, Inc., a diversified real estate company, and its affiliates, who may
also perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1997, the Partnership owned 40 Properties. Of the 40
Properties, 34 are owned by the Partnership in fee simple, five are owned
through joint venture arrangements and one is owned through a tenancy in common
arrangement. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation filed with this report for a listing of
the Properties and their respective costs, including acquisition fees and
certain acquisition expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 14,100
to 98,800 square feet depending upon building size and local demographic
factors. Sites purchased by the Partnership are in locations zoned for
commercial use which have been reviewed for traffic patterns and volume.
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
6
<PAGE>
State Number of Properties
----- --------------------
Alabama 3
Washington D.C. 1
Florida 11
Illinois 2
Indiana 3
Kansas 1
Massachusetts 1
Maryland 1
Michigan 3
Mississippi 1
North Carolina 1
Ohio 2
Tennessee 1
Texas 7
Virginia 2
------
TOTAL PROPERTIES: 40
======
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. However, the
building located on one Checkers Property is owned by the tenant, while the land
parcel is owned by the Partnership. The buildings generally are rectangular and
are constructed from various combinations of stucco, steel, wood, brick and
tile. The sizes of buildings owned by the Partnership range from approximately
800 to 6,800 square feet. All buildings on Properties are freestanding and
surrounded by paved parking areas. Buildings are suitable for conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations. As of December 31, 1997, the Partnership had no plans for
renovation of the Properties. Depreciation expense is computed for buildings and
improvements using the straight line method using depreciable lives of 31.5 and
39 years for federal income tax purposes. As of December 31, 1997, the aggregate
cost basis of the Properties owned by the Partnership and joint ventures
(including the Property held through a tenancy in common arrangement) for
federal income tax purposes was $23,285,225 and $4,439,602, respectively.
8
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
---------------- --------------------
Arby's 2
Boston Market 1
Captain D's 1
Checkers 2
Denny's 5
Dunkin Donuts/Holsum Bread 1
Golden Corral 3
Jack in the Box 1
KFC 1
Perkins 2
Pizza Hut 5
Po Folks 1
Shoney's 6
Taco Bell 3
Waffle House 1
Wendy's 4
Other 1
------
TOTAL PROPERTIES 40
======
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 1997, 1996, 1995, 1994, and 1993, the Properties were
93%, 98%, 98%, 98%, and 100% occupied, respectively. The following is a schedule
of the average annual rent for each of the five years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
For the Year Ended December 31:
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------
Rental Revenues (1) $2,596,455 $2,815,542 $2,876,873 $2,861,346 $2,671,416
Properties (2) 37 40 39 41 40
Average Rent per Unit $70,174 $70,389 $73,766 $66,789 $66,785
</TABLE>
9
<PAGE>
(1) Rental revenues includes the Partnership's share of rental revenues from the
five Properties owned through joint venture arrangements and the property
owned through a tenancy in common arrangement. Rental revenues have been
adjusted, as applicable, for any amounts for which the Partnership has
established an allowance for doubtful accounts.
(2) Excludes Properties that were vacant at December 31 and which did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as of
December 31, 1997 for each of the ten years beginning with 1998 and thereafter.
<TABLE>
<CAPTION>
<S> <C>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
--------------- --------- -------- -------------
1998 1 25,755 1.00%
1999 - - -
2000 - - -
2001 1 37,800 1.50%
2002 2 100,855 4.00%
2003 1 70,708 2.80%
2004 - - -
2005 - - -
2006 - - -
2007 - - -
Thereafter 32 2,290,561 90.70%
-------- ------------- -------------
Totals (1) 37 2,525,679 100.00%
======== ============= =============
</TABLE>
(1) Excludes Properties that were vacant at December 31, 1997.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1997 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Tampa Foods, L.P. leases two Wendy's restaurants. The initial term of each
lease is 20 years (expiring in 2008) and average minimum base rent is
approximately $105,500 (ranging from approximately $98,600 to $112,500).
Shoney's, Inc. leases four Shoney's restaurants and two Captain D's
restaurants. The initial term of each lease is 20 years (expiring in 2008) and
average minimum base rent is approximately $65,100 (ranging from approximately
$41,000 to $81,300).
Competition
The fast-food and family-style restaurant business is characterized
by intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
At the time the Partnership elects to dispose of its Properties, other
than as a result of the exercise of tenant options to purchase Properties, the
Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
11
<PAGE>
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership 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
restaurant Properties were to be constructed, which are leased primarily to
operators of selected national and regional fast-food and family-style
Restaurant Chains. Substantially all of the leases are triple-net leases, with
the lessees generally responsible for all repairs and maintenance, property
taxes, insurance and utilities. As of December 31, 1997, the Partnership owned
40 Properties, either directly or indirectly through joint venture or tenancy in
common arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended
December 31, 1997, 1996 and 1995, was cash from operations (which includes cash
received from tenants, distributions from joint ventures and interest received,
less cash paid for expenses). Cash from operations was $2,417,972, $2,713,964
and $2,670,393 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in cash from operations for 1997, as compared to
1996, and the increase in cash from operations for 1996, as compared to 1995, 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. Cash from
operations during the years ended December 31, 1997, 1996 and 1995, was also
affected by the following:
In October 1992, the Partnership accepted a promissory note from the
former tenant of the Property in Maywood, Illinois, for $175,000 for amounts due
relating to past due rents and real estate taxes and other expenses the
Partnership had incurred as a result of the former tenant's having defaulted
under the terms of the lease. The note was non-interest bearing and was payable
in 36 monthly installments of $2,500 through September 1995, and thereafter in
eight monthly installments of $10,000, with the balance due and payable on
February 20, 1996. The Partnership discounted the note to a principal balance of
$138,094 using an interest rate of ten percent. During 1995, the former tenant
defaulted under the terms of the note. Because of the financial difficulties
that the former tenant was experiencing, the Partnership established an
allowance for doubtful accounts for the full amount of unpaid principal and
interest of $111,031 relating to this note; therefore, no amounts were included
in receivables at December 31, 1996. During 1997, the Partnership ceased
collection efforts for this note and wrote off the related allowance for
doubtful accounts.
Other sources and uses of capital included the following during the
years ended December 31, 1997, 1996 and 1995.
In December 1995, the Partnership sold its Property in Hastings,
Michigan, for $520,000 and received net sales proceeds of $518,650, resulting in
a gain of $128,547 for financial reporting purposes. This Property was
originally acquired by the Partnership in August 1988 and had a cost of
approximately $419,600, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately $99,100
in excess of its original purchase price.
In January 1996, the Partnership reinvested the net sales proceeds it
received from the 1995 sale of the Property in Hastings, Michigan, along with
additional funds, in a Golden Corral Property located in Clinton, North
Carolina, with affiliates of the General Partners as tenants-in-common. In
connection therewith, the Partnership and its 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 December 31,
1997, the Partnership owned a 53.68% interest in this Property.
In September 1996, the Partnership sold its Property in Tampa, Florida,
for $1,090,000 and received net sales proceeds of $1,049,550, resulting in a
gain of $221,390 for financial reporting purposes. This Property was originally
acquired by the Partnership in December 1988 and had a cost of approximately
$832,800, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the Property for approximately $216,800 in
excess of its original purchase price. In December 1996, the Partnership
reinvested the majority of the net sales proceeds in a Boston Market Property,
located in Richmond, Virginia. The remaining net sales proceeds will be used to
pay Partnership liabilities.
In June 1997, the Partnership terminated the leases with the tenant of
the Properties in Portland and Winchester, Indiana. In connection therewith, the
Partnership accepted a promissory note from the former tenant for $32,343 for
amounts relating to past due real estate taxes the Partnership had accrued as a
result of the former tenant's financial difficulties. The promissory note, which
is uncollateralized, bears interest at a rate of ten percent per annum, and is
being collected in 36 monthly installments. Receivables at December 31, 1997
include $7,106 of such amounts.
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
agreed to fund up to $125,000 in renovation costs for each Property. As of
December 31, 1997, such renovations had been completed.
In November 1997, the Partnership sold its Property in Douglasville,
Georgia to a third party for $402,000 and received net sales proceeds of
$378,149 (net of $2,546 which represents amounts due to the former tenant for
prorated rent). This Property was originally acquired by the Partnership in
December 1994 and had a cost of approximately $363,800, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold the
Property for approximately $16,900 in excess of its original purchase price. 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 the cumulative balance of such accrued rental income at
the time of the sale of this Property, resulting in a loss of $6,652 for
financial reporting purposes. Due to the fact that the straight-lining of future
rent increases over the term of the lease is a non-cash accounting adjustment,
the write off of these amounts is a loss for financial statement purposes only.
The net sales proceeds will be used to pay liabilities of the Partnership,
including quarterly distributions to the Limited Partners, and to fund the
renovation costs described above. 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 March 1998, the Partnership sold its Property in Fort Myers,
Florida, to an unrelated third party, for $842,100 and received net sales
proceeds of $794,690, resulting in a gain of approximately $251,100 for
financial reporting purposes. The Partnership intends to distribute some or all
of the net sales proceeds to the Limited Partners. The remaining net sales
proceeds, if any, will be used to pay Partnership liabilities .
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. During the years ended December 31, 1997 and
1996, the Partnership received $294,000 and $22,300, respectively, in capital
contributions from the corporate General Partner in connection with the
operations of the Partnership. No such contributions were received during the
year ended December 31, 1995.
None of the Properties owned by the Partnership, or the joint ventures
or the tenancy in common arrangement in which the Partnership owns an interest,
is or may be encumbered. Under its Partnership Agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf of the
Partnership. Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.
Currently, rental income from the Partnership's Properties and net
sales proceeds received from the sale of Properties, pending reinvestment in
additional Properties, distributions to the Limited Partners or use for the
payment of Partnership liabilities, are invested in money market accounts or
other short-term, highly liquid investments such as demand deposit accounts at
commercial banks, CDs and money market accounts with less than a 30-day maturity
date, pending the Partnership's use of such funds to pay Partnership expenses or
to make distributions to the partners. At December 31, 1997, the Partnership had
$876,452 invested in such short-term investments, as compared to $554,593 at
December 31, 1996. The increase in the amount invested in short-term investments
is primarily a result of the receipt of net sales proceeds from the sale of the
Property in Douglasville, Georgia, during 1997. As of December 31, 1997, the
average interest rate earned on the rental income deposited in demand deposit
accounts at commercial banks was approximately three percent annually. The funds
remaining at December 31, 1997, will be used for the payment of distributions
and other liabilities, as described above.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because the leases for the Partnership's Properties are
generally on a triple-net basis, it is not anticipated that a permanent reserve
for maintenance and repairs will be established at this time. To the extent,
however, that the Partnership has insufficient funds for such purposes, the
General Partners will contribute to the Partnership an aggregate amount of up to
one percent of the offering proceeds for maintenance and repairs.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based primarily on current and anticipated future cash from
operations, and for the years ended December 31, 1997 and 1996, additional
capital contributions received from the General Partners, the Partnership
declared distributions to the Limited Partners of $2,760,000 for each of the
years ended December 31, 1997, 1996 and 1995. This represents distributions of
$46 per Unit for each of the years ended December 31, 1997, 1996 and 1995. The
General Partners expect to distribute some or all of the net sales proceeds from
the sale of the Property in Fort Myers, Florida, to the Limited Partners. In
deciding whether to sell Properties, the General Partners will consider factors
such as potential capital appreciation, net cash flow, and federal income tax
considerations. The reduced number of Properties for which the Partnership
receives rental payments, as well as ongoing operations, is expected to reduce
the Partnership's revenues. The decrease in Partnership revenues, combined with
the fact that a significant portion of the Partnership's expenses are fixed in
nature, is expected to result in a decrease in cash distributions to the Limited
Partners during 1998. No amounts distributed or to be distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, are required to
be or have been treated by the Partnership as a return of capital for purposes
of calculating the Limited Partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis.
During 1997, 1996 and 1995, affiliates of the General Partners,
incurred on behalf of the Partnership $85,702, $114,409 and $101,876,
respectively, for certain operating expenses. As of December 31, 1997 and 1996,
the Partnership owed $88,854 and $67,153, respectively, to affiliates for such
amounts and accounting and administrative services. Amounts payable to other
parties, including distributions payable, increased to $1,068,735 at December
31, 1997, from $766,108 at December 31, 1996. The increase in liabilities at
December 31, 1997, is primarily the result of the Partnership accruing
renovation costs during 1997 for the Properties in Portland and Winchester,
Indiana, in connection with the new leases entered into in July 1997. In
addition, the increase in liabilities is due to the Partnership accruing current
real estate taxes for its Property in Palm Bay, Florida, during 1997, due to the
fact that the tenant vacated the Property in October 1997. In addition, the
increase in liabilities is due to an increase in rents paid in advance at
December 31, 1997. Total liabilities at December 31, 1997, to the extent they
exceed cash and cash equivalents at December 31, 1997, 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.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During 1995, the Partnership owned and leased 36 wholly owned
Properties (including one Property in Hastings, Michigan, which was sold in
December 1995), during 1996, the Partnership owned and leased 36 wholly owned
Properties (including one Property in Tampa, Florida, which was sold in
September 1996) and during 1997, the Partnership owned and leased 35 wholly
owned Properties (including one Property in Douglasville, Georgia, which was
sold in November 1997). In addition, during 1997, 1996 and 1995, the Partnership
was a co-venturer in five separate joint ventures that each owned and leased one
Property. During 1997 and 1996, the Partnership also owned and leased one
Property with affiliates as tenants-in-common. As of December 31, 1997, the
Partnership owned, either directly or through joint venture arrangements, 40
Properties, which are, in general, subject to long-term, triple-net leases. The
leases of the Properties provide for minimum base annual rental amounts (payable
in monthly installments) ranging from $18,100 to $135,800. Generally, the leases
provide for percentage rent based on sales in excess of a specified amount to be
paid annually. In addition, some of the leases provide that, commencing in the
sixth lease year the percentage rent will be an amount equal to the greater of
the percentage rent calculated under the lease formula or a specified percentage
(ranging from one-half to two percent) of the purchase price. For further
description of the Partnership's leases and Properties, see Item 1. Business -
Leases and Item 2. Properties, respectively.
During the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $2,189,386, $2,397,691 and $2,510,406, respectively, in
rental income from operating leases and earned income from direct financing
leases from its wholly owned Properties described above. Rental and earned
income decreased during 1997, as compared to 1996, as a result of the
Partnership establishing an allowance for doubtful accounts totalling
approximately $128,200 during 1997, for rental amounts relating to the Property
located in Palm Bay, Florida, due to financial difficulties the tenant was
experiencing. The tenant vacated the Property in October 1997. The Partnership
has negotiated a settlement agreement with the former tenant's guarantor to
collect some of the amounts due to the Partnership from the former tenant. The
Partnership will recognize such amounts as income if collected. In February
1998, the Partnership entered into a new lease with a new tenant for this
Property.
In addition, rental and earned income decreased approximately $76,300
and $29,300 during the years ended 1997 and 1996, respectively, as a result of
the sale of the Property in Tampa, Florida, in September 1996. The decrease in
rental income for 1997 is partially offset by an increase of approximately
$118,300 in rental income attributable to the reinvestment of the net sales
proceeds in a Property in Richmond, Virginia, in December 1996.
In addition, the decrease in rental and earned income during 1997 and
1996, each as compared to the previous year, is partially attributable to the
Partnership increasing its allowance for doubtful accounts by approximately
$57,000 and $28,500, respectively, for rental income amounts relating to the
Hardee's Properties located in Portland and Winchester, Indiana, which are
leased by the same tenant, due to financial difficulties the tenant was
experiencing. Rental and earned income also decreased by approximately $86,200
during 1997 due to the fact that the Partnership terminated the lease with the
former tenant of the Properties in Portland and Winchester, Indiana, in June
1997, as described above in "Capital Resources." The General Partners have
agreed that they will cease collection efforts on past due rental amounts once
the former tenant of these Properties pays all amounts due under the promissory
note for past due real estate taxes described above in "Capital Resources." The
decrease in rental and earned income for 1997, as compared to 1996, was slightly
offset by an increase of approximately $20,200 in rental income from the new
tenant of this Property who began operating the Property after it was renovated
into an Arby's Property.
The decrease in rental and earned income during 1996, as compared to
1995, is primarily attributable to a decrease of approximately $53,100 as a
result of the sale of the Property in Hastings, Michigan, in December 1995.
Rental and earned income in 1997, 1996, and 1995, continued to remain
at reduced amounts due to the fact that the Partnership is not receiving any
rental income from the Property in Leesburg, Florida. The General Partners are
currently seeking a replacement tenant or purchaser for this Property. Rental
and earned income for 1998 is expected to remain at reduced amounts until such
time as the Partnership executes a new lease for this Property or until the
Property is sold and proceeds from such sale are reinvested in an additional
Property.
For the years ended December 31, 1997, 1996 and 1995, the Partnership
earned $117,031, $97,318 and $94,101, respectively, in contingent rental income
from the Partnership's wholly owned Properties. The increase in contingent
rental income in 1997, as compared to 1996, is primarily attributable to an
increase in gross sales for certain restaurant Properties whose leases require
the payment of contingent rental income.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $189,747, $277,431 and $245,778, respectively, attributable
to net income earned by joint ventures in which the Partnership is a
co-venturer. The decrease in net income earned by these joint ventures during
1997, as compared to 1996, is partially 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, Titusville
Joint Venture (in which the Partnership owns a 26.6% interest in the profits and
losses of the joint venture) established an allowance for doubtful accounts of
approximately $27,000 during 1997. No such allowance was established during
1996. In addition, the joint venture recorded real estate tax expense of
approximately $16,600 during 1997. No such real estate taxes were incurred
during 1996. The joint venture intends to pursue collection of these amounts
from the former tenant and will recognize such amounts as income if collected.
In addition, during 1997, the joint venture established an allowance for loss on
land and building for its Property in Titusville, Florida, for approximately
$147,000. The allowance represents the difference between the Property's
carrying value at December 31, 1997, and the property manager's estimate of the
net realizable value of the Property. In addition, the joint venture wrote off
unamortized lease costs of $23,500 in 1997 due to the tenant vacating the
Property. Titusville Joint Venture is currently seeking either a replacement
tenant or purchaser for this Property.
Net income earned by joint ventures also decreased during 1997, as
compared to 1996, due to the Property in Clinton, North Carolina, held as
tenants-in-common, adjusting estimated contingent rental amounts accrued at
December 31, 1996, to actual amounts during the year ended December 31, 1997.
The increase in net income earned by joint ventures during 1996, as compared to
1995, is primarily attributable to the fact that in January 1996, the
Partnership reinvested the net sales proceeds it received from the sale in
December 1995 of the Property in Hastings, Michigan, along with additional
funds, in a Golden Corral Property in Clinton, North Carolina, with affiliates
as tenants-in-common, as described above in "Capital Resources."
During the years ended December 31, 1997, 1996 and 1995 two of the
Partnership's lessees, Shoney's, Inc. and Tampa Foods, L.P., each contributed
more than ten percent of the Partnership's total rental income (including the
Partnership's share of the rental income from five Properties owned by joint
ventures and one Property owned with affiliates as tenant-in-common). As of
December 31, 1997, Shoney's, Inc. was the lessee under leases relating to six
restaurants and Tampa Foods L.P. was the lessee under leases relating to two
restaurants. It is anticipated that, based on the minimum rental payments
required by the leases, Shoney's, Inc. will continue to contribute more than ten
percent of the Partnership's total rental income during 1998 and subsequent
years. In addition, three Restaurant Chains, Shoney's, Denny's and Wendy's Old
Fashioned Hamburger Restaurants, each accounted for more than ten percent of the
Partnership's total rental income in 1997, 1996 and 1995 (including the
Partnership's share of the rental income from five Properties owned by joint
ventures and one Property owned with affiliates as tenants-in-common). During
the year ended December 31, 1997, another of the Partnership's restaurant
chains, Taco Bell, accounted for more than ten percent of total rental income.
In subsequent years, it is anticipated that these four Restaurant Chains each
will continue to account for more than ten percent of the total rental income to
which the Partnership is entitled under the terms of the leases. Any failure of
these lessees or Restaurant Chains could materially affect the Partnership's
income.
Operating expenses, including depreciation and amortization expense,
were $733,728, $694,518 and $789,780 for the years ended December 31, 1997, 1996
and 1995, respectively. The increase in operating expenses for 1997, as compared
to 1996, was partially due to the fact that during 1997, the Partnership
expensed approximately $25,400 in current and past due real estate taxes for the
Property in Palm Bay, Florida due to the tenant vacating the Property in October
1997. The Property was re-leased and the new tenant is responsible for these
expenses beginning in December 1997. In addition, the increase in operating
expenses during 1997 was partially due to the fact that the Partnership recorded
bad debt expense of $12,794 during 1997, relating to the Properties located in
Portland and Winchester, Indiana, for past due rental income amounts. The
Partnership does not intend to continue to pursue the collection of such amounts
unless the former tenant defaults under the promissory note, as described above
in "Capital Resources."
12
<PAGE>
The decrease in operating expenses in 1996, as compared to 1995, is
primarily a result of the fact that the Partnership's former tenant of the
Property in Maywood, Illinois, defaulted under the terms of its promissory note
with the Partnership, as described above in "Capital Resources," and the
Partnership recorded bad debt expense of $102,431 relating to this Property
during 1995. The decrease in operating expenses during 1996, as compared to
1995, was partially offset by an increase in accounting and administrative
expenses associated with operating the Partnership and its Properties and an
increase in insurance expense as a result of the General Partners' obtaining
contingent liability and property coverage for the Partnership beginning in May
1995.
As the result of the former tenant of the Maywood Property defaulting
under the terms of its lease, the Partnership re-leased this Property during
1993, to two new operators subject to two separate leases. In connection with
one of the two new leases for the Property in Maywood, Illinois, the Partnership
is responsible for the proportionate share of real estate taxes and insurance
expense. In addition, during 1997, 1996 and 1995, the Partnership paid for a
portion of the real estate taxes that are the responsibility of the other tenant
of the Maywood Property, due to a shortage of amounts collected from the tenant
for the payment of their proportionate share of real estate taxes. In addition,
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 expense relating
to this Property during 1997, 1996 and 1995. The Partnership is currently
seeking a replacement tenant for the Property in Leesburg, Florida, and expects
to incur these expenses until such time as a new lease is executed for this
Property.
As a result of the sale of the Property in Douglasville, Georgia, in
November 1997, the Partnership recognized a loss for financial reporting
purposes of $6,652 for the year ended December 31, 1997. In addition, as a
result of the sale of the Property in Tampa, Florida, in September 1996 and the
sale of the Property in Hastings, Michigan, in December 1995, the Partnership
recognized gains for financial reporting purposes of $221,390 and $128,547, for
the years ended December 31, 1996 and 1995, respectively.
During 1997, the Partnership established an allowance for loss on land
and building in the amount of $70,337 for financial reporting purposes for the
Property in Leesburg, Florida. The allowance represents the difference between
the Property's carrying value at December 31, 1997, and the estimated net
realizable value for this Property based on an anticipated sales price.
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on their computer package software.
The hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the General Partners do not expect this matter to materially impact
how the Partnership conducts business nor its current or future results of
operations or financial position.
The Partnership's leases as of December 31, 1997, are, in general,
triple-net leases and contain provisions that the General Partners believe
mitigate the adverse effect of inflation. Such provisions include clauses
requiring the payment of percentage rent based on certain restaurant sales above
a specified level and/or automatic increases in base rent at specified times
during the term of the lease. Management expects that increases in restaurant
sales volumes due to inflation and real sales growth should result in an
increase in rental income over time. Continued inflation also may cause capital
appreciation of the Partnership's Properties. Inflation and changing prices,
however, also may have an adverse impact on the sales of the restaurants and on
potential capital appreciation of the Properties.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
July, 1999.
CNL INCOME FUND IV, LTD.
By: CNL REALTY CORPORATION
General Partner
/s/ Robert A. Bourne
ROBERT A. BOURNE, President
By: ROBERT A. BOURNE
General Partner
/s/ Robert A. Bourne
ROBERT A. BOURNE
By: JAMES M. SENEFF, JR.
General Partner
/s/ James M. Seneff, Jr.
JAMES M. SENEFF, JR.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert A. Bourne President, Treasurer and July 29, 1999
- -------------------- Director (Principal Financial
Robert A. Bourne and Accounting Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer July 29, 1999
- ------------------------ and Director (Principal
James M. Seneff, Jr. Executive Officer)
<PAGE>
