FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
0-19140
CNL Income Fund VII, Ltd.
(Exact name of registrant as specified in its charter)
Florida 59-2963871
(State or other juris- (I.R.S. Employer
diction of incorporation Identification No.)
or organization)
400 E. South Street, #500
Orlando, Florida 32801
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number
(including area code) (407) 422-1574
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-6
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 7-10
Part II
Other Information 11
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
June 30, December 31,
ASSETS 1997 1996
----------- --------
Land and buildings on operating
leases, less accumulated
depreciation of $2,017,392
and $1,865,214 $15,535,041 $15,930,547
Net investment in direct financing
leases 4,060,188 4,098,192
Investment in joint ventures 2,375,747 1,789,238
Mortgage notes receivable, less
deferred gain of $126,778 and
$127,229 1,255,368 1,259,495
Cash and cash equivalents 938,165 1,305,429
Receivables, less allowance for
doubtful accounts of $27,959
and $43,234 15,526 63,386
Prepaid expenses 9,611 4,654
Accrued rental income, less
allowance for doubtful accounts
of $9,845 and $10,786 1,059,094 1,012,490
Other assets 60,422 60,422
----------- -----------
$25,309,162 $25,523,853
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 3,790 $ 6,502
Escrowed real estate
taxes payable 5,988 4,192
Distributions payable 675,000 675,000
Due to related parties 21,460 9,067
Rents paid in advance 24,983 38,705
----------- -----------
Total liabilities 731,221 733,466
Minority interest 148,082 148,617
Partners' capital 24,429,859 24,641,770
----------- -----------
$25,309,162 $25,523,853
=========== ===========
See accompanying notes to condensed financial statements.
1
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- -------
<S> <C>
Revenues:
Rental income from
operating leases $ 492,747 $ 493,479 $ 980,029 $ 992,589
Earned income from direct
financing leases 123,095 130,317 246,760 256,092
Contingent rental income 1,972 481 3,083 709
Interest and other income 40,074 34,433 85,043 122,563
---------- ---------- ---------- ----------
657,888 658,710 1,314,915 1,371,953
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative 37,767 41,943 69,493 81,997
Bad debt expense 4,613 - 4,613 -
Professional services 5,498 3,780 10,406 13,972
Real estate taxes 1,951 - 2,979 -
State and other taxes 42 32 4,560 2,449
Depreciation and
amortization 76,089 82,036 152,178 164,088
---------- ---------- ---------- ----------
125,960 127,791 244,229 262,506
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture,
Equity in Earnings of
Unconsolidated Joint
Ventures and Loss on Sale
of Land and Building 531,928 530,919 1,070,686 1,109,447
Minority Interest in Income
of Consolidated Joint
Venture (4,673) (4,679) (9,300) (9,310)
Equity in Earnings of
Unconsolidated Joint
Ventures 54,712 38,695 95,991 77,124
Loss on Sale of Land and (19,510) 206 (19,288) 407
building
Net Income $ 562,457 $ 565,141 $1,138,089 $1,177,668
========== ========== ========== ==========
Allocation of Net Income:
General partners $ 5,703 $ 5,652 $ 11,459 $ 11,777
Limited partners 556,754 559,489 1,126,630 1,165,891
---------- ---------- ---------- ----------
$ 562,457 $ 565,141 $1,138,089 $1,177,668
========== ========== ========== ==========
Net Income Per Limited
Partner Unit $ 0.019 $ 0.019 $ 0.038 $ 0.039
========== ========== ========== ==========
Weighted Average Number
of Limited Partner
Units Outstanding 30,000,000 30,000,000 30,000,000 30,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1997 1996
---------------- --------
<S> <C>
General partners:
Beginning balance $ 156,785 $ 133,199
Net income 11,459 23,586
----------- -----------
168,244 156,785
----------- -----------
Limited partners:
Beginning balance 24,484,985 24,881,708
Net income 1,126,630 2,303,277
Distributions ($0.045 and
$0.09 per limited partner
unit, respectively) (1,350,000) (2,700,000)
----------- -----------
24,261,615 24,484,985
----------- -----------
Total partners' capital $24,429,859 $24,641,770
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
----------- -------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating
Activities $ 1,380,469 $ 1,346,104
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land 223,589 -
Investment in joint venture (616,245) -
Collections on mortgage notes
receivable 4,758 4,298
----------- -----------
Net cash provided by (used in)
investing activities (387,898) 4,298
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners (1,350,000) (1,350,000)
Distributions to holder of minority
interest (9,835) (9,823)
----------- -----------
Net cash used in financing
activities (1,359,835) (1,359,823)
----------- -----------
Net Decrease in Cash and Cash
Equivalents (367,264) (9,421)
Cash and Cash Equivalents at Beginning of
Period 1,305,429 725,074
----------- -----------
Cash and Cash Equivalents at End of
Period $ 938,165 $ 715,653
=========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid
at end of period $ 675,000 $ 675,000
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1997 and 1996
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 1997, may not be indicative
of the results that may be expected for the year ending December 31,
1997. Amounts as of December 31, 1996, included in the financial
statements, have been derived from audited financial statements as of
that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund VII, Ltd. (the "Partnership) for the year ended December
31, 1996.
The Partnership accounts for its 83 percent interest in San Antonio
#849 Joint Venture using the consolidation method. Minority interest
represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been
eliminated.
2. Land and Buildings on Operating Leases:
In May 1997, the Partnership sold its property in Columbus, Indiana,
for $240,000 and received net sales proceeds of $223,589, resulting in
a loss of $19,739 for financial reporting purposes.
3. Investment in Joint Ventures:
In February 1997, the Partnership entered into a joint venture
arrangement, CNL Mansfield Joint Venture, with an affiliate of the
Partnership which has the same general partners, to hold one restaurant
property in Mansfield, Texas. As of June 30, 1997, the Partnership and
its co-venture partner had contributed $616,245 and $163,964,
respectively, to the joint venture to acquire the restaurant property.
As of June 30, 1997, the Partnership and its co-venture partner owned a
79 percent and 21 percent interest, respectively, 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.
5
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Six Months Ended June 30, 1997 and 1996
3. Investment in Joint Ventures - Continued:
The following presents the combined, condensed financial information
for all of the Partnership's investments in joint ventures at:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C>
Land and buildings on
operating leases,
less accumulated
depreciation $8,447,340 $7,778,815
Cash 10,068 1,106
Receivables 101 14,495
Prepaids 1,056 -
Accrued rental income 172,098 154,782
Other assets - 1,115
Liabilities 18,623 1,216
Partners' capital 8,612,040 7,949,097
Revenues 484,788 911,833
Net income 366,988 689,075
</TABLE>
The Partnership recognized income totalling $95,991 and $77,124 for the
six months ended June 30, 1997 and 1996, respectively, from these joint
ventures, $54,712 and $38,695 of which was earned for the quarters
ended June 30, 1997 and 1996, respectively.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CNL Income Fund VII, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on August 18, 1989, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurants, as well as land upon which restaurants were to be
constructed (the "Properties"), which are leased primarily to operators of
national and regional fast-food and family-style restaurant chains. The leases
are triple-net leases, with the lessees generally responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of June 30, 1997,
the Partnership owned 40 Properties, including ten Properties owned by joint
ventures in which the Partnership is a co-venturer and one Property owned with
an affiliate as tenants-in-common.
Liquidity and Capital Resources
The Partnership's primary source of capital for the six months ended
June 30, 1997 and 1996, was cash from operations (which includes cash received
from tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses). Cash from operations was $1,380,469 and
$1,346,104 for the six months ended June 30, 1997 and 1996, respectively. The
increase in cash from operations for the six months ended June 30, 1997, as
compared to the six months ended June 30, 1996, is primarily a result of changes
in the Partnership's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1997.
In February 1997, the Partnership entered into a joint venture
arrangement, CNL Mansfield Joint Venture, with an affiliate of the Partnership
which has the same general partners to hold one restaurant Property in
Mansfield, Texas. As of June 30, 1997, the Partnership and its co-venture
partner had contributed $616,245 and $163,964, respectively, to the joint
venture to acquire the restaurant Property. As of June 30, 1997, the Partnership
and its co-venture partner owned a 79 percent and 21 percent interest,
respectively, in the profits and losses of the joint venture.
In May 1997, the Partnership sold its Property in Columbus, Indiana,
for $240,000 and received net sales proceeds of $223,589, resulting in a loss of
$19,739 for financial reporting purposes. The net sales proceeds are expected to
be invested in an additional Property or used for other Partnership purposes.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At June 30, 1997, the Partnership had $938,165
invested in such short-term investments, as compared to $1,305,429 at December
31, 1996. The decrease in cash and cash equivalents for the quarter and six
months ended June 30, 1997, is primarily attributable to
7
<PAGE>
Liquidity and Capital Resources - Received
the fact that in February 1997, the Partnership invested in CNL Mansfield Joint
Venture, as discussed above. The decrease in cash and cash equivalents is
partially offset by an increase in cash and cash equivalents due to the receipt
of sales proceeds from the sale of the Property in Columbus, Indiana in May
1997. The funds remaining at June 30, 1997, after payment of distributions and
other liabilities, will be used to meet the Partnership's working capital and
other needs.
Total liabilities of the Partnership, including rents paid in advance
and distributions payable, decreased to $731,221 at June 30, 1997, from $733,466
at December 31, 1996. The general partners believe that the Partnership has
sufficient cash on hand to meet its current working capital needs.
Based primarily on cash from operations, the Partnership declared
distributions to the limited partners of $1,350,000 for each of the six months
ended June 30, 1997 and 1996 ($675,000 for each of the quarters ended June 30,
1997 and 1996). This represents distributions for each applicable six months of
$0.045 per unit ($0.023 per unit for each applicable quarter). No distributions
were made to the general partners for the quarters and six months ended June 30,
1997 and 1996. No amounts distributed to the limited partners for the six months
ended June 30, 1997 and 1996, are required to be or have been treated by the
Partnership as a return of capital for purposes of calculating the limited
partners' return on their adjusted capital contributions. The Partnership
intends to continue to make distributions of cash available for distribution to
the limited partners on a quarterly basis.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Results of Operations
During the six months ended June 30, 1996, the Partnership and its
consolidated joint venture, San Antonio #849 Joint Venture, owned and leased 32
wholly owned Properties (including two Properties in Colorado Springs, Colorado,
and Hartland, Michigan, which were sold in July and October 1996, respectively)
and during the six months ended June 30, 1997, the Partnership and its
consolidated joint venture owned and leased 31 wholly owned Properties
(including one Property in Columbus, Indiana, which was sold in May 1997) to
operators of fast-food and family-style restaurant chains. In connection
therewith, during the six months
8
<PAGE>
Results of Operations - Continued
ended June 30, 1997 and 1996, the Partnership and San Antonio #849 Joint Venture
earned $1,226,789 and $1,248,681, respectively, in rental income from operating
leases and earned income from direct financing leases, $615,842 and $623,796 of
which was earned during the quarters ended June 30, 1997 and 1996, respectively.
The decrease in rental and earned income during the quarter and six months ended
June 30, 1997, as compared to the quarter and six months ended June 30, 1996, is
primarily attributable to the Partnership increasing its allowance for doubtful
accounts by approximately $4,600 and $22,800, respectively, for rental amounts
relating to the Hardee's Property in Columbus, Indiana, due to financial
difficulties the tenant is experiencing. The Partnership sold this Property in
May 1997 as discussed above in "Liquidity and Capital Resources".
During the six months ended June 30, 1996, the Partnership owned and
leased eight Properties indirectly through other joint venture arrangements and
one Property indirectly with an affiliate as tenants-in-common. During the six
months ended June 30, 1997, the Partnership owned and leased nine Properties
indirectly through other joint venture arrangements and one Property indirectly
with an affiliate as tenants-in-common. In connection therewith, during the six
months ended June 30, 1997 and 1996, the Partnership earned $95,991 and $77,124,
respectively, attributable to net income earned by these unconsolidated joint
ventures, $54,712 and $38,695 of which was earned during the quarters ended June
30, 1997 and 1996, respectively. The increase in net income earned by joint
ventures during the quarter and six months ended June 30, 1997, is primarily due
to the fact that in February 1997, the Partnership reinvested the net sales
proceeds it received from the sale, in October 1996, of the Property in
Hartland, Michigan, in CNL Mansfield Joint Venture, with an affiliate of the
Partnership which has the same general partners.
In addition, during the six months ended June 30, 1997 and 1996, the
Partnership earned $85,043 and $122,563, respectively, in interest and other
income, $40,074 and $34,433 of which was earned during the quarters ended June
30, 1997 and 1996, respectively. The decrease in interest and other income
during the six months ended June 30, 1997, as compared to the six months ended
June 30, 1996, was primarily attributable to the fact that during the six months
ended June 30, 1996, the Partnership recognized approximately $46,500 in other
income due to the fact that the corporate franchisor of the Properties in Pueblo
and Colorado Springs, Colorado, paid the past due real estate taxes relating to
these Properties, and the Partnership reversed such amounts during 1996 that it
had previously accrued as payable during 1995.
Operating expenses, including depreciation and amortization expense,
were $244,229 and $262,506 for the six months ended June 30, 1997 and 1996,
respectively, of which $125,960 and $127,791 were incurred for the quarters
ended June 30, 1997 and 1996, respectively. The decrease in operating expenses
during the quarter and six months ended June 30, 1997, as compared to the
9
<PAGE>
Results of Operations - Continued
quarter and six months ended June 30, 1996, is primarily a result of a decrease
in accounting and administrative expenses associated with operating the
Partnership and its Properties. This decrease in operating expenses was
partially offset by the fact that the Partnership recorded bad debt expense of
$4,613 relating to the Property in Columbus, Indiana, relating to past due
rental amounts. This Property was sold in May 1997, as discussed above in
"Liquidity and Capital Resources".
In addition, the decrease in operating expenses was partially
attributable to a decrease in depreciation expense during the quarter and six
months ended June 30, 1997, as compared to the quarter and six months ended June
30, 1996, as a result of the sale of the Property in Colorado Springs, Colorado,
and the sale of the Property in Hartland, Michigan, during 1996. The decrease in
depreciation expense was partially offset by the purchase of the Property in
Marietta, Georgia, in October 1996.
As a result of the sale of the Property in Florence, South Carolina, in
August 1995, and recording the gain using the installment method, the
Partnership recognized a gain for financial reporting purposes of $451 and $407
for the six months ended June 30, 1997 and 1996, respectively, $229 and $206 of
which was earned during the quarters ended June 30, 1997 and 1996, respectively.
As a result of the sale of the Property in Columbus, Indiana, as described above
in "Liquidity and Capital Resources," the Partnership recognized a loss for
financial reporting purposes of $19,739 during the quarter and six months ended
June 30, 1997. No Properties were sold during the six months ended June 30,
1996.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) No reports on Form 8-K were filed during the
quarter ended June 30, 1997.
11
<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 18th day of July, 1997.
CNL INCOME FUND VII, 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 VII, Ltd. at June 30, 1997, and its statement of income
for the six months ended and is qualified in its entirety by reference to the
Form 10Q of CNL Income Fund VII, Ltd. for the six months ended June 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 938,165
<SECURITIES> 0
<RECEIVABLES> 43,485
<ALLOWANCES> 27,959
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 17,552,433
<DEPRECIATION> 2,017,392
<TOTAL-ASSETS> 25,309,162
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,429,859
<TOTAL-LIABILITY-AND-EQUITY> 25,309,162
<SALES> 0
<TOTAL-REVENUES> 1,314,915
<CGS> 0
<TOTAL-COSTS> 244,229
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,138,089
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,138,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,138,089
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund VII, LTD has an unclassified
balance sheet, therefore, no values are shown above for current assets and
current liabilities.
</FN>
</TABLE>
