FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-----------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number
0-19140
CNL Income Fund VII, Ltd.
(Exact name of registrant as specified in its charter)
Florida 59-2963871
(State or other jurisdiction (I.R.S. Employer
of incorporation or organiza- Identification No.)
tion)
400 E. South Street
Orlando, Florida 32801
- ---------------------------- -----------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number
(including area code) (407) 422-1574
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-6
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 7-9
Part II
Other Information 10
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
June 30, December 31,
ASSETS 1998 1997
----------- --------
Land and buildings on operating
leases, less accumulated
depreciation of $2,321,748
and $2,169,570 $15,230,685 $15,382,863
Net investment in direct financing
leases 3,407,502 3,447,152
Investment in joint ventures 3,356,244 3,393,932
Mortgage notes receivable, less
deferred gain of $125,804 and
$126,303 1,245,798 1,250,597
Cash and cash equivalents 822,009 761,317
Receivables, less allowance for
doubtful accounts of $28,911
and $32,959 6,435 64,092
Prepaid expenses 10,649 4,755
Accrued rental income, less
allowance for doubtful accounts
of $9,845 in 1998 and 1997 1,162,013 1,114,632
Other assets 60,422 60,422
----------- -----------
$25,301,757 $25,479,762
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 2,950 $ 6,131
Escrowed real estate taxes payable 9,581 7,785
Distributions payable 675,000 675,000
Due to related parties 10,926 34,883
Rents paid in advance 54,280 60,671
----------- -----------
Total liabilities 752,737 784,470
Minority interest 147,107 147,514
Partners' capital 24,401,913 24,547,778
----------- -----------
$25,301,757 $25,479,762
=========== ===========
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,
1998 1997 1998 1997
---------- ---------- ---------- -------
<S> <C>
Revenues:
Rental income from
operating leases $ 498,467 $ 492,747 $ 991,191 $ 980,029
Earned income from direct
financing leases 103,779 123,095 208,154 246,760
Contingent rental income 2,958 1,972 12,378 3,083
Interest and other income 41,148 40,074 85,138 85,043
---------- ---------- ---------- ----------
646,352 657,888 1,296,861 1,314,915
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative 34,550 37,767 67,662 69,493
Bad debt expense - 4,613 - 4,613
Professional services 7,313 5,498 12,594 10,406
Real estate taxes - 1,951 - 2,979
State and other taxes 40 42 2,728 4,560
Depreciation and
amortization 76,089 76,089 152,178 152,178
---------- ---------- ---------- ----------
117,992 125,960 235,162 244,229
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture,
Equity in Earnings of
Unconsolidated Joint
Ventures and Gain (Loss)
on Sale of Land and
Building 528,360 531,928 1,061,699 1,070,686
Minority Interest in Income
of Consolidated Joint
Venture (4,596) (4,673) (9,256) (9,300)
Equity in Earnings of
Unconsolidated Joint
Ventures 73,260 54,712 151,193 95,991
Gain (Loss) on Sale of
Land and Building 252 (19,510) 499 (19,288)
---------- ---------- ---------- ----------
Net Income $ 597,276 $ 562,457 $1,204,135 $1,138,089
========== ========== ========== ==========
Allocation of Net Income:
General partners $ 5,972 $ 5,703 $ 12,041 $ 11,459
Limited partners 591,304 556,754 1,192,094 1,126,630
---------- ---------- ---------- ----------
$ 597,276 $ 562,457 $1,204,135 $1,138,089
========== ========== ========== ==========
Net Income Per Limited
Partner Unit $ 0.020 $ 0.019 $ 0.040 $ 0.038
========== ========== ========== ==========
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
Six Months Ended Year Ended
June 30, December 31,
1998 1997
---------------- ------------
General partners:
Beginning balance $ 181,085 $ 156,785
Net income 12,041 24,300
----------- -----------
193,126 181,085
----------- -----------
Limited partners:
Beginning balance 24,366,693 24,484,985
Net income 1,192,094 2,581,708
Distributions ($0.045 and
$0.090 per limited partner
unit, respectively) (1,350,000) (2,700,000)
----------- -----------
24,208,787 24,366,693
----------- -----------
Total partners' capital $24,401,913 $24,547,778
=========== ===========
See accompanying notes to condensed financial statements.
3
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1998 1997
----------- ----------
Increase (Decrease) in Cash and
Cash Equivalents:
Net Cash Provided by
Operating Activities $ 1,401,833 $ 1,380,469
----------- -----------
Cash Flows from Investing
Activities:
Proceeds from sale of land - 223,589
Investment in joint venture - (616,245)
Collections on mortgage
notes receivable 5,267 4,758
Other 13,255 -
----------- ----------
Net cash provided by
(used in) investing
activities 18,522 (387,898)
----------- -----------
Cash Flows from Financing
Activities:
Distributions to limited
partners (1,350,000) (1,350,000)
Distributions to holder of
minority interest (9,663) (9,835)
----------- -----------
Net cash used in
financing activities (1,359,663) (1,359,835)
----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents 60,692 (367,264)
Cash and Cash Equivalents at
Beginning of Period 761,317 1,305,429
----------- -----------
Cash and Cash Equivalents at End
of Period $ 822,009 $ 938,165
=========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and
unpaid at end of period $ 675,000 $ 675,000
=========== ===========
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, 1998 and 1997
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 1998, may not be indicative
of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, included in the financial
statements, have been derived from audited financial statements as of
that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund VII, Ltd. (the "Partnership) for the year ended December
31, 1997.
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.
The general partners are in the process of analyzing the effects of the
consensus reached by the Financial Accounting Standards Board in EITF
98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods," issued in May 1998. The general partners do not expect that
the conclusions reached in this consensus will have a material effect
on the Partnership's financial position or results of operations.
5
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1998 and 1997
2. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from the
unconsolidated joint ventures and the properties held as
tenants-in-common with affiliates) for at least one of the six month
periods ended June 30:
1998 1997
-------- ------
Golden Corral Corporation $341,757 $297,501
Restaurant Management
Services, Inc. 220,170 220,750
Waving Leaves, Inc. 150,906 -
Advantica Restaurant Group,
Inc. 75,655 229,821
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees
could significantly impact the results of operations of the
Partnership. However, the general partners believe that the risk of
such a default is reduced due to the essential or important nature of
these properties for the on-going operations of the lessees.
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, 1998,
the Partnership owned 40 Properties, including ten Properties owned by joint
ventures in which the Partnership is a co-venturer and two Properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
The Partnership's primary source of capital for the six months ended
June 30, 1998 and 1997, 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 $1,401,833 and
$1,380,469 for the six months ended June 30, 1998 and 1997, respectively. The
increase in cash from operations for the six months ended June 30, 1998, as
compared to the six months ended June 30, 1997, 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.
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, 1998, the Partnership had $822,009
invested in such short-term investments, as compared to $761,317 at December 31,
1997. The funds remaining at June 30, 1998, 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 distributions payable,
decreased to $752,737 at June 30, 1998, from $784,470 at December 31, 1997. The
general partners believe that the Partnership has sufficient cash on hand to
meet its current working capital needs.
Based on cash from operations, the Partnership declared distributions
to the limited partners of $1,350,000 for each of the six months ended June 30,
1998 and 1997 ($675,000 for each of the quarters ended June 30, 1998 and 1997).
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, 1998 and 1997.
No amounts distributed to the limited partners for the six months ended June 30,
1998 and 1997,
7
<PAGE>
Liquidity and Capital Resources - Continued
are required to be or have been treated by the Partnership as a return of
capital for purposes of calculating the limited partners' return on their
adjusted capital contributions. The Partnership intends to continue to make
distributions of cash available for distribution to the limited partners on a
quarterly basis.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Results of Operations
During the six months ended June 30, 1997, the Partnership and its
consolidated joint venture, San Antonio #849 Joint Venture, owned and leased 31
wholly owned Properties (including two Properties in Columbus, Indiana and
Dunnellon, Florida, which were sold in May and October 1997, respectively) and
during the six months ended June 30, 1998, the Partnership and its consolidated
joint venture owned and leased 29 wholly owned Properties, to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the six months ended June 30, 1998 and 1997, the Partnership and San Antonio
#849 Joint Venture earned $1,199,345 and $1,226,789, respectively, in rental
income from operating leases and earned income from direct financing leases,
$602,246 and $615,842 of which was earned for the quarters ended June 30, 1998
and 1997, respectively. Rental and earned income decreased during the quarter
and six months ended June 30, 1998, as compared to the quarter and six months
ended June 30, 1997, primarily as a result of the sales of the Properties in
Columbus, Indiana and Dunnellon, Florida in May and October 1997, respectively.
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 (including the
Property in Yuma, Arizona held as tenants-in-common with an affiliate which was
sold in October 1997). In addition, during the six months ended June 30, 1998,
the Partnership owned and leased nine Properties indirectly through other joint
venture arrangements and two Properties indirectly with affiliates as
tenants-in-common. In connection therewith, during the six months ended June 30,
1998 and 1997, the Partnership earned $151,193 and $95,991, respectively,
attributable to net income earned by these unconsolidated joint ventures,
$73,260 and $54,712 of which was earned for the quarters ended June 30, 1998 and
1997, respectively. The increase in net income earned by joint ventures during
the quarter and six months
8
<PAGE>
Results of Operations - Continued
ended June 30, 1998, as compared to the quarter and six months ended June 30,
1997, is primarily due to the fact that in December 1997, the Partnership
reinvested the net sales proceeds received from the sale of two Properties in
October 1997, in a Property in Smithfield, North Carolina, and a Property in
Miami, Florida, with affiliates of the general partners as tenants-in-common.
During at least one of the six months ended June 30, 1998 and 1997,
four lessees of the Partnership and its consolidated joint venture, Golden
Corral Corporation, Restaurant Management Services, Inc., Advantica Restaurant
Group, Inc. and Waving Leaves, Inc., each contributed more than ten percent of
the Partnership's total rental income (including rental income from the
Partnership's consolidated joint venture and the Partnership's share of rental
income from Properties owned by unconsolidated joint ventures and Properties
owned with affiliates as tenants-in-common). As of June 30, 1998, Golden Corral
Corporation was the lessee under leases relating to five restaurants, Restaurant
Management Services, Inc. was the lessee under leases relating to eight
restaurants, Advantica Restaurant Group, Inc. was the lessee under leases
relating to two restaurants, and Waving Leaves, Inc. was the lessee under leases
relating to four restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, Golden Corral Corporation, Restaurant
Management Services, Inc. and Waving Leaves, Inc. each will continue to
contribute more than ten percent of the Partnership's total rental income during
1998 and subsequent years. Any failure of these lessees could materially affect
the Partnership's income.
Operating expenses, including depreciation and amortization expense,
were $235,162 and $244,229 for the six months ended June 30, 1998 and 1997,
respectively, of which $117,992 and $125,960 were incurred for the quarters
ended June 30, 1998 and 1997, respectively.
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 $499 and $451
for the six months ended June 30, 1998 and 1997, respectively, $252 and $229 of
which was recognized for the quarters ended June 30, 1998 and 1997,
respectively. As a result of the sale of the Property in Columbus, Indiana in
1997, 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 quarter and six months ended June 30, 1998.
The general partners are in the process of analyzing the effects of the
consensus reached by the Financial Accounting Standards Board in EITF 98-9,
entitled "Accounting for Contingent Rent in the Interim Financial Periods,"
issued in May 1998. The general partners do not expect that the conclusions
reached in this consensus will have a material effect on the Partnership's
financial position or results of operations.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) No reports on Form 8-K were filed during the quarter
ended June 30, 1998.
10
<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 11th day of August, 1998.
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, 1998, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10Q of CNL Income Fund VII, Ltd. for the six months ended June 30,
1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 822,009
<SECURITIES> 0
<RECEIVABLES> 35,346
<ALLOWANCES> 28,911
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 17,552,433
<DEPRECIATION> 2,321,748
<TOTAL-ASSETS> 25,301,757
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 24,401,913
<TOTAL-LIABILITY-AND-EQUITY> 25,301,757
<SALES> 0
<TOTAL-REVENUES> 1,296,861
<CGS> 0
<TOTAL-COSTS> 235,162
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,204,135
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,204,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,204,135
<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>
