FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------------------------------------
Commission file number
0-19139
----------------------------
CNL Income Fund VIII, Ltd.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2963338
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 6-10
Part II
Other Information 11
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- ------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,610,464
and $1,438,534 $15,844,324 $13,960,232
Net investment in direct financing leases 7,841,439 10,044,975
Investment in joint ventures 2,824,170 2,877,717
Mortgage notes receivable 1,822,560 1,853,386
Cash and cash equivalents 1,724,745 1,602,236
Receivables, less allowance for doubtful
accounts of $22,160 and $19,228 16,023 51,393
Prepaid expenses 7,558 4,357
Accrued rental income, less allowance for
doubtful accounts of $4,501 in 1997 1,896,493 1,811,329
Other assets 52,671 52,671
----------------- -----------------
$32,029,983 $32,258,296
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 7,857 $ 8,359
Escrowed real estate taxes payable 23,100 24,459
Distributions payable 787,501 787,501
Due to related parties 60,005 59,649
Rents paid in advance 73,452 53,556
----------------- -----------------
Total liabilities 951,915 933,524
Minority interest 108,565 108,374
Partners' capital 30,969,503 31,216,398
----------------- -----------------
$32,029,983 $32,258,296
================= =================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ -------------- ------------- -------------
<S> <C>
Revenues:
Rental income from operating
leases $ 478,742 $ 452,867 $ 1,389,490 $ 1,354,475
Earned income from direct financing
leases 258,348 302,203 855,788 910,525
Contingent rental income -- 2,547 21,033 34,487
Interest and other income 66,175 60,005 201,501 181,801
------------ -------------- ------------- -------------
803,265 817,622 2,467,812 2,481,288
------------ -------------- ------------- -------------
Expenses:
General operating and
administrative 40,683 33,808 116,775 103,897
Professional services 4,248 4,632 16,611 15,042
State and other taxes -- -- 5,372 5,081
Depreciation and amortization 67,445 52,243 171,930 156,728
------------ -------------- ------------- -------------
112,376 90,683 310,688 280,748
------------ -------------- ------------- -------------
Income Before Minority Interest in
Income of Consolidated Joint
Venture, Equity in Earnings of
Unconsolidated Joint Ventures and
Gain on Sale of Land 690,889 726,939 2,157,124 2,200,540
Minority Interest in Income of
Consolidated Joint Venture (3,412 ) (3,436 ) (10,123 ) (10,266 )
Equity in Earnings of Unconsolidated
Joint Ventures 71,177 74,581 210,430 214,372
Gain on Sale of Land 108,176 -- 108,176 --
------------ -------------- ------------- -------------
Net Income $ 866,830 $ 798,084 $ 2,465,607 $ 2,404,646
============ ============== ============= =============
Allocation of Net Income:
General partners $ 7,586 $ 7,981 $ 23,574 $ 24,046
Limited partners 859,244 790,103 2,442,033 2,380,600
------------ -------------- ------------- -------------
$ 866,830 $ 798,084 $ 2,465,607 $ 2,404,646
============ ============== ============= =============
Net Income Per Limited Partner Unit $ 0.025 $ 0.023 $ 0.070 $ 0.068
============ ============== ============= =============
Weighted Average Number of Limited
Partner Units Outstanding 35,000,000 35,000,000 35,000,000 35,000,000
============ ============== ============= =============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
---------------------------- ------------------
<S> <C>
General partners:
Beginning balance $ 226,441 $ 194,025
Net income 23,574 32,416
---------------- ---------------
250,015 226,441
---------------- ---------------
Limited partners:
Beginning balance 30,989,957 30,930,809
Net income 2,442,033 3,209,151
Distributions ($0.078 and
$0.090 per limited partner
unit, respectively) (2,712,502 ) (3,150,003 )
---------------- ---------------
30,719,488 30,989,957
---------------- ---------------
Total partners' capital $30,969,503 $31,216,398
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities $ 2,697,992 $ 2,694,116
---------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land 116,397 --
Collections on mortgage notes receivable 30,554 2,092
---------------- ---------------
Net cash provided by investing
activities 146,951 2,092
---------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,712,502 ) (2,625,001 )
Distributions to holder of minority interest (9,932 ) (10,028 )
---------------- ---------------
Net cash used in financing
activities (2,722,434 ) (2,635,029 )
---------------- ---------------
Net Increase in Cash and Cash Equivalents 122,509 61,179
Cash and Cash Equivalents at Beginning
of Period 1,602,236 1,476,274
---------------- ---------------
Cash and Cash Equivalents at End of
Period $ 1,724,745 $ 1,537,453
================ ===============
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Netinvestment in direct financing leases
reclassified to land and building on
operating leases as a result of lease
amendments $ 2,064,243 $ --
================ ===============
Distributions declared and unpaid at end of
period $ 787,501 $ 787,501
================ ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in CNL Income Fund
VIII, Ltd.'s Form 10-K for the year ended December 31, 1997.
CNL Income Fund VIII, Ltd. (the "Partnership") accounts for its 88
percent interest in Woodway 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.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
Interim Financial Periods." Adoption of this consensus did not have a
material effect on the Partnership's financial position or results of
operations.
2. Land and Buildings on Operating Leases:
In July 1998, the Partnership received $116,397 as a settlement from
the Florida Department of Transportation for a right of way taking
relating to a parcel of land on its property in Brooksville, Florida.
In connection therewith, the Partnership recognized a gain of $108,176
for financial reporting purposes.
3. Net Investment in Direct Financing Leases:
In August 1998, four of the Partnership's leases were amended. As a
result, the Partnership reclassified these leases from direct financing
leases to operating leases. In accordance with the Statement of
Financial Accounting Standards #13, "Accounting for Leases," the
Partnership recorded each of the reclassified leases at the lower of
original cost, present fair value, or present carrying amount. No
losses on the termination of direct financing leases were recorded for
financial reporting purposes.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund VIII, 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 responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of September 30, 1998,
the Partnership owned 36 Properties, which included interests in nine Properties
owned by joint ventures in which the Partnership is a co-venturer.
Liquidity and Capital Resources
The Partnership's primary source of capital for the nine months ended
September 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
$2,697,992 and $2,694,116 for the nine months ended September 30, 1998 and 1997,
respectively. The increase in cash from operations for the nine months ended
September 30, 1998, is primarily a result of changes in the Partnership's
working capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1998.
In July 1998, the Partnership received $116,397 as a settlement from
the Florida Department of Transportation for a right of way taking relating to a
parcel of land on its Property in Brooksville, Florida. In connection therewith,
the Partnership recognized a gain of $108,176 for financial reporting purposes.
The Partnership anticipates that it will distribute amounts sufficient to enable
the limited partners to pay federal and state income taxes, if any (at a level
reasonably assumed by the general partners), resulting from the right of way
taking. The Partnership intends to reinvest the proceeds in an additional
Property or use the funds 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 September 30, 1998, the Partnership had
$1,724,745 invested in such short-term investments, as compared to $1,602,236 at
December 31, 1997. The increase in cash and cash equivalents at September 30,
1998, is primarily attributable to the receipt of settlement proceeds relating
to the right of way taking in Brooksville, Florida, as described above. The
funds remaining at September 30, 1998, after payment of distributions for the
nine months ended September 30, 1998, and other liabilities, will be used to
meet the Partnership's working capital and other needs and also may be used to
acquire an additional Property.
6
<PAGE>
Liquidity and Capital Resources - Continued
Total liabilities of the Partnership, including distributions payable,
increased to $951,915 at September 30, 1998, from $933,524 at December 31, 1997,
primarily as the result of an increase in rents paid in advance at September 30,
1998, as compared to 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, and for the nine months ended September
30, 1998, accumulated excess operating reserves, the Partnership declared
distributions to the limited partners of $2,712,502 and $2,362,502 for the nine
months ended September 30, 1998 and 1997, respectively ($787,501 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions of
$0.078 and $0.068 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.023 per unit for each applicable quarter). No
distributions were made to the general partners for the quarters and nine months
ended September 30, 1998 and 1997. No amounts distributed to the limited
partners for the nine months ended September 30, 1998 and 1997, are required to
be or have been treated by the Partnership as a return of capital for purposes
of calculating the limited partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the limited partners on a quarterly basis.
The general partners have been informed by CNL American Properties
Fund, Inc. ("APF"), an affiliate of the general partners, that it intends to
significantly increase its asset base by proposing to acquire affiliates of the
general partners which have similar restaurant property portfolios, including
the Partnership. APF is a real estate investment trust whose primary business is
the ownership of restaurant properties leased on a long-term, "triple-net" basis
to operators of national and regional restaurant chains. Accordingly, the
general partners anticipate that APF will make an offer to acquire the
Partnership in exchange for securities of APF. The general partners have
recently retained financial and legal advisors to assist them in evaluating and
negotiating any offer that may be proposed by APF. However, at this time, APF
has made no such offer. In the event that an offer is made, the general partners
will evaluate it and if the general partners believe that the offer is worth
pursuing, the general partners will promptly inform the limited partners. Any
agreement to sell the Partnership would be subject to the approval of the
limited partners in accordance with the terms of the partnership agreement.
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.
7
<PAGE>
Results of Operations
During the nine months ended September 30, 1998 and 1997, the
Partnership and its consolidated joint venture, Woodway Joint Venture, owned and
leased 28 wholly owned Properties to operators of fast-food and family-style
restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Partnership and Woodway Joint Venture earned
$2,245,278 and $2,265,000, respectively, in rental income from operating leases
and earned income from direct financing leases, $737,090 and $755,070 of which
was earned during the quarters ended September 30, 1998 and 1997, respectively.
The decrease in rental and earned income for the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, is primarily due to the fact that the leases relating to the Burger
King Properties in New City and Syracuse, New York and New Philadelphia and
Mansfield, Ohio were amended to provide for rent reductions from August 1998
through the end of the lease terms.
For the nine months ended September 30, 1998 and 1997, the Partnership
owned and leased eight Properties indirectly through joint venture arrangements.
In connection therewith, during the nine months ended September 30, 1998 and
1997, the Partnership earned $210,430 and $214,372, respectively, attributable
to net income earned by these unconsolidated joint ventures, $71,177 and $74,581
of which was earned during the quarters ended September 30, 1998 and 1997,
respectively.
Operating expenses, including depreciation and amortization expense,
were $310,688 and $280,748 for the nine months ended September 30, 1998 and
1997, respectively, of which $112,376 and $90,683 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to an increase in administrative expenses for services related to
accounting; financial, tax and regulatory compliance and reporting; lease and
loan compliance; limited partner distributions and reporting; and investor
relations. In addition, the increase in operating expenses during the quarter
and nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is partially due to an increase in depreciation
expense relating to the fact that during the quarter and nine months ended
September 30, 1998, the Partnership reclassified the leases for its Properties
in New City and Syracuse, New York and New Philadelphia and Mansfield, Ohio from
direct financing leases to operating leases due to lease amendments.
As a result of the right of way settlement for the Partnership's
Property in Brooksville, Florida, as described above in "Liquidity and Capital
Resources," the Partnership recognized a gain on sale of land of $108,176 during
the quarter and nine months ended September 30, 1998, for financial reporting
purposes. No Properties were sold during the quarter and nine months ended
September 30, 1997.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim
Financial Periods." Adoption of this consensus did not have a material effect on
the Partnership's financial position or results of operations.
8
<PAGE>
Results of Operations - Continued
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
The Partnership does not have any information technology systems.
Affiliates of the general partners provide all services requiring the use of
information technology systems pursuant to a management agreement with the
Partnership. The maintenance of embedded systems, if any, at the Partnership's
properties is the responsibility of the tenants of the properties in accordance
with the terms of the Partnership's leases. The general partners and affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Partnership, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Partnership's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of the affiliates of the
general partners consists of a network of personal computers and servers that
were obtained from major suppliers. The affiliates utilize various
administrative and financial software applications on that infrastructure to
perform the business functions of the Partnership. The inability of the general
partners and affiliates to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of the Partnership's business activities
or operations. Accordingly, the general partners and affiliates have requested
and are evaluating documentation from the suppliers of the affiliates regarding
the Year 2000 compliance of their products that are used in the business
activities or operations of the Partnership. The costs expected to be incurred
by the general partners and affiliates to become Year 2000 compliant will be
incurred by the general partners and affiliates; therefore, these costs will
have no impact on the Partnership's financial position or results of operations.
The Partnership has material third party relationships with its
tenants, financial institutions and transfer agent. The Partnership depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash and its transfer agent to maintain and track investor
information. If any of these third parties are unable to meet their obligations
to the Partnership because of the Year 2000 deficiencies, such a failure may
have a material impact on the Partnership. Accordingly, the general partners
have requested and are evaluating documentation from the Partnership's tenants,
financial institutions, and transfer agent relating to their Year 2000
compliance plans. At this time, the general partners have not yet received
sufficient certifications to be assured that the tenants, financial
institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, the general
partners do not, at this time, know of the potential costs to the Partnership of
any adverse impact or effect of any Year 2000 deficiencies by these third
parties.
9
<PAGE>
Results of Operations - Continued
The general partners currently expect that all year 2000 compliance
testing and any necessary remedial measures on the information technology
systems used in the business activities and operations of the Partnership will
be completed prior to June 30, 1999. Based on the progress the general partners
and affiliates have made in identifying and addressing the Partnership's Year
2000 issues and the plan and timeline to complete the compliance program, the
general partners do not foresee significant risks associated with the
Partnership's Year 2000 compliance at this time. Because the general partners
and affiliates are still evaluating the status of the systems used in business
activities and operations of the Partnership and the systems of the third
parties with which the Partnership conducts its business, the general partners
have not yet developed a comprehensive contingency plan and are unable to
identify "the most reasonably likely worst case scenario" at this time. As the
general partners identify significant risks related to the Partnership's Year
2000 compliance or if the Partnership's Year 2000 compliance program's progress
deviates substantially from the anticipated timeline, the general partners will
develop appropriate contingency plans.
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
September 30, 1998.
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 11th day of November, 1998.
CNL INCOME FUND VIII, 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 VIII, Ltd. at September 30, 1998, and its statement of
income for the nine months then ended and is qualified in its entirety by
reference to the Form 10Q of CNL Income Fund VIII, Ltd. for the nine months
ended September 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,724,745
<SECURITIES> 0
<RECEIVABLES> 38,183
<ALLOWANCES> 22,160
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 17,454,788
<DEPRECIATION> 1,610,464
<TOTAL-ASSETS> 32,029,983
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 30,969,503
<TOTAL-LIABILITY-AND-EQUITY> 32,029,983
<SALES> 0
<TOTAL-REVENUES> 2,467,812
<CGS> 0
<TOTAL-COSTS> 310,688
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,465,607
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,465,607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,465,607
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund VIII, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
