UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(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, 2003
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)
450 South Orange Avenue
Orlando, Florida 32801-3336
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
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. No [x]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes___ No X -
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 60,000 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
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.
As of December 31, 2000, the Partnership owned 34 Properties, either
directly or indirectly through joint venture or tenancy in common arrangements.
During the year ended December 31, 2001, the Partnership sold its Properties in
Palm Bay, Florida and Corpus Christi, Texas and distributed the majority of the
net sales proceeds to the Limited Partners as a special distribution. During
2002, the Partnership and the joint venture partner in the Titusville Joint
Venture sold its Property and liquidated the joint venture; the Partnership used
the majority of the liquidation proceeds to pay liabilities of the Partnership.
In 2003, the Partnership sold its properties in Portland, Indiana; Richmond,
Virginia; and Maywood, Illinois. The Partnership used the majority of the net
sales proceeds from the sales in Portland, Indiana and Richmond, Virginia to
make a special distribution to the Limited Partners. The remaining proceeds will
be used to make distributions to the limited partners and to pay liabilities of
the Partnership.
As of December 31, 2003, the Partnership owned 28 Properties. The 28
Properties include interests in five Properties owned by joint ventures in which
the Partnership is a co-venturer and two Properties owned with affiliates of the
General Partners 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 holds 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 consider factors such as potential capital
appreciation, net cash flow and federal income taxes. 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. 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 purchase options
granted to certain lessees.
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 and Properties owned as
tenants-in-common with affiliates of the General Partners provide for initial
terms, ranging from five to 21 years (the average being 18 years), and expire
between 2004 and 2019. 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
$20,300 to $126,600. 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 to four
five-year renewal options subject to the same terms and conditions as the
initial lease. Lessees of 23 of the Partnership's 28 Properties also have been
granted options to purchase Properties at the Property's then fair market value,
after a specified portion of the lease term has elapsed. Fair market value will
be determined through an appraisal by an independent appraisal firm. Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is exercised. 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.
The leases 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.
The tenant of the Property in Kingsville, Texas, owned by Kingsville
Real Estate Joint Venture, in which the Partnership has a 68.87% interest, did
not exercise its option to renew its lease. The lease expired in January 2004.
Major Tenants
During 2003, two lessees of the Partnership, Shoney's, Inc. and Tampa
Foods, L.P., each contributed more than ten percent of total rental revenues
(including the Partnership's share of total rental revenues from Properties
owned by joint ventures and Properties owned with affiliates of the General
Partners as tenants-in-common). As of December 31, 2003, Shoney's, Inc. was the
lessee under leases relating to three restaurants, and Tampa Foods, L.P. was the
lessee relating to two restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, Shoney's, Inc. and Tampa Foods, L.P.,
each will continue to contribute more than ten percent of total rental revenues
in 2004. In addition, three Restaurant Chains, Pizza Hut, Denny's, and Wendy's
Old Fashioned Hamburger Restaurants ("Wendy's"), each accounted for more than
ten percent of total rental revenues in 2003 (including the Partnership's share
of total rental revenues from Properties owned by joint ventures and Properties
owned with affiliates of the General Partners as tenants-in-common). In 2004, it
is anticipated that these three Restaurant Chains each will continue to account
for more than ten percent of the total rental revenues to which the Partnership
is entitled under the terms of the leases. Any failure of these lessees or these
Restaurant Chains could materially affect the Partnership's income if the
Partnership is unable to re-lease the Property in a timely manner. As of
December 31, 2003, 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.
Joint Venture and Tenancy in Common Arrangements
The partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2003:
Entity Name Year Ownership Partners Property
Holland Joint Venture 1988 51.00 % CNL Income Fund II, Ltd. Holland, MI
Cocoa Joint Venture 1988 57.00% CNL Income Fund V, Ltd. Cocoa Beach, FL
Auburn Joint Venture 1989 96.10% CNL Income Fund VI, Ltd. Auburn, MA
Entity Name Year Ownership Partners Property
Kingsville Real Estate Joint 1993 68.87% CNL Income Fund XII, Ltd. Kingsville, TX
Venture
CNL Income Fund IV, Ltd., CNL 1996 53.00% CNL Income Fund VI, Ltd. CNL Clinton, NC
Income Fund VI, CNL Income Fund X, Ltd.
Ltd., Income Fund X, CNL Income Fund XV, Ltd.
Ltd. and CNL Income Fund
XV, Ltd., Tenants in
Common
Warren Joint Venture 1998 35.71% CNL Income Fund VI, Ltd. Warren, MI
CNL Income Fund IV, Ltd. and 1999 76.00% CNL Income Fund XVII, Ltd. Zephyrhills, FL
CNL Income Fund XVII,
Ltd., Tenants in Common
Each joint venture or tenancy in common was formed to hold one
Property. Each CNL Income Fund is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. The
Partnership shares management control equally with the affiliates of the General
Partners.
The joint venture and tenancy in common arrangements provide for the
Partnership and its joint venture or tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
entity or Property. The Partnership and its partners are also jointly and
severally liable for all debts, obligations and other liabilities of the joint
venture or tenancy in common. Net cash flow from operations is distributed to
each joint venture or tenancy in common partner in accordance with its
respective percentage interest in the entity or Property.
Each joint venture has an initial term of approximately 5 to 20 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 partners
to dissolve the joint venture. 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.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its interest without first offering
it for sale to its partners, either upon such terms and conditions as to which
the parties may agree or, in the event the parties cannot agree, on the same
terms and conditions as any offer from a third party to purchase such joint
venture or tenancy in common interest.
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
RAI Restaurants, Inc. (the "Advisor"), 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.
Under this agreement, the Advisor, is 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. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership has agreed to pay the Advisor 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 property management agreement, the property 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").
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.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
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.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM 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 Financial 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, 2003, the Partnership owned 28 Properties, of which
21 are owned by the Partnership in fee simple, five are owned through joint
venture arrangements and two are owned through tenancy in common arrangements.
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.
Description of Properties
Land. The Partnership's Property sites, owned directly and indirectly,
range from approximately 14,100 to 76,147 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,
directly and indirectly, as of December 31, 2003 by state.
State Number of Properties
Alabama 3
Florida 5
Illinois 1
Indiana 2
Maryland 1
Massachusetts 1
Michigan 3
Mississippi 1
North Carolina 1
Ohio 1
Tennessee 1
Texas 6
Virginia 1
Washington, D.C. 1
-----------------
Total Properties 28
=================
Buildings. Each of the Properties 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 1,700 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, 2003, 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, 2003, the aggregate cost of the Properties owned by
the Partnership and joint ventures (including Properties owned through tenancy
in common arrangements) for federal income tax purposes was $12,651,645 and
$6,039,412, respectively.
The following table lists the Properties owned by the Partnership,
directly and indirectly, as of December 31, 2003 by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 2
Captain D's 2
Checkers 1
Denny's 4
Golden Corral 2
IHOP 1
Jack in the Box 1
KFC 1
Pizza Hut 5
Shoney's 2
Taco Bell 1
Waffle House 1
Wendy's 2
Other 3
---------------------
Total Properties 28
=====================
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
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.
The following is a schedule of the average rent per property and
occupancy rate for the years ended December 31:
2003 2002 2001 2000 1999
-------------- -------------- ------------- ------------- -------------
Rental revenues (1)(2) $ 1,766,672 $1,975,618 $ 1,976,264 $ 2,255,228 $ 2,640,100
Properties (2) 28 31 31 32 37
Average rent per property $ 63,095 $ 63,730 $ 63,750 $ 70,476 $ 71,354
Occupancy rate 100% 100% 97% 94% 97%
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture and tenancy in common
arrangements.
(2) Excludes Properties that were vacant at December 31, and that 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, 2003 for the next ten years and thereafter.
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2004 1 $ 33,058 1.94%
2005 -- -- --
2006 -- -- --
2007 -- -- --
2008 14 824,753 48.44%
2009 4 344,143 20.21%
2010 1 72,803 4.28%
2011 2 94,573 5.55%
2012 -- -- --
2013 1 61,326 3.60%
Thereafter 5 271,832 15.98%
---------- ----------------- -------------
Total 28 $ 1,702,488 100.00%
========== ================= =============
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2003 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Shoney's, Inc. leases two Shoney's restaurants and one other
restaurant. The initial term of each lease is 20 years (expiring in 2008) and
average minimum base rent is approximately $75,000 (ranging from approximately
$64,900 to $81,300).
Tampa Foods, L.P. leases one Wendy's Old Fashioned Hamburger Restaurant
and one Green Tea Restaurant. The initial term of each lease is 20 years
(expiring in 2008) and average minimum base rent is approximately $101,300
(approximately $108,000 and $94,600, respectively).
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners, nor any affiliate of
the Partnership, nor any of their respective Properties, is party to, or subject
to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 12, 2004, there were 2,852 holders of record of the Units.
There is no public trading market for the Units, and it is not anticipated that
a public market for the Units will develop. During 2003, Limited Partners who
wished to sell their Units may have offered the Units for sale pursuant to the
Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners
who wished to have their distributions used to acquire additional Units (to the
extent Units were available for purchase) may have done so pursuant to such
Plan. The General Partners have the right to prohibit transfer of Units. From
inception through December 2000, the price paid for any Unit transferred
pursuant to the Plan ranged from $405 to $475 per Unit. During 2002 and 2003,
due primarily to the sales of Properties, the price paid for any Unit
transferred pursuant to the Plan was $332 and $357 per Unit. The price paid for
any Unit transferred other than pursuant to the Plan was subject to negotiation
by the purchasers and the selling Limited Partner. The Partnership will not
redeem or repurchase Units.
The following table reflects, for each calendar quarter, the high, low
and average sales prices for transfers of Units during 2003 and 2002 other than
pursuant to the Plan, net of commissions.
2003 (1) 2002 (1)
----------------------------------- ------------------------------------
High Low Average High Low Average
---------- -------- ---------- ---------- -------- ----------
First Quarter $ 311 $220 $ 251 $ 263 $200 $ 232
Second Quarter 334 200 275 259 259 259
Third Quarter 334 260 295 508 23 249
Fourth Quarter 325 289 310 325 228 281
(1) A total of 359 and 747 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2003 and 2002, respectively.
The capital contribution per Unit was $500. All cash available for
distribution will be distributed to the partners pursuant to the provision of
the partnership agreement.
For the years ended December 31, 2003 and 2002, the Partnership
declared cash distributions of $2,691,900 and $2,095,788, respectively, to the
Limited Partners. Distributions for the year ended December 31, 2003, included
$650,000 in special distributions, as a result of the distribution of net sales
proceeds from the sales of the Richmond, Virginia and Portland, Indiana
Properties. These special distributions were effectively a return of a portion
of the Limited Partners' investment, although, in accordance with the
Partnership Agreement, $650,000 was applied toward the Limited Partners' 10%
Preferred Return. The reduced number of Properties for which the Partnership
receives rental payments reduced the Partnership's revenues. Therefore, the
decrease in Partnership revenues, combined with the fact that a significant
portion of the Partnership's expenses are fixed in nature, resulted in a
decrease in cash distributions to the Limited Partners in the quarter ended
March 2003. No amounts distributed to the partners for the years ended December
31, 2003 and 2002, 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. No distributions have been made to the
General Partners to date. As indicated in the chart below, these distributions
were declared at the close of each of the Partnership's calendar quarters. This
amount includes monthly distributions made in arrears for the Limited Partners
electing to receive such distributions on this basis.
Quarter Ended 2003 2002
------------------- --------------- -------------
March 31 $1,160,475 $ 523,947
June 30 510,475 523,947
September 30 510,475 523,947
December 31 510,475 523,947
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although the General Partners, in their sole discretion, may elect to pay
distributions monthly.
(b) Not applicable
Item 6. Selected Financial Data
2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- -----------------
Year ended December 31:
Continuing operations (2):
Revenues $ 1,393,961 $ 1,401,959 $ 1,574,186 $ 1,818,616 $ 2,055,781
Equity in earnings of
unconsolidated joint
ventures 294,120 315,135 278,224 234,317 303,223
Income from continuing
operations (1) 1,193,105 1,200,250 976,695 2,024,093 1,664,818
Discontinued Operations (2):
Revenues 55,498 207,565 194,900 136,827 243,053
Income (loss) from and gain
on disposal of discontinued
operations (4) 115,076 (82,805 ) 112,399 54,217 162,541
Net income 1,308,181 1,117,445 1,089,094 2,078,310 1,827,359
Income (loss) per unit:
Continuing operations $ 19.89 $ 20.00 $ 16.28 $ 33.73 $ 27.75
Discontinued operations 1.91 (1.38 ) 1.87 0.91 2.71
-------------- -------------- -------------- -------------- ----------------
$ 21.80 $ 18.62 $ 18.15 $ 34.64 $ 30.46
============== ============== ============== ============== ================
Cash distributions declared (3) $ 2,691,900 $ 2,095,788 $ 3,147,894 $ 5,050,000 $ 2,400,000
Cash distributions declared per
unit (3) 45.00 35.00 52.00 84.00 40.00
At December 31:
Total assets $13,209,456 $14,587,910 $ 15,542,775 $17,616,159 $20,828,319
Partners' capital 12,374,807 13,758,526 14,736,869 16,795,669 19,767,359
(1) Years ended December 31, 2001 and 2000 includes $178,817 and $439,132,
respectively, for provisions for write-down of assets. Income for the
years ended December 31, 2001 and 2000 includes $120,872 and $92,397,
from losses on the sale of assets. Income for the years ended December
31, 2000 includes $1,134,692 from gains on the sale of assets.
(2) Certain items in the prior year's financial statements have been
reclassified to conform to 2003 presentation. These reclassifications
had no effect on total net income. The results of operations relating
to properties that were either disposed of or were classified as held
for sale as of December 31, 2003 are reported as discontinued
operations. The results of operations relating to properties that were
identified for sale as of December 31, 2001 but sold subsequently are
reported as continuing operations.
(3) Distributions for the years ended December 31, 2003, 2001 and 2000
include special distributions to the Limited Partners of $650,000,
$1,050,000 and $2,800,000, respectively, in net sales proceeds from the
sale of two, two, and four Properties in 2003, 2001, and 2000,
respectively.
(4) The year ended December 31, 2003 includes a gain on the disposal of
discontinued operations of $107,039 and a provision for write-down of
assets of $36,000. The year ended December 31, 2002 includes a
provision for write-down of assets of $210,000.
The above selected financial data should be read in conjunction with
the financial statements and related notes contained in Item 8. hereof.
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 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. The leases provide for minimum base
annual rental amounts (payable in monthly installments) ranging from
approximately $20,300 to $126,600. The majority of the leases provide for
percentage rent, based on sales in excess of a specified amount. In addition,
some of the leases provide that, commencing in specified lease years (generally
the sixth lease year), the annual base rent required under the terms of the
lease will increase.
As of December 31, 2003, the Partnership owned 21 Properties directly
and as of December 31, 2002 and 2001, 24 Properties directly. In addition, the
Partnership owned seven Properties indirectly through joint venture or tenancy
in common arrangements as of December 31, 2003 and 2002, and eight Properties as
of December 31, 2001.
Capital Resources
For the years ended December 31, 2003, 2002 and 2001, cash from
operating activities was $1,594,436, $1,813,739 and $1,768,652, respectively.
The decrease in cash from operating activities during the year ended December
31, 2003, as compared to 2002, was a result of changes in the Partnership's
working capital, such as the timing of transactions relating to the collection
of receivables and the payment of expenses, and changes in income and expenses,
such as changes in rental revenues resulting from the sales of Properties and
changes in operating and Property related expenses. The increase in cash from
operating activities during 2002, as compared to 2001, was a result of changes
in the Partnership's working capital, such as the timing of transactions
relating to the collection of receivables and the payment of expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2003, 2002, and 2001.
In November 2000, the Partnership sold its Property in Topeka, Kansas
to a third party and received net sales proceeds of approximately $496,400. In
January 2001, the Partnership distributed $450,000 of the net sales proceeds
from the sale of this Property as a special distribution to the Limited Partners
and used the remaining net proceeds to pay Partnership liabilities.
During 2001, the Partnership sold its Properties in Corpus Christi,
Texas, and Palm Bay, Florida, and received net sales proceeds of approximately
$679,900, resulting in losses of $120,872. In connection with the sale, the
Partnership incurred deferred, real estate disposition fees of $21,023. In
October 2001, the Partnership distributed $600,000 of the net sales proceeds
from the sales of these Properties as a special distribution to the Limited
Partners and used the remaining net proceeds to pay Partnership liabilities.
In January 2002, Titusville Joint Venture, in which the Partnership
owned a 26.6% interest, sold its Property to a third party and received net
sales proceeds of approximately $165,600 resulting in a gain of approximately
$4,900 to the joint venture. This Property was identified for sale as of
December 31, 2001. The Partnership and the joint venture partner dissolved the
joint venture in accordance with the joint venture agreement and the Partnership
received approximately $42,000 representing its pro rata share of the joint
venture's liquidating distribution. No gain or loss was recorded relating to the
dissolution of the joint venture. The Partnership used the majority of the
liquidation proceeds to pay liabilities of the Partnership.
In February 2003, the Partnership sold the property in Portland,
Indiana and received net sales proceeds of approximately $776,100, resulting in
a gain on disposal of assets of approximately $129,400. In connection with the
sale, the Partnership incurred a deferred, subordinated, real estate disposition
fee of approximately $24,000.
In March 2003, the Partnership sold the Property in Richmond, Virginia
and received net sales proceeds of approximately $922,700, resulting in a loss
on disposal of assets of approximately $22,400. The Partnership had recorded a
provision for write-down of assets, of $37,000, relating to this property in the
previous year in anticipation of the sale of the property. In connection with
the sale, the Partnership incurred a deferred, subordinated, real estate
disposition fee of $28,500.
In July 2003, the Partnership sold the property in Maywood, Illinois to
the tenant and received net sales proceeds of approximately $346,000. Because
the Partnership recorded a provision for write-down of assets of $36,000 during
the year ended December 31, 2003, no gain or loss on disposal of assets was
recognized relating to this sale. The provision represented the difference
between the carrying value of the property and its estimated fair value. In
connection with the sale, the Partnership incurred a deferred, subordinated,
real estate disposition fee of $10,500.
In December 2003, the tenant of the Property in Kingsville, Texas,
owned by Kingsville Real Estate Joint Venture, in which the Partnership has a
68.87% interest, did not exercise its option to renew its lease. The lease
expired in January 2004.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements 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.
At December 31, 2003, the Partnership had $1,338,928 invested in cash
and cash equivalents as compared to $405,155 at December 31, 2002. At December
31, 2003, these funds were held in a demand deposit account at a commercial
bank. The increase at December 31, 2003, as compared to December 31, 2002, is
primarily a result of the Partnership holding a portion of the proceeds from the
sale of the Property in Richmond, Virginia and the net proceeds from the sale of
the Property in Maywood, Illinois, pending the Partnership's use of such funds
to pay its expenses or to make distributions to the limited partners. As of
December 31, 2003, the average interest rate earned by the Partnership on the
rental income deposited in demand deposit accounts at commercial banks was less
than one percent annually. The funds remaining at December 31, 2003, after the
payment of distributions and other liabilities, will be used to meet the
Partnership's working capital needs.
Short-Term Liquidity
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 net cash
flow in excess of operating expenses.
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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.
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 on current and anticipated future cash from operations and
net sales proceeds from the sale of Properties, the Partnership declared
distributions to the Limited Partners of $2,691,900, $2,095,788, and $3,147,894,
for the years ended December 31, 2003, 2002 and 2001, respectively. This
represents distributions of $45, $35 and $52 per Unit for the years ended
December 31, 2003, 2002 and 2001, respectively. Distributions for the year ended
December 31, 2003 and 2001, included $650,000 and $1,050,000, respectively, in
special distributions, as a result of the distribution of net sales proceeds
from the sale of several Properties. These special distributions, in 2003 and
2001, were effectively a return of a portion of the Limited Partners'
investment, although, in accordance with the Partnership agreement, $650,000 and
$989,873, respectively, was applied toward the Limited Partners' 10% Preferred
Return. The remaining balance of $60,127, from the 2001 special distribution was
treated as a return of capital for purposes of calculating the Limited Partners'
10% Preferred Return. As a result of the return of capital, the amount of the
Limited Partners' invested capital contributions (which generally is the Limited
Partners' capital contributions, less distributions from the sale of a Property
that are considered to be a return of capital) was decreased; therefore, the
amount of the Limited Partners' invested capital contributions on which the 10%
Preferred Return is calculated was lowered accordingly. The reduced number of
Properties for which the Partnership receives rental payments reduced 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, resulted in two decreases in cash distributions to the Limited Partners
commencing the quarters ended September 30, 2001 and March 31, 2003. No
distributions were made to the General Partners for the years ended December 31,
2003, 2002 and 2001. No amounts distributed to the Limited Partners for the
years ended December 31, 2003 and 2002, 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 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income and did not receive any distributions
during the years ended December 31, 2003, 2002 and 2001.
As of December 31, 2003 and 2002, the Partnership owed $11,194 and
$12,798, respectively, to affiliates for operating expenses, accounting and
administrative services, and management fees. As of March 12, 2004, the
Partnership had reimbursed the affiliates for these amounts. In addition, during
the year ended December 31, 2003, the Partnership incurred $62,959 in real
estate disposition fees due to an affiliate as a result of its services in
connection with the sale of three Properties. The payment of such fees is
deferred until the Limited Partners have received the sum of their 10% Preferred
Return and their adjusted capital contributions.
Other liabilities, including distributions payable, decreased to
$575,353 at December 31, 2003, from $631,442 at December 31, 2002. The decrease
is primarily a result of a decrease in real estate taxes payable. The General
Partners believe that the Partnership has sufficient cash on hand to meet its
current working capital needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities,
or commitments as of December 31, 2003.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases"
("FAS 13"), and have been accounted for using either the direct financing or the
operating method. FAS 13 requires management to estimate the economic life of
the leased property, the residual value of the leased property and the present
value of minimum lease payments to be received from the tenant. In addition,
management assumes that all payments to be received under its leases are
collectible. Changes in management's estimates or assumptions regarding
collectibility of lease payments could result in a change in accounting for the
lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities for impairment at least once a year or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The assessment is based on the carrying amount of the
Property or investment at the date it is tested for recoverability compared to
the sum of the estimated future cash flows expected to result from its operation
and sale through the expected holding period. If an impairment is indicated, the
asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("FAS 144"). Accordingly, when the Partnership
makes the decision to sell or commits to a plan to sell a Property within one
year, its operating results are reported as discontinued operations.
Results of Operations
Comparison of the year ended December 31, 2003 to the year ended December 31,
2002
Rental revenues from continuing operations were $1,293,931 for the year
ended December 31, 2003 as compared to $1,309,560 in the same period in 2002,
decreasing slightly as a result of amendments to the leases of two Properties.
During the years ended December 31, 2003 and 2002, the Partnership also
earned $98,045 and $78,184, respectively, in contingent rental income. The
increase in contingent rental income during 2003, as compared to 2002, was due
primarily to an increase in the reported gross sales of several of the
restaurants with leases that require the payment of contingent rental income.
During the years ended December 31, 2003 and 2002, the Partnership
earned $294,120 and $315,135, respectively, attributable to the net income
earned by unconsolidated joint ventures, respectively. Net income earned by
unconsolidated joint ventures decreased slightly during 2003, as compared to the
same period of 2002, due to the fact that Kingsville Real Estate Joint Venture,
in which the Partnership owns a 68.87% interest, recorded a provision for
write-down of assets in the amount of $30,800, relating to its property in
Kingsville, Texas because the tenant of the property did not exercise its option
to renew its lease. The lease expired in January 2004. The provision represented
the difference between the carrying value of the property at December 31, 2003
and its estimated fair value. The lost revenues that will result from the loss
of this lease will have an adverse effect on net income earned by joint ventures
if the joint venture is unable to re-lease the Property in a timely manner.
During 2003, two lessees of the Partnership, Shoney's, Inc. and Tampa
Foods, L.P., each contributed more than ten percent of total rental revenues
(including the Partnership's share of total rental revenues from Properties
owned by joint ventures and Properties owned with affiliates of the General
Partners as tenants-in-common). As of December 31, 2003, Shoney's, Inc. was the
lessee under leases relating to three restaurants, and Tampa Foods, L.P. was the
lessee relating to two restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, Shoney's, Inc. and Tampa Foods, L.P.,
each will continue to contribute more than ten percent of the Partnership's
total rental revenues in 2004. In addition, three Restaurant Chains, Pizza Hut,
Denny's, and Wendy's, each accounted for more than ten percent of total rental
revenues in 2003 (including the Partnership's share of total rental revenues
from Properties owned by joint ventures and Properties owned with affiliates of
the General Partners as tenants-in-common). In 2004, it is anticipated that
these three Restaurant Chains each will continue to account for more than ten
percent of the total rental revenues to which the Partnership is entitled under
the terms of the leases. Any failure of these lessees or these Restaurant Chains
will materially affect the Partnership's operating results if the Partnership is
unable to re-lease the Property in a timely manner.
During the years ended December 31, 2003 and 2002, the Partnership
earned $1,985 and $14,215, respectively, in interest and other income. Interest
and other income during 2002 was higher because the Partnership received and
recorded as income proceeds received from the right of way taking relating to a
parcel of land on its Property in Streator, Illinois.
Operating expenses, including depreciation and amortization expense,
were $494,976 and $516,844 for the years ended December 31, 2003 and 2002,
respectively. The decrease in operating expenses during 2003, as compared to the
same period in 2002, was due to a decrease in the costs incurred for
administrative expenses for servicing the Partnership and its Properties. The
decrease was partially offset by an increase in state tax expenses relating to
several states where the Partnership conducts business.
During the year ended December 31, 2003, the Partnership identified for
sale three Properties, located in Portland, Indiana; Richmond, Virginia; and
Maywood, Illinois, which were classified as Discontinued Operations in the
accompanying financial statements. In connection with the sale of these
Properties, the Partnership received aggregate net sales proceeds of
approximately $2,044,700, resulting in an aggregate net gain on disposal of
assets of $107,000. In anticipation of the sale of the Property in Richmond,
Virginia the Partnership had recorded a provision for write-down of assets in
the previous year. The Partnership had recorded a provision for write-down of
assets of $36,000 during 2003 in anticipation of the sale of the Property in
Maywood, Illinois. In addition, the Partnership had recorded a provision for
write-down of assets relating to this Property in a previous year. The
provisions represented the difference between the carrying value of the Property
and its estimated fair value at the end of each period. The Partnership
recognized net rental income (rental revenues less Property related expenses and
provision for write-down of assets) of $8,037 during 2003 and a net rental loss
(Property related expenses and provision for write-down of assets in excess of
rental revenues) of $82,805 during 2002, relating to these three Properties.
In December 2003, Holland Joint Venture, in which the Partnership owns
a 51% interest, entered into negotiations with a third party to sell the
Property in Holland, Michigan. As a result, the joint venture reclassified the
assets relating to this property from land and building on operating leases to
real estate held for sale. The Property was recorded at the lower of its
carrying amount or fair value less cost to sell. In addition, the joint venture
stopped recording depreciation upon identifying the Property as held for sale.
The financial results for this property are reflected as Discontinued Operations
in the condensed joint venture financial information presented in the footnotes
to the accompanying financial statements.
Comparison of the year ended December 31, 2002 to the year ended December 31,
2001
Rental revenues from continuing operations were $1,309,560 for the year
ended December 31, 2002 as compared to $1,347,378 in the same period in 2001.
The decrease in rental revenues from continuing operations during 2002, as
compared to the same period in 2001, was partially attributable to the sale of
the Properties in Palm Bay, Florida and Corpus Christi, Texas during 2001.
During 2001, the Partnership distributed a portion of the net sales proceeds
from the sale of these Properties to the Limited Partners, as a result, rental
revenues from continuing operations are expected to remain at reduced amounts.
Rental revenues from continuing operations also decreased during 2002
because the Partnership entered into a new lease relating to the Property in
Streator, Illinois. The former lease for this Property, which was scheduled to
expire in December 2002, was terminated by the Partnership and the tenant during
2001. In connection therewith, the Partnership received approximately $67,100 in
lease termination income in consideration for the Partnership releasing the
tenant from its obligations under the lease. The Partnership re-leased this
Property to a new tenant with terms substantially the same as the Partnership's
other leases. Rents due under the new lease are lower than rents due under the
previous lease; therefore, the Partnership expects that rental revenues in
future period will remain at reduced amounts. However, the General Partners do
not anticipate that the decrease in rental revenues from continuing operations
relating to the new lease will have a material adverse affect on the
Partnership's financial position or results of operations.
During the years ended December 31, 2002 and 2001, the Partnership also
earned $78,184 and $81,550, respectively, in contingent rental income.
During the years ended December 31, 2002 and 2001, the Partnership
earned $315,135 and $278,224, respectively, attributable to the net income
earned by unconsolidated joint ventures, respectively. Net operating results
reported by joint ventures were lower during 2001, as compared to the same
period in 2002, due to the fact that the tenant of the Property owned by
Titusville Joint Venture (in which the Partnership owned a 26.6% interest in the
profits and losses of the joint venture) vacated the Property in 1997, and the
Partnership incurred expenses, which are of a fixed nature, such as real estate
taxes, insurance and maintenance during 2001. In addition, during 2001, the
joint venture established a provision for write-down of assets for its Property
for approximately $73,800. The provision represented the difference between the
Property's carrying value at December 31, 2001, and its estimated fair value. In
January 2002, the joint venture sold this Property. This Property was identified
for sale as of December 31, 2001.
During the years ended December 31, 2002 and 2001, the Partnership also
earned $14,215 and $78,185, respectively, in interest and other income. Interest
and other income during 2001 was higher because the Partnership earned interest
on the net sales proceeds received from the sale of Properties pending
distribution to the Limited Partners. During 2002, the Partnership received and
recorded as income proceeds received from the right of way taking relating to a
parcel of land on its Property in Streator, Illinois.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $516,844 and $754,843 for the years
ended December 31, 2002 and 2001, respectively. The decrease in operating
expenses during 2002, as compared to the same period in 2001, was partially due
to a decrease in depreciation expense due to the sale of two Properties in 2001.
In addition, the Partnership recorded a provision for doubtful accounts for past
due rental amounts relating to the Big Boy's Property located in Topeka, Kansas,
due to financial difficulties the tenant was experiencing. The decrease in
operating expenses during 2002, as compared to the same period in 2001, was also
partially due to the fact that during 2001, the Partnership incurred expenses
such as legal fees, repairs and maintenance, and real estate taxes relating to
several Properties with tenants who experienced financial difficulties. In
addition, state taxes were higher during 2001, as compared to the same period in
2002, due to the fact that the Partnership incurred additional taxes on gains on
sale of assets.
During 2001, the Partnership recorded a provision for write-down of
assets of approximately $178,800 relating to the Property in Palm Bay, Florida.
The tenant defaulted under the terms of its lease and vacated the Property. The
increase in the provision represented the difference between the carrying value
of the Property at December 31, 2001, and its estimated fair value.
As a result of the sales of the Properties in Corpus Christi, Texas and
Palm Bay, Florida during 2001, the Partnership recognized losses of
approximately $120,900 during 2001.
As discussed above, the Properties in Portland, Indiana, Richmond,
Virginia and Maywood, Illinois were classified as Discontinued Operations in the
accompanying financial statements. In anticipation of the sale of the Property
in Richmond, Virginia the Partnership recorded a provision for write-down of
assets of $37,000 during 2002. Also, during 2002, the Partnership recorded a
provision for write-down of assets of $173,000 relating to the Property in
Maywood, Illinois. The provisions represented the difference between the
carrying value of the Property and its estimated fair value. The Partnership
recognized a net rental loss (Property related expenses and provision for
write-down of assets in excess of rental revenues) of $82,805 during 2002 and
net rental income (rental revenues less Property related expenses) of $112,399
during 2001, relating to these Properties.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases as of December 31, 2003, are generally
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. Inflation, overall, has had a minimal effect on
results of operations of the Partnership. Continued inflation 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.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that company is
subject to a majority risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Prior to FIN 46, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. The
General Partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 18
Financial Statements:
Balance Sheets 19
Statements of Income 20
Statements of Partners' Capital 21
Statements of Cash Flows 22-23
Notes to Financial Statements 24-36
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund IV, Ltd.
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of CNL Income Fund IV, Ltd. (a Florida limited
partnership) at December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under item 15(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedules are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/PricewaterhouseCoopers LLP
Orlando, Florida
March 24, 2004
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
------------------ ------------------
ASSETS
Real estate properties with operating leases, net $ 8,498,647 $ 8,750,170
Net investment in direct financing leases 276,945 300,064
Real estate held for sale -- 1,917,775
Investment in joint ventures 2,869,536 2,979,763
Cash and cash equivalents 1,338,928 405,155
Receivables, less allowance for doubtful accounts
of $3,214 in 2003 10,207 9,755
Accrued rental income 200,145 215,631
Other assets 15,048 9,597
------------------ ------------------
$ 13,209,456 $ 14,587,910
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 6,595 $ 10,757
Real estate taxes payable 8,829 47,973
Distributions payable 510,475 523,947
Due to related parties 259,296 197,942
Rents paid in advance and deposits 49,454 48,765
------------------ ------------------
Total liabilities 834,649 829,384
Partners' capital 12,374,807 13,758,526
------------------ ------------------
$ 13,209,456 $ 14,587,910
================== ==================
See accompanying notes to financial statements.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
---------------- ---------------- ----------------
Revenues:
Rental income from operating leases $ 1,263,483 $ 1,276,781 $ 1,312,199
Earned income from direct financing leases 30,448 32,779 35,179
Contingent rental income 98,045 78,184 81,550
Lease termination income -- -- 67,073
Interest and other income 1,985 14,215 78,185
---------------- ---------------- ----------------
1,393,961 1,401,959 1,574,186
---------------- ---------------- ----------------
Expenses:
General operating and administrative 213,501 239,580 236,921
Property related 7,001 10,542 42,255
State and other taxes 22,952 14,283 30,350
Depreciation and amortization 251,522 252,439 266,500
Provision for write-down of assets -- -- 178,817
---------------- ---------------- ----------------
494,976 516,844 754,843
---------------- ---------------- ----------------
Income before loss on sale of assets and equity in
earnings of unconsolidated joint ventures 898,985 885,115 819,343
Loss on sale of assets -- -- (120,872 )
Equity in earnings of unconsolidated joint ventures 294,120 315,135 278,224
---------------- ---------------- ----------------
Income from continuing operations 1,193,105 1,200,250 976,695
---------------- ---------------- ----------------
Discontinued operations
Income (loss) from discontinued operations 8,037 (82,805 ) 112,399
Gain on disposal of discontinued operations 107,039 -- --
---------------- ---------------- ----------------
115,076 (82,805 ) 112,399
---------------- ---------------- ----------------
Net income $ 1,308,181 $ 1,117,445 $ 1,089,094
================ ================ ================
Income (loss) per limited partner unit
Continuing operations $ 19.89 $ 20.00 $ 16.28
Discontinued operations 1.91 (1.38 ) 1.87
---------------- ---------------- ----------------
$ 21.80 $ 18.62 $ 18.15
================ ================ ================
Weighted average number of limited
partner units outstanding 60,000 60,000 60,000
================ ================ ================
See accompanying notes to financial statements.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2003, 2002, and 2001
General Partners Limited Partners
----------------------------------- --------------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
---------------- ---------------- ---------------- ---------------- ----------------
Balance, December 31, 2000 $ 557,804 $ 229,547 $ 30,000,000 $ (36,291,711 ) $ 25,740,029
Distributions to limited
partners ($52 per limited
partner unit) -- -- (60,127 ) (3,087,767 ) --
Net income -- -- -- -- 1,089,094
---------------- ---------------- ---------------- ---------------- ----------------
Balance, December 31, 2001 557,804 229,547 29,939,873 (39,379,478 ) 26,829,123
Distributions to limited
partners ($35 per limited
partner unit) -- -- -- (2,095,788 ) --
Net income -- -- -- -- 1,117,445
---------------- ---------------- ---------------- ---------------- ----------------
Balance, December 31, 2002 557,804 229,547 29,939,873 (41,475,266 ) 27,946,568
Distributions to limited
partners ($45 per limited
partner unit) (2,691,900 )
Net income 1,308,181
---------------- ---------------- ---------------- ---------------- ----------------
Balance, December 31, 2003 $ 557,804 $ 229,547 $ 29,939,873 $ (44,167,166 ) $ 29,254,749
================ ================ ================ ================ ================
- -----------------
Syndication
Costs Total
--------------- ----------------
$ (3,440,000 ) $ 16,795,669
-- (3,147,894 )
-- 1,089,094
--------------- ----------------
(3,440,000 ) 14,736,869
-- (2,095,788 )
-- 1,117,445
--------------- ----------------
(3,440,000 ) 13,758,526
(2,691,900 )
1,308,181
--------------- ----------------
$ (3,440,000 ) $ 12,374,807
=============== ================
See accompanying notes to financial statements.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
---------------- ---------------- ----------------
Cash Flows from Operating Activities:
Net income $ 1,308,181 $ 1,117,445 $ 1,089,094
---------------- ---------------- ----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 256,962 306,037 320,213
Amortization 265 2,478 2,363
Provision for doubtful accounts -- 10,792
Provision for write-down of assets 36,000 210,000 178,817
Loss (gain) on sale of assets (107,039 ) -- 120,872
Equity in earnings of joint ventures,
net of distributions 110,227 86,295 89,468
Decrease (increase) in receivables (452 ) 41,804 (17,164 )
Decrease in due from related parties -- 4,531 10,652
Amortization of investment in direct
financing leases 23,119 23,871 15,754
Decrease (increase) in accrued rental
income 15,044 (6,359 ) (18,829 )
Decrease (increase) in other assets (3,649 ) 4,159 1,174
Increase (decrease) in accounts
payable and accrued expenses (4,162 ) 505 (34,818 )
Increase (decrease) in real estate taxes
payable (39,144 ) (681 ) 146
Increase (decrease) in due to related
parties (1,605 ) 7,957 (3,715 )
Increase in rents paid in advance and
deposits 689 15,697 3,833
---------------- ---------------- ----------------
Total adjustments 286,255 696,294 679,558
---------------- ---------------- ----------------
Net cash provided by operating
activities 1,594,436 1,813,739 1,768,652
---------------- ---------------- ----------------
Cash Flows from Investing Activities:
Proceeds from sale of real estate properties 2,044,709 -- 679,894
Liquidating distribution from joint venture -- 41,984 --
Payment of lease costs -- -- (21,250 )
---------------- ---------------- ----------------
Net cash provided by investing activities 2,044,709 41,984 658,644
---------------- ---------------- ----------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,705,372 ) (2,095,788 ) (3,148,947 )
---------------- ---------------- ----------------
Net cash used in financing activities (2,705,372 ) (2,095,788 ) (3,148,947 )
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents 933,773 (240,065 ) (721,651 )
Cash and cash equivalents at beginning of year 405,155 645,220 1,366,871
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 1,338,928 $ 405,155 $ 645,220
================ ================ ================
See accompanying notes to financial statements.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2003 2002 2001
---------------- ---------------- ----------------
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Deferred real estate disposition fees incurred
and unpaid at December 31 $ 62,959 $ -- $ 21,023
================ ================ ================
Distributions declared and unpaid at
December 31 $ 510,475 $ 523,947 $ 523,947
================ ================ ================
See accompanying notes to financial statements.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies
Organization and Nature of Business - CNL Income Fund IV, Ltd. (the
"Partnership") is a Florida limited partnership that was organized for
the purpose of acquiring both newly constructed and existing restaurant
properties, as well as properties upon which restaurants were to be
constructed, which are leased primarily to operators of national and
regional fast-food and family-style restaurant chains.
The general partners of the Partnership are CNL Realty Corporation (the
"Corporate General Partner"), James M. Seneff, Jr. and Robert A.
Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the
Corporate General Partner. The general partners have responsibility for
managing the day-to-day operations of the Partnership.
Real Estate and Lease Accounting - The Partnership records the real
estate property acquisitions at cost. The properties are leased to
third parties generally on a triple-net basis, whereby the tenant is
generally responsible for all operating expenses relating to the
property, including property taxes, insurance, maintenance and repairs.
During the years ended December 31, 2003, 2002 and 2001, tenants paid,
or are expected to pay, directly to real estate taxing authorities
approximately $191,900, $202,200, and $193,800, respectively, in
estimated real estate taxes in accordance with the terms of their
leases.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The Partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using either the
operating or the direct financing method.
Operating method - Real estate property leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce
a constant periodic rent over the lease term commencing on the
date the property is placed in service.
Direct financing method - Leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset). Unearned income is deferred and amortized
to income over the lease terms so as to produce a constant
periodic rate of return on the Partnership's investment in the
leases. For property leases classified as direct financing
leases, the building portions of the majority of property
leases are accounted for as direct financing leases while the
land portions of these leases are accounted for as operating
leases.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
The majority of the leases are for 15 to 20 years and provide for
minimum and contingent rentals. The lease options generally allow
tenants to renew the leases for two to four successive five-year
periods subject to the same terms and conditions of the initial lease.
Most leases also allow the tenant to purchase the property at fair
market value after a specified portion of the lease has elapsed.
When the properties are sold, the related cost and accumulated
depreciation for operating leases and the net investment for direct
financing leases, plus any accrued or deferred rental income, are
removed from the accounts and gains or losses from sales are reflected
in income. The general partners of the Partnership review properties
for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in
value has occurred by comparing the estimated future undiscounted cash
flows, including the residual value of the property, with the carrying
cost of the individual property. If an impairment is indicated, the
assets are adjusted to their estimated fair value.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is recorded to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - The Partnership's investments in Holland
Joint Venture, Cocoa Joint Venture, Auburn Joint Venture, Kingsville
Real Estate Joint Venture, Warren Joint Venture, and properties in
Clinton, North Carolina and Zephyrhills, Florida, held as
tenants-in-common, are accounted for using the equity method since each
joint venture agreement requires the consent of all partners on all key
decisions affecting the operations of the underlying property.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks. Cash equivalents are stated at cost plus
accrued interest, which approximates market value.
Cash accounts maintained on behalf of the Partnership in demand
deposits at commercial banks may exceed federally insured levels;
however, the Partnership has not experienced any losses in such
accounts.
Lease Costs - Other assets include brokerage fees associated with
negotiating leases and are amortized over the terms of the new leases
using the straight-line method.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
Rents Paid in Advance - Rents paid in advance by lessees for future
periods are deferred upon receipt and are recognized as revenues during
the period in which the rental income is earned.
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. The more significant areas requiring
the use of management estimates relate to the allowance for doubtful
accounts and future cash flows associated with long-lived assets.
Actual results could differ from those estimates.
Reclassification - Certain items in the prior year's financial
statements have been reclassified to conform to 2003 presentation,
including a change in presentation of the statement of cash flows from
the direct to the indirect method. These reclassifications had no
effect on partner's capital, net income or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 ("FAS 144") "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement requires that a
long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when
the carrying amount of a long-lived asset exceeds its estimated fair
value. If an impairment is recognized, the adjusted carrying amount of
a long-lived asset is its new cost basis. The statement also requires
that the results of operations of a component of an entity that either
has been disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
FASB Interpretation No. 46 - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and
strengthen existing accounting guidance that addresses when a company
should include the assets, liabilities and activities of another entity
in its financial statements. To improve financial reporting by
companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. In December 2003,
the FASB issued FASB Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46. Under FIN 46R, special effective date
provisions apply to entities that have fully or partially applied FIN
46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
for periods ending after December 15, 2003. Application by public
entities, other than small business issuers, for all other types of
variable interest entities is required in financial statements for
periods ending after March 15, 2004. The Partnership did not fully or
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
partially apply FIN 46 prior to the issuance of FIN 46R. Also, the
Partnership does not have interests in structures commonly referred to
as special-purpose entities. Therefore, application of FIN 46R is
required in the Partnership's financial statements for periods ending
after March 15, 2004. The General Partners believe adoption of this
standard may result in either consolidation or additional disclosure
requirements of the Partnership's unconsolidated joint ventures, which
are currently accounted for under the equity method. However, such
consolidation is not expected to significantly impact the Partnership's
results of operations.
2. Real Estate Properties with Operating Leases
Real estate properties with operating leases consisted of the following
at December 31:
2003 2002
------------------ ------------------
Land $ 4,765,319 $ 4,765,319
Buildings 7,403,747 7,403,747
------------------ ------------------
12,169,066 12,169,066
Less accumulated depreciation (3,670,419 ) (3,418,896 )
------------------ ------------------
$ 8,498,647 $ 8,750,170
================== ==================
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 2003:
2004 $ 1,288,883
2005 1,298,141
2006 1,301,132
2007 1,301,132
2008 1,236,840
Thereafter 1,817,888
------------------
$ 8,244,016
==================
3. Net Investment in Direct Financing Leases
The following lists the components of the net investment in direct
financing leases at December 31:
2003 2002
----------------- -----------------
Minimum lease payments receivable $ 268,831 $ 322,398
Estimated residual values 114,886 114,886
Less unearned income (106,772 ) (137,220 )
----------------- -----------------
Net investment in direct financing
leases $ 276,945 $ 300,064
================= =================
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
3. Net Investment in Direct Financing Leases - Continued
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 2003:
2004 $ 53,568
2005 53,568
2006 53,568
2007 53,568
2008 53,568
Thereafter 991
------------------
$ 268,831
==================
4. Investment in Joint Ventures
As of December 31, 2003, the Partnership had a 51%, 57%, 96.1%, 68.87%,
and 35.71% interest in the profits and losses of Holland Joint Venture,
Cocoa Joint Venture, Auburn Joint Venture, Kingsville Real Estate Joint
Venture and Warren Joint Venture, respectively, and a 53% and 76%
interest in the profits and losses of properties in Clinton, North
Carolina and Zephyrhills, Florida, held as tenants-in-common with
affiliates of the general partners. The remaining interests in these
joint ventures are held by affiliates of the Partnership which have the
same general partners. Holland Joint Venture, Cocoa Joint Venture,
Auburn Joint Venture, Kingsville Real Estate Joint Venture, Warren
Joint Venture and the Partnership and affiliates, as tenants-in-common,
each owns one property.
In December 2003, Holland Joint Venture, in which the Partnership owns
a 51% interest, entered into negotiations with a third party to sell
the property in Holland, Michigan. As a result, the joint venture
reclassified the assets relating to this property from land and
building on operating leases to real estate held for sale. The property
was recorded at the lower of its carrying amount or fair value less
cost to sell. In addition, the joint venture stopped recording
depreciation upon identifying the property as held for sale. The
financial results for this property are reflected as Discontinued
Operations in the condensed financial information presented below.
During the year ended December 31, 2003, Kingsville Real Estate Joint
Venture recorded a provision for write-down of assets in the amount of
$30,800, relating to its property in Kingsville, Texas because the
tenant of the property did not exercise its option to renew its lease.
The lease expired in January 2004. The provision represented the
difference between the carrying value of the Property at December 31,
2003 and its estimated fair value.
The following presents the combined, condensed financial information
for the joint ventures and the properties held as tenants-in-common
with affiliates at:
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
4. Investment in Joint Ventures - Continued
December 31,
2003 2002
----------------- ----------------
Real estate properties with operating $ 3,574,362 $ 3,691,298
leases, net
Net investment in direct financing leases 303,858 325,247
Real estate held for sale 768,120 794,554
Cash 50,783 19,781
Receivables 27,303 33,692
Accrued rental income 65,326 70,528
Other assets -- 170
Liabilities 41,229 11,554
Partners' capital 4,748,523 4,923,716
Year Ended December 31,
2003 2002 2001
--------------- -------------- --------------
Revenues $ 501,756 $ 509,590 $ 493,708
Expenses (89,195 ) (102,516 ) (124,828 )
Provision for write-down of assets (30,800 ) -- (73,750 )
Gain on disposal of assets -- 4,901 --
--------------- -------------- --------------
Income from continuing operations 381,761 411,975 295,130
--------------- -------------- --------------
Discontinued operations:
Revenues 120,744 120,248 120,248
Expenses (26,425 ) (26,867 ) (27,937 )
--------------- -------------- --------------
94,319 93,381 92,311
--------------- -------------- --------------
Net income $ 476,080 $ 505,356 $ 387,441
=============== ============== ==============
The Partnership recognized income totaling $294,120, $315,135 and
$278,224 for the years ended December 31, 2003, 2002 and 2001,
respectively, from these joint ventures.
5. Discontinued Operations
In February 2003, the Partnership sold the property in Portland,
Indiana and received net sales proceeds of approximately $776,100,
resulting in a gain on disposal of assets of $129,403. In connection
with the sale, the Partnership incurred a deferred, subordinated, real
estate disposition fee of $23,959.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
5. Discontinued Operations - Continued
In March 2003, the Partnership sold the property in Richmond, Virginia
and received net sales proceeds of approximately $922,700, resulting in
a loss on disposal of assets of $22,364. The Partnership had recorded a
provision for write-down of assets relating to this property in the
previous year in anticipation of the sale of the property. In
connection with the sale, the Partnership incurred a deferred,
subordinated, real estate disposition fee of $28,500.
In July 2003, the Partnership sold the property in Maywood, Illinois to
the tenant and received net sales proceeds of approximately $346,000.
Because the Partnership recorded a provision for write-down of assets
of $36,000 during the year ended December 31, 2003, no gain or loss on
disposal of assets was recognized relating to this sale. The provision
represented the difference between the carrying value of the property
and its estimated fair value. In connection with the sale, the
Partnership recorded a deferred, subordinated, real estate disposition
fee of $10,500.
The financial results for these properties are reflected as
Discontinued Operations in the accompanying financial statements. The
operating results of discontinued operations are as follows:
Year Ended December 31,
2003 2002 2001
----------------- ----------------- -------------------
Rental revenues $ 55,270 $ 206,340 $ 194,778
Other income 228 1,225 122
Expenses (11,461 ) (80,370 ) (82,501 )
Provisions for write-down of assets (36,000 ) (210,000 ) --
------------------ ----------------- ------------------
Income(loss) from discontinued
Operations $ 8,037 $ (82,805 ) $ 112,399
================== ================= ===================
6. Allocations and Distributions
From inception through December 31, 1999, generally, all net income and
net losses of the Partnership, excluding gains and losses from the sale
of properties, were allocated 99% to the limited partners and one
percent to the general partners. From inception through December 31,
1999, distributions of net cash flow were made 99% to the limited
partners and one percent to the general partners. However, the one
percent of net cash flow to be distributed to the general partners was
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").
From inception through December 31, 1999, generally, net sales proceeds
from the sale of properties not in liquidation of the Partnership, to
the extent distributed, were distributed first to the limited partners
in an amount sufficient to provide them with their 10% Preferred
Return, plus the return of their adjusted capital contributions. The
general partners then received, to the extent previously subordinated
and unpaid, a one percent interest in all prior distributions of net
cash flow and a return of their capital contributions. Any remaining
sales proceeds were distributed 95% to the limited partners and five
percent to the general partners.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
6. Allocations and Distributions - Continued
Any gain from the sale of a property not in liquidation of the
Partnership was, in general, allocated in the same manner as net sales
proceeds are distributable. Any loss from the sale of a property not in
liquidation of the Partnership was, in general, allocated first, on a
pro rata basis, to partners with positive balances in their capital
accounts, and thereafter, 95% to the limited partners and five percent
to the general partners.
Generally, net sales proceeds from a liquidating sale of properties,
will be used in the following order: (i) first to pay and discharge all
of the Partnership's liabilities to creditors, (ii) second, to
establish reserves that may be deemed necessary for any anticipated or
unforeseen liabilities or obligations of the Partnership, (iii) third,
to pay all of the Partnership's liabilities, if any, to the general and
limited partners, (iv) fourth, after allocations of net income, gains
and/or losses, to distribute to the partners with positive capital
accounts balances, in proportion to such balances, up to amounts
sufficient to reduce such positive balances to zero, and (v)
thereafter, any funds remaining shall then be distributed 95% to the
limited partners and five percent to the general partners.
Effective January 1, 2000, the general partners waived their right to
receive future distributions from the Partnership, including both
distributions of operating cash flow and distributions of liquidation
proceeds, to the extent that the cumulative amount of such
distributions would exceed the balance in the general partners' capital
account as of December 31, 1999. Accordingly, for years commencing
January 1, 2000 and after, the Partnership's net income will be
allocated entirely among the limited partners. However, if losses are
allocated to the general partners in a year, an amount of income equal
to the sum of such losses may be allocated to the general partners in
succeeding years. Accordingly, the general partners were not allocated
any net income and did not receive any distributions during the years
ended December 31, 2003, 2002 and 2001.
During each of the years ended December 31, 2003, 2002 and 2001, the
Partnership declared distributions to the limited partners of
$2,691,900, $2,095,788 and $3,147,894, respectively. Distributions for
the year ended December 31, 2003 and 2001 included $650,000 and
$1,050,000, respectively, in special distributions, as a result of the
distributions of net sales proceeds from the sale of several
properties. These special distributions, in 2003 and 2001, were
effectively a return of a portion of the limited partners' investment,
although, in accordance with the Partnership agreement, $650,000 and
$989,873 respectively, was applied toward the limited partners' 10%
Preferred Return. The balance of $60,127, remaining from the 2001
special distribution, was treated as a return of capital for purposes
of calculating the limited partners 10% Preferred Return. As a result
of the return of capital, the amount of the limited partners' invested
capital contributions (which generally is the limited partners' capital
contributions, less distributions from the sale of a property that are
considered to be a return of capital) was decreased; therefore, the
amount of the limited partners' invested capital contributions on which
the 10% Preferred Return is calculated was lowered accordingly. No
distributions have been made to the general partners to date.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
7. Income Taxes
The following is a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes for the years
ended December 31:
2003 2002 2001
------------- ------------- -------------
Net income for financial reporting
purposes $ 1,308,181 $ 1,117,445 $ 1,089,094
Effect of timing differences relating to
depreciation (4,831 ) 11,954 6,102
Provision for write-down of assets 36,000 210,000 178,817
Direct financing leases recorded as
operating leases for tax reporting
purposes 23,120 23,871 15,754
Effect of timing differences relating to
gains/losses on real estate property sales (27,853 ) -- (576,193 )
Effect of timing differences relating to
equity in earnings of joint ventures 58,600 (128,173 ) 20,451
Effect of timing differences relating to
allowance for doubtful accounts 3,215 -- (301,517 )
Accrued rental income 15,044 (6,359 ) (18,829 )
Rents paid in advance 10,527 15,697 (1,772 )
Other (235 ) -- --
------------- ------------- -------------
Net income for federal income tax
purposes $ 1,421,768 $ 1,244,435 $ 411,907
============= ============= =============
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
8. Related Party Transactions
One of the individual general partners, James M. Seneff, Jr., is one of
the principal shareholders of CNL Holdings, Inc. The other individual
general partner, Robert A. Bourne, serves as President and Treasurer of
CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings,
Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL Restaurant
Properties, Inc. (formerly known as CNL American Properties Fund,
Inc.), served as the Partnership's advisor until January 1, 2002, when
it assigned its rights and obligations under a management agreement to
RAI Restaurants, Inc. (the "Advisor"). The Advisor is a wholly owned
subsidiary of CNL Restaurant Properties, Inc. ("CNL-RP") The individual
general partners are stockholders and directors of CNL-RP.
The Advisor provides services pursuant to a management agreement with
the Partnership. In connection therewith, the Partnership agreed to pay
the Advisor an annual, noncumulative, subordinated management fee of
one percent of the sum of gross revenues from properties wholly owned
by the Partnership and the Partnership's allocable share of gross
revenues from joint ventures, but not in excess of competitive fees for
comparable services. These fees are payable only after the limited
partners receive their 10% Preferred Return. Due to the fact that these
fees are noncumulative, if the limited partners have not received their
10% Preferred Return in any particular year, no management fees will be
due or payable for such year. As a result of such threshold, no
management fees were incurred during the years ended December 31, 2003,
2002 and 2001.
The Advisor is also entitled to receive a deferred, subordinated, real
estate disposition fee, payable upon the sale of one or more properties
based on the lesser of one-half of a competitive real estate commission
or three percent of the sales price if the Advisor provides a
substantial amount of services in connection with the sale. However, if
the net sales proceeds are reinvested in a replacement property, no
such real estate disposition fees will be incurred until such
replacement property is sold and the net sales proceeds are
distributed. The payment of the real estate disposition fee is
subordinated to the receipt by the limited partners of their aggregate
10% Preferred Return, plus their adjusted capital contributions. For
the years ended December 31, 2003 and 2001, the Partnership incurred
$62,959 and $21,023, respectively, in deferred, subordinated, real
estate disposition fees as a result of the sales of properties. No
deferred, subordinated, real estate disposition fees were incurred for
the year ended December 31, 2002.
During the years ended December 31, 2003, 2002 and 2001, the
Partnership's advisor and its affiliates provided accounting and
administrative services. The Partnership incurred $123,859, $159,198
and $152,529 for the years ended December 31, 2003, 2002 and 2001,
respectively, for such services.
The due to related parties consisted of the following at December 31:
2003 2002
-------------- --------------
Accounting and administrative services $ 11,193 $ 12,798
Deferred, subordinated real estate
disposition fee 248,103 185,144
-------------- --------------
$ 259,296 $ 197,942
============== ==============
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
9. Concentration of Credit Risk
The following schedule presents total rental revenues from individual
lessees, each representing more than ten percent of rental revenues
(including the Partnership's share of total rental revenues from the
joint ventures and the properties held as tenants-in-common with
affiliates of the General Partners), for each of the years ended
December 31:
2003 2002 2001
----------- ------------ ------------
Shoney's, Inc. $ 218,202 $ 284,611 $279,529
Tampa Foods, L.P. 203,771 207,354 203,277
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than ten percent
of rental revenues (including the Partnership's share of total rental
revenues from the joint ventures and the properties held as
tenants-in-common with affiliates of the General Partners), for each of
the years ended December 31:
2003 2002 2001
-------------- -------------- -------------
Wendy's Old Fashioned
Hamburger Restaurants $ 349,805 $ 329,268 $ 330,682
Denny's 235,146 241,596 127,024
Pizza Hut 193,002 N/A 212,266
Shoney's N/A 237,036 232,325
The information denoted by N/A indicates that for the period presented,
the chain did not represent more than ten percent of the Partnership's
rental revenues.
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 of these lessees or
restaurant chains will significantly impact the results of operations
of the Partnership.
10. Selected Quarterly Financial Data
The following table presents selected unaudited quarterly financial
data for each full quarter during the years ended December 31, 2003 and
2002:
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data - Continued
2003 Quarter First Second Third Fourth Year
- ---------------------------------- ----------- ----------- ------------ ------------ --------------
Continuing operations (1):
Revenues $338,499 $336,122 $342,619 $376,721 $ 1,393,961
Equity in earnings of
unconsolidated joint
ventures 76,633 78,051 74,723 64,713 294,120
Income from continuing
operations 261,573 295,350 301,275 334,907 1,193,105
Discontinued operations (1)(2):
Revenues 44,315 9,589 8,415 (6,821 ) 55,498
Income from and gain on
disposal of discontinued
operations 101,115 7,252 6,616 93 115,076
Net income 362,688 302,602 307,891 335,000 1,308,181
Income per limited partner unit:
Continuing operations $ 4.36 $ 4.92 $ 5.02 $ 5.59 $ 19.89
Discontinued operations 1.68 0.12 0.11 -- 1.91
----------- ----------- ------------ ------------ --------------
$ 6.04 $ 5.04 $ 5.13 $ 5.59 $ 21.80
=========== =========== ============ ============ ==============
2002 Quarter First Second Third Fourth Year
----------------------------------- ----------- ---------- ----------- ------------ --------------
Continuing operations (1):
Revenues $352,932 $333,331 $363,957 $ 351,739 $1,401,959
Equity in earnings of
unconsolidated joint
ventures 71,923 80,011 75,218 87,983 315,135
Income from continuing
operations 277,235 279,486 319,477 324,052 1,200,250
Discontinued operations (1)(2):
Revenues 52,970 52,971 54,196 47,428 207,565
Income (loss) from and gain
on the disposal of
discontinued operations 38,169 32,631 32,849 (186,454 ) (82,805 )
Net income 315,404 312,117 352,326 137,598 1,117,445
Income (loss) per limited partner
unit:
Continuing operations $ 4.62 $ 4.66 $ 5.32 $ 5.40 $ 20.00
Discontinued operations 0.64 0.54 0.55 (3.11 ) (1.38 )
----------- ---------- ----------- ------------ --------------
$ 5.26 $ 5.20 $ 5.87 $ 2.29 $ 18.62
=========== ========== =========== ============ ==============
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
10. Selected Quarterly Financial Data - Continued
(1) Certain items in the quarterly financial data have been
reclassified to conform to the 2003 presentation. This
reclassification had no effect on net income. The results of
operations relating to properties that were identified for sale as
of December 31, 2001 but sold subsequently are reported as
continuing operations. The results of operations relating to
properties that were either identified for sale and disposed of
subsequent to January 1, 2002 or were classified as held for sale
as of December 31, 2003 are reported as discontinued operations
for all periods presented.
(2) In December 2002, the Partnership recorded a provision for
write-down of assets of $173,000 relating to the property in
Maywood, Illinois since the two tenants of this Property were not
expected to exercise their option to renew their leases. An
additional $36,000 was recorded as a provision for write-down of
assets in 2003 in anticipation of the sale of this property. Also,
in December 2002, the Partnership recorded a provision for
write-down of assets of $37,000 relating to the property in
Richmond, Virginia in anticipation of the sale of this property.
The provisions represented the difference between the carrying
values of the properties and their estimated fair values. Both of
these properties were sold during 2003.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A.Controls and Procedures
The General Partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The principal executive
and financial officers of the corporate general partner have evaluated the
Partnership's disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K and have determined that such
disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert
A. Bourne and CNL Realty Corporation, a Florida corporation. The General
Partners manage and control the Partnership's affairs and have general
responsibility and the ultimate authority in all matters affecting the
Partnership's business. The Partnership has available to it the services,
personnel and experience of CNL-RP, CCM, CNL Financial Group, Inc. and their
affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 57. Since 1971, Mr. Seneff has been active in
the acquisition, development, and management of real estate projects and,
directly or through an affiliated entity, has served as a general partner or
co-venturer in over 100 real estate ventures. These ventures have involved the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has
served as Director and Chairman of the Board of CNL-RP, a public, unlisted real
estate investment trust since 1994. Mr. Seneff served as Chief Executive Officer
of CNL-RP from 1994 through August 1999 and as Co-Chief Executive Officer from
December 2000 through September 2003. Mr. Seneff served as Chairman of the Board
and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the
Partnership's advisor, from its inception in 1990 until it merged with a
wholly-owned subsidiary of CNL-RP in September 1999, and in June 2000, was
re-elected to those positions of CNL Fund Advisors, Inc. CNL Fund Advisors,
Inc., formerly CNL Institutional Advisors, Inc., is a registered investment
advisor. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent
company of CNL Financial Group, Inc., a diversified real estate company, and has
served as a Director, Chairman of the Board and Chief Executive Officer of CNL
Financial Group, Inc. since 1973. CNL Financial Group, Inc. is and is the parent
company, either directly or indirectly through subsidiaries, of CNL Real Estate
Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL
Securities Corp., all of which are engaged in the business of real estate
finance. Mr. Seneff also serves as a Director and Chairman of the Board of CNL
Hospitality Properties, Inc., a public, unlisted real estate investment trust;
and served as Chief Executive Officer of CNL Hospitality Properties, Inc. from
its inception in 1997 until 2003 and served as Co-Chief Executive Officer from
February 2003 until May 1, 2003. Mr. Seneff has served as Chairman of the Board
of CNL Hospitality Corp., the advisor to CNL Hospitality Properties, Inc., since
its inception in 1997. Mr. Seneff also served as Chief Executive Officer from
its inception in 1997 through February 2003, and currently serves as Co-Chief
Executive Officer of CNL Hospitality Corp. Mr. Seneff has served as Director and
Chairman of the Board of CNL Retirement Corp. since 1997 and served as Chief
Executive Officer of CNL Retirement Corp. from 1997 through 2003. CNL Retirement
Corp. is the advisor to CNL Retirement Properties, Inc., a public, unlisted real
estate investment trust. Mr. Seneff has also served as Director and Chairman of
the Board of Commercial Net Lease Realty, Inc., a public real estate investment
trust that is listed on the New York Stock Exchange, since 1992 and served as
Chief Executive Officer of Commercial Net Lease Realty, Inc. from 1992 through
February 2004. Mr. Seneff Has served as a Director, Chairman of the Board, and
Chief Executive Officer of CNL Securities Corp. since its formation in 1979; CNL
Investment Company since 1990; and CNL Institutional Advisors, Inc., a
registered investment advisor for pension plans, since 1990. Mr. Seneff has
served as Chairman of the Board and Chief Executive Officer of CNL Commercial
Finance, Inc. since 2000. Mr. Seneff also serves as Chairman of the Board of
CNLBank, an independent, state-chartered commercial bank. Mr. Seneff previously
served on the Florida State Commission on Ethics and is a former member and past
Chairman of the State of Florida Investment Advisory Council, which recommends
to the Florida Board of Administration investments for various Florida employee
retirement funds. The Florida Board of Administration, Florida's principal
investment advisory and money management agency, oversees the investment of the
Florida state retirement plan. Mr. Seneff received his degree in Business
Administration from Florida State University in 1968.
Robert A. Bourne, age 56. Mr. Bourne has participated as a general
partner or co-venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Bourne has
served as a Director and Vice Chairman of the Board of CNL-RP since 1994. Mr.
Bourne also served as President of CNL-RP from 1994 through February 1999 and
served as Treasurer from February 1999 through August 1999 and from May 1994
through December 1994. Mr. Bourne served in various executive positions with CNL
Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of CNL-RP
including, President from 1994 through September 1997, and Director from 1994
through August 1999. Mr. Bourne serves as President and Treasurer of CNL
Financial Group, Inc. Mr. Bourne serves as Director, Vice Chairman of the Board
and Treasurer and from 1997 until June 2002 served as President of CNL
Hospitality Properties, Inc. and as Director, President and Treasurer of CNL
Hospitality Corp. Mr. Bourne also serves as Director and Treasurer of CNL
Retirement Properties, Inc. and as Director and Treasurer of CNL Retirement
Corp. Mr. Bourne serves as a Director of CNLBank. Mr. Bourne has also served as
a Director since 1992, Vice Chairman of the Board since February 1996, Secretary
and Treasurer from February 1996 through 1997, and President from July 1992
through February 1996, of Commercial Net Lease Realty, Inc. Mr. Bourne serves as
Director, President and Treasurer for various affiliates of CNL Financial Group,
Inc. including, CNL Investment Company, CNL Securities Corp. and CNL
Institutional Advisors, Inc. Mr. Bourne began his career as a certified public
accountant employed by Coopers & Lybrand, Certified Public Accountants, from
1971 through 1978, where he attained the position of Tax Manager in 1975. Mr.
Bourne graduated from Florida State University in 1970 where he received a B.A.
in Accounting, with honors.
Curtis B. McWilliams, age 48. Mr. McWilliams has served as President of
CNL-RP since May 2001 and as Chief Executive Officer of CNL-RP since September
2003. Mr. McWilliams served as Co-Chief Executive Officer of CNL-RP from
December 2000 through September 2003 and served as Chief Executive Officer from
September 1999 through December 2000. Mr. McWilliams also served as President
and Chief Executive Officer of CNL Franchise Network Corp., a wholly owned
subsidiary of CNL-RP since August 2002 and served as President of CNL-RP from
February 1999 until September 1999 and as Executive Vice President of CNL-RP
from 1997 through February 1999. Mr. McWillimas served as an Executive Vice
President of CNL Financial Group, Inc. from the time he joined the company in
April 1997 until September 1999. Mr. McWilliams served as President of CNL Fund
Advisors, Inc. and CNL Financial Services, Inc., a corporation engaged in the
business of real estate financing, from April 1997 until the acquisition of such
entities by wholly owned subsidiaries of CNL-RP in September 1999. From
September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch
& Co. The majority of his career at Merrill Lynch & Co. was in the Investment
Banking division where he served as a Managing Director. Mr. McWilliams received
a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master
of Business Administration degree with a concentration in finance from the
University of Chicago in 1983.
Steven D. Shackelford, age 40. Mr. Shackelford was promoted to
Executive Vice President and Chief Operating Officer of CNL-RP in September
2003. Mr. Shackelford has also served as Chief Financial Officer since January
1997. He served as Senior Vice President of CNL-RP from January 1997 through
July 2000, when he was promoted to Executive Vice President. Mr. Shackelford has
also served as Secretary and Treasurer of CNL-RP since September 1999. He also
served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996
to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior
manager in the national office of Price Waterhouse LLP where he was responsible
for advising foreign clients seeking to raise capital and a public listing in
the United States. From August 1992 to March 1995, he was a manager in the
Paris, France office of Price Waterhouse, serving several multi-national
clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the
Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor
of Arts degree in Accounting, with honors, and a Master of Business
Administration degree from Florida State University and is a certified public
accountant.
Thomas Arasi, age 46. Mr. Arasi has served as President of CCM since it
was formed in July 2003 to provide strategic advisory services to the General
Partners. He has served in various consulting capacities to CNL Hospitality Corp
and other CNL affiliates since January 2003. Since November 2001 he has been an
independent consultant working for a variety of operating and investment
companies in the hospitality industry. Until October 2001, Mr. Arasi was
President & Chief Executive Officer, and a member of the Board of Directors of
Lodgian, Inc., a New York Stock Exchange traded company, one of the largest
independent hotel owner/operators in North America, with hotel properties under
most brand names including Marriott, Courtyard by Marriott, Fairfield Inn by
Marriott, Crowne Plaza, Holiday Inn, Hilton, and Radisson. From June 1997
through November 2000, Mr. Arasi was a member of the Management Committee and
held several top operating positions with Bass Hotels & Resorts, one of the
leading international owners, operators and franchisors of hotels, most recently
serving as President, Bass Hotels & Resort--The Americas. Mr. Arasi was formerly
President of Tishman Hotel Corporation, Vice President of Salomon Brothers,
Inc., in New York, Tokyo and Los Angeles and held positions with Sheraton,
Westin and HVS International. Mr. Arasi graduated from Cornell University in
January 1981, where he received a Bachelor's degree in Hotel and Restaurant
Administration.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the General Partners, the
officers of the corporate General Partner, and persons who own more than ten
percent of a registered class of the Partnership's equity securities
(collectively, the "Reporting Persons"), to file reports of ownership and
changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are
required by SEC regulation to furnish the Partnership with copies of all Forms
3, 4 and 5 that they file.
Based solely on the General Partners' review of the copies of such
forms the Partnership has received and written representations from certain
Reporting Persons that they were not required to file Forms 5 for the last
fiscal year, the General Partners believe that all Reporting Persons complied
with all filing requirements applicable to them with respect to transactions
during fiscal 2003.
Code of Business Conduct
The Partnership does not have employees and, accordingly, has not
adopted a code of business conduct applicable exclusively to the Partnership.
However, employees of the General Partners or their affiliates, including the
individual General Partners, are bound by the Code of Business Conduct adopted
November 11, 2003 by CNL Holdings, Inc. Separately, the employees of the Advisor
are bound by the similar Code of Business Conduct adopted by CNL Restaurant
Properties, Inc. Each of these codes of business conduct will be made available
to any person who writes the Partnership requesting a copy.
Audit Committee Financial Expert
Due to its organization as a limited partnership, the Partnership does
not have an audit committee that is responsible for supervising the
Partnership's relationship with its independent auditors. For the Partnership,
this role is performed by the General Partners. Based on his previous service as
the principal financial officer of companies with businesses similar to that of
the Partnership, Robert A. Bourne, one of the General Partners, has the
requisite experience to be considered an "audit committee financial expert" as
defined in the rules under the Securities Exchange Act of 1934, if the
Partnership had an audit committee. As a General Partner, Mr. Bourne is not
independent of the Partnership.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and
does not intend to pay any executive compensation to the General Partners or any
of their affiliates. There are no compensatory plans or arrangements regarding
termination of employment or change of control.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
As of March 12, 2004, no person was known to the Registrant to be a
beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 12, 2004, the beneficial
ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class
General Partnership Interests James M. Seneff, Jr. 45%
Robert A. Bourne 45%
CNL Realty Corporation 10%
--------
100%
========
Neither the General Partners, nor any of their affiliates, owns any
interest in the Registrant, except as noted above.
The Partnership does not have any equity compensation plans.
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of computation
and amounts of compensation, fees and distributions paid or payable by the
Partnership to the General Partners and their affiliates for the year ended
December 31, 2003, exclusive of any distributions to which the General Partners
or their affiliates may be entitled by reason of their purchase and ownership of
Units.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2003
- --------------------------------- -------------------------------------- ------------------------------
Reimbursement to affiliates for Operating expenses are reimbursed at Accounting and
operating expenses the lower of cost or 90% of the administrative services:
prevailing rate at which comparable $123,859
services could have been obtained in
the same geographic area.
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.
Annual, subordinated One percent of the sum of gross $-0-
man-agement fee to affiliates operating 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,
subordinated to certain minimum returns
to the Limited Partners. The management
fee will not exceed competitive fees for
comparable services. Due to the fact that
these fees are non-cumulative, if the
Limited Partners have not received their
10% Preferred Return in any particular
year, no management fees will be due or
payable for such year.
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2003
- --------------------------------- -------------------------------------- ------------------------------
Deferred, subordinated real A deferred, subordinated real estate $62,959
estate disposition fee payable disposition fee, payable upon sale
to affiliates. of one or more Properties, in an
amount equal to the lesser of (i)
one-half of a competitive real estate
commission, or (ii) three percent of the
sales price of such Property or
Properties. Payment of such fee shall be
made only if affiliates of the General
Partners provide a substantial amount of
services in connection with the sale of a
Property or Properties and shall be
subordinated to certain minimum returns
to the Limited Partners. However, if the
net sales proceeds are reinvested in a
replacement Property, no such real estate
disposition fee will be incurred until
such replacement Property is sold and the
net sales proceeds are distributed.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to one percent of Partnership
Partnership net cash flow distributions of net cash flow,
subordinated to certain minimum
returns to the Limited Partners.
General Partners' deferred, A deferred, subordinated share equal $-0-
subordinated share of to five percent of Partnership
Partnership net sales proceeds distributions of such net sales
from a sale or sales not in proceeds, subordinated to certain
liquidation of the Partnership minimum returns to the Limited
Partners
Amount Incurred
Type of Compensation For the Year
and Recipient Method of Computation Ended December 31, 2003
- --------------------------------- -------------------------------------- ------------------------------
General Partners' share of Distributions of net sales proceeds $-0-
Partnership net sales proceeds from a sale or sales of
from a sale or sales in substantially all of the
liquidation of the Partnership Partnership's assets will be
distributed in the following order or
priority: (i) first, to pay all debts and
liabilities of the Partnership and to
establish reserves; (ii) second, to
Partners with positive capital account
balances, determined after the allocation
of net income, net loss, gain and loss,
in proportion to such balances, up to
amounts sufficient to reduce such
balances to zero; and (iii) thereafter,
95% to the Limited Partners and 5% to the
General Partners.
Item 14. Principal Accountant Fees and Services
The following table outlines the only fees paid or accrued by the
Partnership for the audit and other services provided by the Partnership's
independent certified public accountants, PricewaterhouseCoopers LLP, for the
years ended December 31:
2003 2002
------------------- ------------------
Audit Fees (1) $ 10,429 $ 8,200
Tax Fees (2) 6,789 6,727
------------------- ------------------
Total $ 17,218 $ 14,927
=================== ==================
(1) Audit services of PricewaterhouseCoopers LLP for 2003 and 2002
consisted of the examination of the financial statements of the
Partnership and quarterly review of financial statements.
(2) Tax Fees relates to tax consulting and compliance services.
Each of the non-audit services described above was approved by the
General Partners. Due to its organization as a limited partnership, the
Partnership does not have an audit committee.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2003 and 2002
Statements of Income for the years ended December 31, 2003, 2002 and
2001
Statements of Partners' Capital for the years ended December 31, 2003,
2002 and 2001
Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002 and 2001
Schedule III - Real Estate and Accumulated Depreciation at December
31, 2003
Notes to Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2003
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or notes
thereto.
3. Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund IV, Ltd.
(Included as Exhibit 3.1 in Amendment No. 1 to Registration
Statement No. 33-20249 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund IV, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on March 31, 1994, and incorporated herein by
reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund IV, Ltd.
(Included as Exhibit 3.1 in Amendment No. 1 to Registration
Statement No. 33-20249 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund IV, Ltd. (Included as Exhibit
3.2 to Form 10-K filed with the Securities and Exchange
Commission on March 31, 1994, and incorporated herein by
reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1 to Form
10-K filed with the Securities and Exchange Commission on March
31, 1994, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as Exhibit
10.2 to Form 10-K filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated herein by
reference.)
10.3 Assignment of Property Management Agreement from CNL Income
Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as
Exhibit 10.3 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and incorporated herein
by reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors, Inc.
to CNL APF Partners, LP. (Included as Exhibit 10.4 to Form 10-Q
filed with the Securities and Exchange Commission on August 9,
2001, and incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF Partners, LP to
CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form
10-Q filed with the Securities and Exchange Commission on
August 14, 2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
32.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)
(b) The Registrant filed no reports on Form 8-K during the period from October
1, 2003 through December 31, 2003.
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 24th day of
March, 2004.
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.
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 Director March 24, 2004
--------------------------- (Principal Financial and Accounting
Robert A. Bourne (Officer)
/s/ James M. Seneff, Jr. Chief Executive Officer and Director March 24, 2004
--------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002, and 2001
Additions Deductions
--------------------------------- ------------------------------
Collected
or Deter-
Balance at Charged to Charged to Deemed mined to Balance
Beginning Costs and Other Uncollec- be Col- at End
Year Description of Year Expenses Accounts tible lectible of Year
- ---------- ----------------- -------------- --------------- ---------------- ------------- ------------ ------------
2001 Allowance for
doubtful
accounts (a) $ 301,517 $ 10,792 $ 16,339 (b) $ 309,608 (c) $ 19,040 $ --
============== =============== ================ ============= ============ ============
2002 Allowance for
doubtful
accounts (a) $ -- $ -- $ 11,830 (b) $ 11,830 (c) $ -- $ --
============== =============== ================ ============= ============ ============
2003 Allowance for
doubtful
accounts (a) $ -- $ --- $ 3,214 (b) $ -- $ -- $ 3,214
============== =============== ================ ============= ============ ============
(a) Deducted from receivables on the balance sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Costs Capitalized
Subsequent to Net Cost Basis at Which
Initial Cost Acquisition arried at Close of Period (c)
------------------------- -------------------- --------------------------------------
Encum- Buildings and Improve- Carrying Buildings and
brances Land Improvements ments Costs Land Improvements Total
---------- ------------ ----------- ----------- ------- ----------- ------------ -----------
Properties the Partnership
has Invested in Under
Operating Leases:
Arby's Restaurants:
Winchester, Indiana - $287,769 - $567,785 - $287,769 $567,785 $855,554
Captain D's Restaurants:
Alexander City, Alabama - 120,210 279,689 - - 120,210 279,689 399,899
Oak Ridge, Tennessee - 169,951 281,686 - - 169,951 281,686 451,637
Checkers Drive-In Restaurant:
Miami, Florida - 174,336 - - - 174,336 - 174,336
Chipper's Grill Restaurant:
Streator, Illinois - 161,616 650,934 - - 161,616 650,934 812,550
Denny's Restaurants:
Marion, Ohio - 135,407 334,665 - - 135,407 334,665 470,072
Dundee, Michigan - 251,650 - 372,278 - 251,650 372,278 623,928
Golden Corral
Buffet and Grill
Franklin, Indiana - 107,560 586,375 - - 107,560 586,375 693,935
Green Tea Restaurant:
Tampa, Floridaa, Florida - 476,755 368,405 - - 476,755 368,405 845,160
Jack in the Box Restaurant:
San Antonio, Texas - 352,957 - 368,702 - 352,957 368,702 721,659
Pizza Hut Restaurants:
Memphis, Texas - 26,510 231,874 - - 26,510 231,874 258,384
Carthage, Texas - 40,444 232,823 - - 40,444 232,823 273,267
Crystal City, Texas - 8,826 178,570 - - 8,826 178,570 187,396
Sequin, Texas - 63,708 184,279 - - 63,708 184,279 247,987
Washington, D.C. - 191,737 - - - 191,737 (f) 191,737
Shoney's Restaurants:
Alexander City, Alabama - 202,438 428,406 - - 202,438 428,406 630,844
Brookhaven, Mississippi - 312,574 452,601 - - 312,574 452,601 765,175
Auburn, Alabama - 363,432 426,123 - - 363,432 426,123 789,555
Taco Bell Restaurant:
Edgewood, Maryland - 440,355 - 523,478 - 440,355 523,478 963,833
Wendy's Old Fashioned
Hamburger Restaurants:
Mechanicsville, -irginia 346,627 502,117 - - 346,627 502,117 848,744
Tampa, Florida - 530,457 432,957 - - 530,457 432,957 963,414
------------ ----------- ----------- ------- ----------- ------------ -----------
$4,765,319 $5,571,504 $1,832,243 - $4,765,319 $7,403,747 $12,169,066
============ =========== =========== ======= =========== ============ ===========
Properties the Partnership has
Invested in Under Direct
Financing Leases:
Pizza Hut Restaurant:
Washington, D. C. - - $459,543 - - - (f) (f)
============ =========== =========== ======= ===========
Life on Which
Depreciation in
Date Latest Income
Accumulated of Con- Date Statement is
Depreciation struction Acquired Computed
----------- --------- -------- ---------------
$260,263 1988 07/88 (b)
140,075 1988 12/88 (b)
141,094 1988 12/88 (b)
(e) - 06/94 (e)
332,698 1988 08/88 (b)
133,423 1989 10/88 (f)
188,206 1988 10/88 (b)
302,963 1988 06/88 (b)
184,273 1987 12/88 (b)
182,301 1989 11/88 (b)
118,190 1985 09/88 (b)
118,678 1981 09/88 (b)
91,021 1981 09/88 (b)
93,932 1974 09/88 (b)
(d) 1986 01/89 (d)
214,555 1988 12/88 (b)
226,711 1988 12/88 (b)
213,455 1988 12/88 (b)
259,556 1989 10/88 (b)
252,456 1988 12/88 (b)
216,569 1984 12/88 (b)
-----------
$3,670,419
===========
(d) 1986 01/89 (d)
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
(a) Transactions in real estate and accumulated depreciation during 2003,
2002 and 2001 summarized as follows:
Accumulated
Cost Depreciation
---------------- -----------------
Properties the Partnership has Invested in Under
Operating Leases:
Balance, December 31, 2000 $ 13,592,277 $ 3,369,450
Dispositions (1,244,394 ) (464,651 )
Provisions for write-down of assets (178,817 ) --
Depreciation expense -- 264,137
---------------- -----------------
Balance, December 31, 2001 12,169,066 3,168,936
Depreciation expense -- 249,961
---------------- -----------------
Balance, December 31, 2002 12,169,066 3,418,897
Depreciation expense -- 251,522
---------------- -----------------
Balance, December 31, 2003 $ 12,169,066 $ 3,670,419
================ =================
(b) Depreciation expense is computed for buildings and improvements based
upon estimated lives of 30 years.
(c) As of December 31, 2003, the aggregate cost of the Partnership's wholly
owned Properties was $12,651,645 for federal income tax purposes. All
of the leases are treated as operating leases for federal income tax
purposes.
(d) The portion of the lease relating to the building has been recorded as
a direct financing lease. The cost of the building has been included in
the net investment in direct financing leases, therefore, depreciation
is not applicable.
(e) The building portion of this Property is owned by the tenant;
therefore, depreciation is not applicable.
(f) Effective January 1, 1999, the lease for this Property was amended,
resulting in the reclassification of the building portion of the lease
as an operating lease. The building was recorded at net book value as
of January 1, 1999, and depreciated over remaining estimated life of
approximately 19 years.
EXHIBIT INDEX
Exhibit Number
(a) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund IV, Ltd.
(Included as Exhibit 3.1 in Amendment No. 1 to Registration
Statement No. 33-20249 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund IV, Ltd. (Included as Exhibit 3.2
to Form 10-K filed with the Securities and Exchange Commission on
March 31, 1994, and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund IV, Ltd.
(Included as Exhibit 3.1 in Amendment No. 1 to Registration
Statement No. 33-20249 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund IV, Ltd. (Included as Exhibit 3.2
to Form 10-K filed with the Securities and Exchange Commission on
March 31, 1994, and incorporated herein by reference.)
10.1 Property Management Agreement (Included as Exhibit 10.1 to Form
10-K filed with the Securities and Exchange Commission on March
31, 1994, and incorporated herein by reference.)
10.2 Assignment of Property Management Agreement from CNL Investment
Company to CNL Income Fund Advisors, Inc. (Included as Exhibit
10.2 to Form 10-K filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated herein by
reference.)
10.3 Assignment of Property Management Agreement from CNL Income Fund
Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit
10.3 to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein by
reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors, Inc. to
CNL APF Partners, LP. (Included as Exhibit 10.4 to Form 10-Q filed
with the Securities and Exchange Commission on August 9, 2001, and
incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF Partners, LP to
CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form 10-Q
filed with the Securities and Exchange Commission on August 14,
2002, and incorporated herein by reference.)
31.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate General
Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2