FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended September 30, 2004
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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
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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
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ---------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes___ No X
CONTENTS
Page
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Item 4. Controls and Procedures 11
Part II.
Other Information 12-13
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
2004 2003
------------------ -------------------
ASSETS
Real estate properties with operating leases, net $ 9,063,640 $ 9,257,733
Net investment in direct financing leases 543,459 580,803
Real estate held for sale -- 1,078,662
Investment in joint ventures 1,245,035 1,270,319
Cash and cash equivalents 2,289,321 1,367,889
Receivables, less allowance for doubtful accounts
of $3,214 in 2003 12,941 19,510
Accrued rental income 219,248 265,471
Other assets 15,500 15,048
------------------ -------------------
$ 13,389,144 $ 13,855,435
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 57,102 $ 6,963
Real estate taxes payable 25,365 19,419
Distributions payable 510,475 510,475
Due to related parties 280,204 259,296
Rents paid in advance and deposits 76,077 62,018
------------------ -------------------
Total liabilities 949,223 858,171
Minority interests 252,027 622,457
Partners' capital 12,187,894 12,374,807
------------------ -------------------
$ 13,389,144 $ 13,855,435
================== ===================
See accompanying notes to condensed financial statements.
1
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- -------------- ------------- -------------
Revenues:
Rental income from operating leases $ 312,412 $ 340,260 $ 939,754 $ 1,023,796
Earned income from direct financing leases 17,751 19,302 54,460 58,963
Contingent rental income 14,704 18,167 47,402 42,685
Lease termination income -- -- 225,000 --
Interest and other income 114 118 6,840 3,772
------------- -------------- ------------- -------------
344,981 377,847 1,273,456 1,129,216
------------- -------------- ------------- -------------
Expenses:
General operating and administrative 85,730 49,719 227,126 169,706
Property related 14,219 4,402 32,080 8,152
State and other taxes -- -- 23,236 22,952
Depreciation and amortization 64,743 65,148 194,094 195,444
Provision for write-down of assets -- -- 25,153 --
------------- -------------- ------------- -------------
164,692 119,269 501,689 396,254
------------- -------------- ------------- -------------
Income before minority interests and equity in earnings
of unconsolidated joint ventures 180,289 258,578 771,767 732,962
Minority interests (2,778) (7,425) (9,469) (22,562)
Equity in earnings of unconsolidated joint ventures 29,168 28,546 87,213 85,012
------------- -------------- ------------- -------------
Income from continuing operations 206,679 279,699 849,511 795,412
------------- -------------- ------------- -------------
Discontinued operations:
Income from discontinued operations -- 39,616 63,342 105,422
Gain on disposal of discontinued operations -- -- 768,030 107,039
Minority interest -- (11,424) (336,371) (34,692)
------------- -------------- ------------- -------------
-- 28,192 495,001 177,769
------------- -------------- ------------- -------------
Net income $ 206,679 $ 307,891 $ 1,344,512 $ 973,181
============= ============== ============= =============
Income per limited partner unit:
Continuing operations $ 3.44 $ 4.66 $ 14.16 $ 13.26
Discontinued operations -- 0.47 8.25 2.96
------------- -------------- ------------- -------------
$ 3.44 $ 5.13 $ 22.41 $ 16.22
============= ============== ============= =============
Weighted average number of limited partner
units outstanding 60,000 60,000 60,000 60,000
============= ============== ============= =============
See accompanying notes to condensed financial statements.
2
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Nine Months Ended Year Ended
September 30, December 31,
2004 2003
--------------------- ------------------
General partners:
Beginning balance $ 787,351 $ 787,351
Net income -- --
--------------------- ------------------
$ 787,351 $ 787,351
--------------------- ------------------
Limited partners:
Beginning balance 11,587,456 12,971,175
Net income 1,344,512 1,308,181
Distributions ($25.52 and $44.87 per
limited partner unit, respectively) (1,531,425) (2,691,900)
--------------------- ------------------
11,400,543 11,587,456
--------------------- ------------------
Total partners' capital $ 12,187,894 $ 12,374,807
===================== ==================
See accompanying notes to condensed financial statements.
3
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2004 2003
-------------- ---------------
Net cash provided by operating activities $ 1,317,487 $ 1,245,748
-------------- ---------------
Cash flows from investing activities:
Proceeds from sale of assets 1,851,635 2,044,709
-------------- ---------------
Net cash provided by investing activities 1,851,635 2,044,709
-------------- ---------------
Cash flows from financing activities:
Distributions to limited partners (1,531,425) (2,194,897)
Distributions to holders of minority interests (716,265) (73,304)
-------------- ---------------
Net cash used in financing activities (2,247,690) (2,268,201)
-------------- ---------------
Net increase in cash and cash equivalents 921,432 1,022,256
Cash and cash equivalents at beginning of period 1,367,889 421,416
-------------- ---------------
Cash and cash equivalents at end of period $ 2,289,321 $ 1,443,672
============== ===============
Supplemental schedule of non-cash investing and financing activities:
Deferred real estate disposition fee incurred and unpaid at
end of period $ 13,950 $ 62,959
============== ===============
Distributions declared and unpaid at end of period $ 510,475 $ 510,475
============== ===============
See accompanying notes to condensed financial statements.
4
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of the general partners, necessary for a fair
statement of the results for the interim periods presented. Operating
results for the quarter and nine months ended September 30, 2004, may
not be indicative of the results that may be expected for the year
ending December 31, 2004. Amounts as of December 31, 2003, included in
the financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund IV, Ltd. (the "Partnership") for the year ended December
31, 2003.
The Partnership accounts for its 96.10%, interest in Auburn Joint
Venture, its 57% interest in Cocoa Joint Venture, and its 68.87%
interest in Kingsville Real Estate Joint Venture using the
consolidation method. Prior to the liquidation of Holland Joint
Venture, in June 2004, the Partnership accounted for its 51% interest
in the joint venture using the consolidation method. Minority interests
represent the minority joint venture partners' proportionate share of
the equity in the joint ventures. All significant intercompany accounts
and transactions have been eliminated.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January
2003) ("FIN 46R"), "Consolidation of Variable Interest Entities"
requiring existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries. The primary beneficiary of
a variable interest entity is the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected residual
returns, or both, as a result of holding variable interests, which are
the ownership, contractual, or other pecuniary interests in an entity
that change with changes in the fair value of the entity's net assets
excluding variable interests. Prior to FIN 46R, a company generally
included another entity in its financial statements only if it
controlled the entity through voting interests. Application of FIN 46R
is required in financial statements of public entities that have
interests in variable interest entities for periods ending after March
15, 2004. The Partnership adopted FIN 46R during the quarter ended
March 31, 2004, which resulted in the consolidation of previously
unconsolidated joint ventures, which were accounted for under the
equity method. FIN 46R does not require, but does permit restatement of
previously issued financial statements. The Partnership has restated
prior year's financial statements to maintain comparability between the
periods presented. Such consolidation resulted in certain assets and
minority interests, and revenues and expenses, of the entities being
reported on a gross basis in the Partnership's financial statements;
however, these restatements had no effect on partners' capital or net
income.
2. Discontinued Operations
During February 2004, the Partnership identified for sale its property
in Oak Ridge, Tennessee. In April 2004, the Partnership sold this
property to a third party and received net sales proceeds of
approximately $452,000, resulting in a gain on disposal of discontinued
operations of approximately $129,100.
In April 2004, Holland Joint Venture, in which the Partnership owned a
51% interest and accounted for under the consolidation method, entered
into an agreement with a third party to sell its property in Holland,
Michigan. In June 2004, the joint venture sold this property and
received net sales proceeds of approximately $1,399,600, resulting in a
gain on disposal of discontinued operations of approximately
5
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
2. Discontinued Operations - Continued
$638,900. As a result of the sale, the joint venture was dissolved, and
approximately $671,200 was paid to the minority interest holder,
representing its pro-rata share of the liquidating distribution.
The following presents the operating results of the discontinued
operations for these properties, along with the properties in Portland,
Indiana, Richmond, Virginia and Maywood, Illinois that were sold in
February, March, and July 2003, respectively.
Quarter Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------- -------------- -------------- ----------------
Rental revenues $ -- $ 50,139 $ 71,871 $ 187,128
Expenses -- (10,523) (8,529) (45,706)
Provision for
write-down of assets -- -- -- (36,000)
-------------- -------------- -------------- ----------------
Income from
discontinued operations $ -- $ 39,616 $ 63,342 $ 105,422
============== ============== ============== ================
3. Concentration of Credit Risk
The following schedule presents total rental revenues from individual
lessees, each representing more than 10% of the Partnership's total
rental revenues (including total rental revenues from consolidated
joint ventures and the Partnership's share of total rental revenues
from unconsolidated joint ventures and properties held as
tenants-in-common with affiliates of the general partners) for each of
the nine months ended September 30:
2004 2003
-------------- --------------
Shoney's, Inc. $ 168,742 $ 161,961
Denny's, Inc. 159,564 N/A
Tampa Food, LP N/A 154,259
In addition, the following schedule presents total rental revenues from
individual restaurant chains, each representing more than 10% of the
Partnership's total rental revenues (including total rental revenues
from the consolidated joint ventures and the Partnership's share of
total rental revenues from unconsolidated joint ventures and properties
held as tenants-in-common with affiliates of the general partners) for
each of the nine months ended September 30:
2004 2003
-------------- --------------
Wendy's $ 189,306 $ 264,583
Denny's 161,405 226,685
Pizza Hut 122,895 N/A
Shoney's N/A 161,961
6
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2004 and 2003
3. Concentration of Credit Risk - Continued
The information denoted by N/A indicates that for each period
presented, the tenant or group of affiliated tenants, the chain did not
represent more than ten percent of the Partnership's total rental
revenues.
Although the properties have some geographical diversity in the United
States and the lessees operate a variety of restaurant concepts,
default by any of these lessees or restaurant chains will significantly
impact the results of operations if the Partnership is not able to
re-lease the properties in a timely manner.
4. Related Party Transactions
An affiliate of the Partnership is 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
affiliate 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 fee 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 receipt by the limited partners of their
aggregate 10% preferred return, plus their adjusted capital
contributions. During the nine months ended September 30, 2004 and
2003, the Partnership incurred deferred, subordinated real estate
disposition fees of $13,950 and $62,959, respectively, as a result of
the sale of one and three properties during each period, respectively.
5. Merger Transaction
On August 9, 2004, the Partnership entered into a definitive Agreement
and Plan of Merger pursuant to which the Partnership will be merged
with a subsidiary of U.S. Restaurant Properties, Inc. (NYSE: USV). The
merger is one of multiple concurrent transactions pursuant to which 17
other affiliated limited partnerships also will be merged with a
subsidiary of U.S. Restaurant Properties, Inc. and in which CNL
Restaurant Properties, Inc., an affiliate, also will be merged with
U.S. Restaurant Properties, Inc. CNL Restaurant Properties, Inc.
currently provides property management and other services to the
Partnership. The merger of the Partnership (and each of the 17 other
affiliated mergers) is subject to certain conditions including approval
by a majority of the limited partners, consummation of a minimum number
of limited partnership mergers representing at least 75.0% in value (as
measured by the value of the merger consideration) of all limited
partnerships, consummation of the merger between U.S. Restaurant
Properties, Inc. and CNL Restaurant Properties, Inc., approval of the
shareholders of U.S. Restaurant Properties, Inc., and availability of
financing. The transaction is expected to be consummated in the first
quarter of 2005.
Under the terms of the merger agreement, if the transaction is
approved, the limited partners will receive total consideration of
approximately $16.02 million, consisting of approximately $13.40
million in cash and approximately $2.62 million in U.S. Restaurant
Properties, Inc. Series A Convertible Preferred Stock that is listed on
the New York Stock Exchange. The general partners will receive total
consideration of approximately $622,000 consisting of approximately
$520,000 in cash and approximately $102,000 in preferred stock.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund IV, Ltd. (the "Partnership," which may be referred to
as "we," "us," or "our") is a Florida limited partnership that 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 restaurants were to be constructed, which are leased
primarily to operators of national and regional fast-food and family-style
restaurant chains (collectively, the "Properties"). The leases generally are
triple-net leases, with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities. As of September 30, 2004 and 2003, the
Partnership owned 20 and 21 Properties directly, respectively. As of September
30, 2004 and 2003, the Partnership also owned six and seven Properties
indirectly, respectively, through joint venture or tenancy in common
arrangements.
Merger Transaction
The general partners believe their primary objective is to maintain
current operations with restaurant operators as successfully as possible, while
evaluating strategic alternatives, including alternatives that may provide
liquidity to the limited partners. Real estate markets are strong throughout
much of the nation, and the performance of restaurants has generally improved
after several challenging years. As a result, the general partners believe that
this is an attractive period for a strategic event to monetize the interests of
the limited partners.
In furtherance of this, on August 9, 2004, we entered into a definitive
Agreement and Plan of Merger pursuant to which we will be merged with a
subsidiary of U.S. Restaurant Properties, Inc. (NYSE: USV). The merger is one of
multiple concurrent transactions pursuant to which 17 other affiliated limited
partnerships also will be merged with a subsidiary of U.S. Restaurant
Properties, Inc. and in which CNL Restaurant Properties, Inc., an affiliate,
also will be merged with U.S. Restaurant Properties, Inc. Our merger (and each
of the 17 other affiliated mergers) is subject to certain conditions including
approval by a majority of the limited partners, consummation of a minimum number
of limited partnership mergers representing at least 75.0% in value (as measured
by the value of the merger consideration) of all limited partnerships,
consummation of the merger between U. S. Restaurant Properties, Inc. and CNL
Restaurant Properties, Inc., approval of the shareholders of U.S. Restaurant
Properties, Inc., and availability of financing. U.S. Restaurant Properties,
Inc. is a real estate investment trust (REIT) that focuses primarily on
acquiring, owning and leasing restaurant properties. The transaction is expected
to be consummated in the first quarter of 2005.
Under the terms of the merger agreement, if the transaction is
approved, our limited partners will receive total consideration of approximately
$16.02 million, consisting of approximately $13.40 million in cash and
approximately $2.62 million in U.S. Restaurant Properties, Inc. Series A
Convertible Preferred Stock that is listed on the New York Stock Exchange. The
general partners will receive total consideration of approximately $622,000
consisting of approximately $520,000 in cash and approximately $102,000 in
preferred stock.
We received an opinion from Wachovia Capital Markets, LLC that as of
August 9, 2004 the merger consideration to be received by the holders of our
general and limited partnership interests is fair, from a financial point of
view, to such holders.
As reflected above, the contemplated transactions are complex, and
contingent upon certain conditions. The restaurant marketplace, the real estate
industry, and the equities markets, all individually or taken as a whole, could
impact the economics of this transaction. As a result, there is no assurance
that we will be successful in completing the contemplated transaction.
Capital Resources
Net cash provided by operating activities was $1,317,487 and
$1,245,748, during the nine months ended September 30, 2004, and 2003,
respectively.
8
In April 2004, we sold the Property in Oak Ridge, Tennessee and
received net sales proceeds of approximately $452,000, resulting in a gain on
disposal of discontinued operations of approximately $129,100. In connection
with the sale, we incurred a deferred, subordinated, real estate disposition fee
of $13,950. Payment of the real estate disposition fee is subordinated to
receipt by the limited partners of their aggregate, cumulative 10% preferred
return, plus their adjusted capital contributions. We intend to use the sales
proceeds to pay liabilities.
In June 2004, Holland Joint Venture, in which we owned a 51% interest
and accounted for under the consolidation method, sold the Property in Holland,
Michigan and received net sales proceeds of approximately $1,399,600, resulting
in a gain on disposal of discontinued operations of approximately $638,900. As a
result of the sale of the Property, the joint venture was dissolved, and
$671,200 was paid to the minority interest holder, representing its pro-rata
share of the liquidating distribution. We intend to use the remaining sales
proceeds to pay liabilities.
At September 30, 2004, we had $2,289,321 in cash and cash equivalents,
as compared to $1,367,889 at December 31, 2003. At September 30, 2004, these
funds were held in demand deposit accounts at a commercial bank. The increase
was primarily a result of holding sales proceeds. The funds remaining at
September 30, 2004, after the payment of distributions and other liabilities,
will be used to meet our working capital needs.
Short-Term Liquidity
Our investment strategy of acquiring Properties for cash and leasing
them under triple-net leases to operators who meet specified financial standards
minimizes our operating expenses. The general partners believe that the leases
will generate net cash flow in excess of operating expenses.
Our short-term liquidity requirements consist primarily of our
operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
our operations.
We generally distribute cash from operations remaining after the
payment of operating expenses, to the extent that the general partners determine
that such funds are available for distribution. Based on current and anticipated
future cash from operating activities and for the nine months ended September
30, 2004 and 2003, the net proceeds from the sales of the Properties in
Portland, Indiana and Richmond, Virginia, respectively, we declared
distributions to the limited partners of $1,531,425 and $2,181,425 for the nine
months ended September 30, 2004 and 2003, respectively ($510,475 for each of the
quarters ended September 30, 2004 and 2003). This represents distributions of
$25.52 and $36.36 per unit for the nine months ended September 30, 2004 and
2003, respectively ($8.51 for each applicable quarter). Distributions for the
nine months ended September 30, 2003, included a special distribution of
$650,000 as a result of the distribution of net sales proceeds from the 2003
sale of the Property in Richmond, Virginia. This special distribution was
effectively a return of a portion of the limited partners investment, although,
in accordance with the Partnership agreement, it was applied towards the limited
partners' unpaid preferred return. As a result of the sales of Properties in the
current year and in previous years, our total revenues have declined and are
expected to remain reduced in subsequent periods, while the majority of our
operating expenses have remained and are expected to remain fixed. No
distributions were made to the general partners for the quarters and nine months
ended September 30, 2004 and 2003. No amounts distributed to the limited
partners for the nine months ended September 30, 2004 and 2003 are required to
be or have been treated as a return of capital for purposes of calculating the
limited partners' return on their adjusted capital contributions. We intend to
continue to make distributions of cash to the limited partners on a quarterly
basis.
Total liabilities, including distributions payable, were $949,223 at
September 30, 2004, as compared to $858,171 at December 31, 2003. The increase
in total liabilities was primarily due to increases in accounts payable and
accrued expenses, amounts due to related parties and rents paid in advance and
deposits. The general partners believe that we have sufficient cash on hand to
meet our current working capital needs.
9
Long-Term Liquidity
We have no long-term debt or other long-term liquidity requirements.
Results of Operations
Rental revenues from continuing operations were $994,214 for the nine
months ended September 30, 2004, as compared to $1,082,759 for the same period
in 2003, of which, $330,163 and $359,562 were earned during the third quarters
of 2004 and 2003, respectively. Rental revenues from continuing operations
during the nine months and quarter ended September 30, 2004, decreased due to
the lease related to a Property in Tampa, Florida being terminated in March
2004. The lost revenues resulting from the lease termination will continue to
have an adverse effect on our results of operations until we are able to
re-lease the Property. In addition, the decrease was also partially due to the
fact that in January 2004, the lease relating to the Property owned by the
Kingsville Real Estate Joint Venture, in which we own a 68.87% interest and
account for under the consolidation method, expired. The lost revenues resulting
from the lease expiration will continue to have an adverse effect on our results
of operations until the joint venture is able to re-lease the Property.
During the nine months ended September 30, 2004 and 2003, we earned
$47,402 and $42,685, respectively, in contingent rental income from our
Properties, of which $14,704 and $18,167 were earned during the third quarters
of 2004 and 2003, respectively.
As, described above, the lease relating to a Property in Tampa, Florida
was terminated in March 2004. In connection with the terminated lease, we
received approximately $225,000 in lease termination income as consideration for
releasing the tenant from its obligation under the lease. We are currently
seeking a new tenant for this Property.
During the nine months ended September 30, 2004 and 2003, we earned
$87,213 and $85,012, respectively, attributable to net income earned by
unconsolidated joint ventures, of which $29,168 and $28,546 were earned during
the third quarters of 2004 and 2003, respectively. These amounts remained
relatively constant, because there were no changes in the leased Property
portfolio owned by the unconsolidated joint ventures and tenancies in common.
During the nine months ended September 30, 2004, two lessees, Shoney's,
Inc. and Denny's, Inc., each contributed more than 10% of our total rental
revenues (including total rental revenues from consolidated joint ventures and
our share of total rental revenues from unconsolidated joint ventures and
Properties held as tenants-in-common with affiliates of the general partners).
We anticipate that based on the minimum rental payments required by the leases,
these lessees will each continue to contribute more than 10% of our total rental
revenues. In addition, during the nine months ended September 30, 2004, three
restaurant chains, Denny's, Pizza Hut and Wendy's, each accounted for more than
10% of our total rental revenues (including total revenues from consolidated
joint ventures and our share of total rental revenues from unconsolidated joint
ventures and Properties held as tenants-in-common with affiliates of the general
partners). We anticipate that these restaurant chains will each continue to
account for more than 10% of the total rental revenues to which we are entitled
under the terms of the leases. Any failure of these lessees or restaurant chains
will materially affect our operating results if we are not able to re-lease the
Properties in a timely manner.
Operating expenses, including depreciation and amortization and
provision for write-down of assets, were $501,689 and $396,254 for the nine
months ended September 30, 2004 and 2003, respectively, of which, $164,692 and
$119,269 were incurred in the third quarters of 2004 and 2003, respectively. The
increase in operating expenses during the nine months ended September 30, 2004
was due to the provision for write-down of assets incurred as a result of the
termination of the lease of a Property in Tampa, Florida. The provision
represented the difference between the carrying value of the Property and its
estimated fair value. The increase during the quarter and nine months ended
September 30, 2004, was also due to incurring additional general operating and
administrative expenses, including, primarily, legal fees incurred in connection
with the merger transaction described above. In addition, operating expenses
were higher during the quarter and nine months ended September 30, 2004 because
we incurred property related expenses such as insurance, repairs and
maintenance, legal fees and real estate taxes relating to the vacant Properties
in Tampa, Florida and Kingsville, Texas. We will continue to incur these
expenses until the Properties are re-leased.
10
We recognized income from discontinued operations (rental revenues less
property related expenses and provision for write-down of assets) of $105,422
and $39,616 during the nine months and quarter ended September 30, 2003,
respectively, relating to the Properties in Portland, Indiana; Richmond,
Virginia; Maywood, Illinois; Oak Ridge, Tennessee; and Holland, Michigan. During
the nine months ended September 30, 2003, we sold the Properties in Portland,
Indiana; Richmond, Virginia; and Maywood, Illinois, resulting in a net gain on
disposal of discontinued operations of approximately $107,000. During this
period we also recorded a provision for write-down of assets of $36,000 related
to the property in Maywood, Illinois. During the nine months ended September 30,
2004, we recognized income from discontinued operations of $63,342, relating to
the Properties in Oak Ridge, Tennessee and Holland, Michigan. In April 2004, we
sold the Property in Oak Ridge, Tennessee, to a third party resulting in a gain
on disposal of discontinued operations of approximately $129,100. In June 2004,
Holland Joint Venture, in which the we owned a 51% interest and accounted for
under the consolidation method, sold the property in Holland, Michigan, to a
third party resulting in a gain on disposal of discontinued operations of
approximately $638,900. The amount of income and gain attributed to the owner of
the 49% interest was $336,371 and $34,692 during the nine months ended September
30, 2004 and 2003, respectively, of which $11,424 related to the quarter ended
September 30, 2003.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January 2003) ("FIN
46R"), "Consolidation of Variable Interest Entities" requiring existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, which are the ownership, contractual, or other pecuniary
interests in an entity that change with changes in the fair value of the
entity's net assets excluding variable interests. Prior to FIN 46R, a company
generally included another entity in its financial statements only if it
controlled the entity through voting interests. Application of FIN 46R is
required in financial statements of public entities that have interests in
variable interest entities for periods ending after March 15, 2004. We adopted
FIN 46R during the quarter ended March 31, 2004, which resulted in the
consolidation of previously unconsolidated joint ventures, Auburn Joint Venture,
Cocoa Joint Venture, and Kingsville Real Estate Joint Venture, all of which were
accounted for under the equity method. Prior to its liquidation in June 2004,
Holland Joint Venture was also consolidated and accounted for under the equity
method. FIN 46R does not require, but does permit restatement of previously
issued financial statements. We have restated prior year's financial statements
to maintain comparability between the periods presented. These restatements had
no effect on partners' capital or net income. Such consolidation resulted in
certain assets and minority interests, and revenues and expenses, of these
entities being reported on a gross basis in our financial statements; however,
these restatements had no effect on partners' capital or net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The general partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in our
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 our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report on
Form 10-Q 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.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
-----------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
-----------------------------------------------------------
Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
---------------------------------------------------
Item 5. Other Information. Inapplicable.
-----------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
2.1 Agreement and Plan of Merger among U.S. Restaurant
Properties, Inc., Ivanhoe Acquisition IV, LLC, and CNL
Income Fund IV, Ltd., dated as of August 9, 2004.
(Included as Exhibit 99.2 to Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004,
and incorporated herein by reference.)
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.)
12
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.)
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November 2004.
CNL INCOME FUND IV, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
------------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
------------------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
EXHIBIT INDEX
Exhibit Number
Exhibits
2.1 Agreement and Plan of Merger among U.S. Restaurant
Properties, Inc., Ivanhoe Acquisition IV, LLC, and CNL
Income Fund IV, Ltd., dated as of August 9, 2004.
(Included as Exhibit 99.2 to Form 8-K filed with the
Securities and Exchange Commission on August 9, 2004,
and incorporated herein by reference.)
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