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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended June 30, 2002
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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
0-16850
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CNL Income Fund III, Ltd.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2809460
- ------------------------------------ ------------------------------
(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 _____
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
Part II.
Other Information 12-13
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001
------------------- -------------------
ASSETS
Land and buildings on operating leases, net $ 9,458,207 $ 9,324,746
Net investment in direct financing leases -- 772,309
Investment in joint ventures 2,084,258 2,196,170
Mortgage note receivable 324,356 --
Cash and cash equivalents 607,122 1,242,931
Receivables, less allowance for doubtful accounts
of $40,595 and $28,216, respectively 4,487 27,528
Due from related parties 334 9,754
Accrued rental income 85,073 74,755
Other assets 34,304 31,923
------------------- -------------------
$ 12,598,141 $ 13,680,116
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 4,208 $ 12,786
Real estate taxes payable 2,746 12,050
Distributions payable 375,000 437,500
Due to related parties 148,343 128,985
Rents paid in advance 13,108 3,943
------------------- -------------------
Total liabilities 543,405 595,264
Minority interest 126,035 127,430
Partners' capital 11,928,701 12,957,422
------------------- -------------------
$ 12,598,141 $ 13,680,116
=================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------- ---------------- --------------
Revenues:
Rental income from operating leases $ 287,837 $ 377,551 $ 588,368 $ 751,943
Earned income from direct financing leases 5,063 30,988 24,830 62,128
Contingent rental income 5,486 77,516 32,506 87,897
Interest and other income 7,346 5,914 13,237 16,119
------------- ------------- ---------------- --------------
305,732 491,969 658,941 918,087
------------- ------------- ---------------- --------------
Expenses:
General operating and administrative 51,927 58,708 111,808 139,359
Property expenses 17,808 2,220 34,023 3,554
State and other taxes 2,050 1,911 23,080 12,538
Depreciation 66,621 69,535 126,769 139,070
Provision for write-down of assets 79,649 -- 126,005 --
------------- ------------- ---------------- --------------
218,055 132,374 421,685 294,521
------------- ------------- ---------------- --------------
Income Before Loss on Sale of Assets, Minority
Interest in Income of Consolidated Joint Venture
and Equity in Earnings of Unconsolidated Joint
Ventures 87,677 359,595 237,256 623,566
Loss on Sale of Assets (9,945 ) -- (9,945 ) --
Minority Interest in Income of Consolidated
Joint Venture (4,388 ) (4,370 ) (8,591 ) (8,649 )
Equity in Earnings of Unconsolidated Joint Ventures 51,929 20,012 102,559 69,233
------------- ------------- ---------------- --------------
Net Income $ 125,273 $ 375,237 $ 321,279 $ 684,150
============= ============= ================ ==============
Net Income per Limited Partner Unit $ 2.51 $ 7.50 $ 6.43 $ 13.68
============= ============= ================ ==============
Weighted Average Number of Limited Partner
Units Outstanding 50,000 50,000 50,000 50,000
============= ============= ================ ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Six Months Ended Year Ended
June 30, December 31,
2002 2001
--------------------- -------------------
General partners:
Beginning balance $ 371,371 $ 371,371
Net income -- --
--------------------- -------------------
371,371 371,371
--------------------- -------------------
Limited partners:
Beginning balance 12,586,051 14,068,004
Net income 321,279 918,047
Distributions ($27.00 and $48.00 per
limited partner unit, respectively) (1,350,000 ) (2,400,000 )
--------------------- -------------------
11,557,330 12,586,051
--------------------- -------------------
Total partners' capital $ 11,928,701 $ 12,957,422
===================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2002 2001
----------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 618,661 $ 845,168
----------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of assets 78,295 --
Liquidating distribution from joint venture 106,521 --
Other (16,800 ) --
----------------- ---------------
Net cash provided by investing activities 168,016 --
----------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,412,500 ) (875,000 )
Distributions to holders of minority interests (9,986 ) (10,003 )
----------------- ---------------
Net cash used in financing activities (1,422,486 ) (885,003 )
----------------- ---------------
Net Decrease in Cash and Cash Equivalents (635,809 ) (39,835 )
Cash and Cash Equivalents at Beginning of Period 1,242,931 578,746
----------------- ---------------
Cash and Cash Equivalents at End of Period $ 607,122 $ 538,911
================= ===============
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Mortgage note accepted in exchange for sale of asset $ 320,000 $ --
================= ===============
Deferred real estate disposition fee incurred and unpaid at
end of period $ 12,000 $ --
================= ===============
Distributions declared and unpaid at end of
period $ 375,000 $ 437,500
================= ===============
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2002 and 2001
1. Basis of Presentation:
---------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and six months ended June 30, 2002 may not be indicative of
the results that may be expected for the year ending December 31, 2002.
Amounts as of December 31, 2001, 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 III, Ltd. (the "Partnership") for the year ended December
31, 2001.
The Partnership accounts for its 69.07% interest in Tuscawilla Joint
Venture using the consolidation method. Minority interests represents
the minority joint venture partners' proportionate share of the equity
in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 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 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.
2. Reclassification:
----------------
Certain items in the prior year's financial statements have been
reclassified to conform to 2002 presentation. These reclassifications
had no effect on total partners' capital or net income.
3. Land and Buildings on Operating Leases:
--------------------------------------
During the six months ended June 30, 2002, the Partnership established
a provision for write-down of assets of $46,356 relating to its
property in Fayetteville, North Carolina. In January, the tenant of
this property, Houlihan's, Inc., filed for bankruptcy and rejected the
one lease it had with the Partnership. The provision represented the
difference between the carrying value of the property and its fair
value.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2002 and 2001
3. Land and Buildings on Operating Leases - Continued:
--------------------------------------------------
In May 2002, the Partnership sold the property in Montgomery, Alabama,
the building portion of which is classified as a direct financing lease
(see Note 4), to an unrelated third party for $400,000. The Partnership
received net sales proceeds of approximately $398,300 (consisting of
approximately $78,300 in cash and $320,000 in the form of a promissory
note, see Note 5) resulting in a loss of $9,945 during the quarter and
six months ended June 30, 2002. In connection with the sale, the
Partnership incurred a deferred, subordinated, real estate disposition
fee of $12,000 (see Note 7). This property was identified for sale as
of December 31, 2001.
In June 2002, the Partnership established a provision for write-down of
assets of $76,649 relating to its property in Altus, Oklahoma, the
lease for which is scheduled to expire in October 2002. The provision
represented the difference between the carrying value of the property
and its fair value.
4. Net Investment in Direct Financing Leases:
-----------------------------------------
In January 2002, the tenant of the property in Canton Township, Ohio,
filed for bankruptcy, and in February 2002, rejected the one lease it
had with the Partnership. As a result, the Partnership reclassified the
asset to land and buildings on operating leases and recorded the
reclassified asset at the lower of original cost, present fair value,
or present carrying amount. No loss on termination of direct financing
lease was recorded.
In May 2002, the Partnership sold the property in Montgomery, Alabama
to an unrelated third party (see Note 3). In connection with the sale,
the gross investment (minimum lease payments receivable and the
estimated residual value) and unearned income relating to the building
were removed from the accounts and the loss from the sale of the
property was reflected in income.
5. Mortgage Note Receivable:
--------------------------
In connection with the sale of its property in Montgomery, Alabama, the
Partnership accepted a promissory note in the principal sum of
$320,000, collateralized by a mortgage on the property (see Note 3).
The promissory note bears interest at a rate of ten percent per annum
for the first year, twelve percent per annum for the second year and
fourteen percent per annum for the third year. The payments are being
collected in monthly installments of $1,333 plus any accrued interest,
with a balloon payment of $273,333, due in June 2005. In addition, if
the borrower does not pay off the promissory note, a loan fee of one
percent, two percent and three percent of the outstanding principal
balance as of May 31, 2003, 2004, and 2005, respectively will be due.
6. Investment in Joint Ventures:
----------------------------
In January 2002, Titusville Joint Venture, in which the Partnership
owned a 73.4% interest, sold its property, which had been vacant since
1997, to an unrelated third party for $180,000 and received net sales
proceeds of approximately $165,600, resulting in a gain of
approximately $4,900 to the joint venture. The Partnership and the
joint venture partner dissolved the joint venture and the Partnership
received approximately $106,500 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.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2002 and 2001
7. Related Party Transaction:
--------------------------
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
Advisor provides a substantial amount of services in connection with
the sales. 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, cumulative 10% Preferred Return, plus their adjusted capital
contributions. During the six months ended June 30, 2002, the
Partnership incurred a deferred, subordinated real estate disposition
fee of $12,000 as a result of the Partnership's sale of the property in
Montgomery, Alabama.
8. 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 the Partnership's share of rental revenues
from joint ventures and the properties held as tenants-in-common with
affiliates of the general partners) for each of the periods ended June
30:
2002 2001
--------------- ---------------
IHOP Properties, Inc. $ 139,814 $ 140,095
Golden Corral Corp. 84,866 161,019
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 the Partnership's share
of rental revenues from joint ventures and the properties held as
tenants-in-common with affiliates of the general partners) for each of
the periods ended June 30:
2002 2001
-------------- -------------
Golden Corral Family
Steakhouse Restaurants $ 139,855 $ 284,604
IHOP 139,814 140,095
KFC 135,318 125,137
Taco Bell 86,334 N/A
Pizza Hut 82,256 N/A
The information denoted by N/A indicates that for each period
presented, the chains did not represent more than 10% of the
Partnership's total rental and earned income.
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these lessees or
restaurant chains will significantly impact the results of operations
of the Partnership if the Partnership is not able to re-lease the
properties in a timely manner.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund III, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on June 1, 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 (the "Properties"), which are leased primarily to operators of
selected national and regional fast-food restaurant chains. The leases generally
are triple-net leases, with the lessees responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of June 30, 2001, the
Partnership owned 20 Properties directly and seven Properties indirectly through
joint venture or tenancy in common arrangements. As of June 30, 2002, the
Partnership owned 17 Properties directly and six Properties indirectly through
joint venture or tenancy in common arrangements.
Capital Resources
The Partnership's primary source of capital for the six months ended
June 30, 2002 and 2001, was cash from operating activities (which includes cash
received from tenants, distributions from joint ventures, and interest and other
income received, less cash paid for expenses). Cash from operating activities
was $618,661 and $845,168 for the six months ended June 30, 2002 and 2001,
respectively. The decrease in cash from operating activities for the six months
ended June 30, 2002, as compared to the same period of 2001 was primarily a
result of changes in the Partnership's income and expenses, as described below.
Other sources and uses of capital included the following during the six
months ended June 30, 2002.
In January 2002, Titusville Joint Venture, in which the Partnership
owned a 73.40% interest, sold its Property, which had been vacant since 1997, to
an unrelated third party for $180,000 and received net sales proceeds of
approximately $165,600 resulting in a gain of approximately $4,900 to the joint
venture. The Partnership and the joint venture partner dissolved the joint
venture in accordance with the joint venture agreement and the Partnership
received approximately $106,500 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 distributed the liquidation
proceeds as a special distribution to the limited partners, as described below.
In May 2002, the Partnership sold its Property in Montgomery, Alabama
to an unrelated third party for $400,000 and received net sales proceeds of
approximately $398,300 (consisting of approximately $78,300 in cash and $320,000
in the form of a promissory note) resulting in a loss of $9,945 during the
quarter and six months ended June 30, 2002. The promissory note bears interest
at a rate of ten percent per annum for the first year, twelve percent per annum
for the second year, and fourteen percent per annum for the third year. The
payments are being collected in monthly installments of $1,333 plus any accrued
interest, with a balloon payment of $273,333, due in June 2005. In addition, a
loan fee of one percent, two percent and three percent of the outstanding
principal balance as of May 31, 2003, 2004, and 2005, respectively is due. This
Property was identified for sale as of December 31, 2001. In connection with the
sale, the Partnership incurred a deferred, subordinated real estate disposition
fee of $12,000. Payment of the real estate disposition fee is subordinated to
the receipt by the limited partners of their aggregate, cumulative 10% Preferred
Return, plus their adjusted capital contributions. The Partnership used these
sales proceeds to pay liabilities of the Partnership. The Partnership
distributed amounts sufficient to enable the limited partners to pay federal and
state income taxes, if any (at a level reasonably assumed by the general
partners), resulting from the sale.
Currently, rental income from the Partnership's Properties and any net
sales proceeds from the sales of Properties are invested in money market
accounts or other short-term, highly liquid investments such as demand deposit
accounts at commercial banks, money market accounts and certificates of deposit
with less than a 90-day maturity date, pending the Partnership's use of such
funds to pay Partnership expenses or to make distributions to the partners. At
June 30, 2002, the Partnership had $607,122 invested in such short-term
investments, as compared to $1,242,931 at December 31, 2001. The decrease in
cash and cash equivalents at June 30, 2002 was primarily due to the fact that
during the six months ended June 30, 2002, the Partnership used the net sales
proceeds that were held at December 31, 2001 to pay a special distribution to
the limited partners. The funds remaining at June 30, 2002, after payment
distributions and other liabilities, will be used to meet the Partnership's
working capital needs.
Short Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of 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 for the six
months ended June 30, 2002, the net sales proceeds from the 2001 sale of the
Property in Washington, Illinois and the liquidating distribution received from
Titusville Joint Venture, the Partnership declared distributions to limited
partners of $1,350,000 and $875,000 for the six months ended June 30, 2002 and
2001, respectively, ($375,000 and $437,500 for the quarters ended June 30, 2002
and 2001, respectively). This represents distributions of $27.00 and $17.50 per
unit for the six months ended June 30, 2002 and 2001, respectively, ($7.50 and
$8.75 per unit for each applicable quarter). Distributions for the six months
ended June 30, 2002 included a special distribution of $600,000 as a result of
the distribution of the net sales proceeds from the 2001 sale of the Property in
Washington, Illinois and the liquidating distribution received from Titusville
Joint Venture. 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 to the limited partner's unpaid cumulative
10% Preferred Return. As a result of the sale of several Properties in 2002 and
2001, the Partnership's total revenue was reduced and is expected to remain
reduced in subsequent periods, while the majority of the Partnership's operating
expenses remained and are expected to remain fixed. Therefore, distributions of
net cash flow were adjusted commencing during the quarter ended March 31, 2002.
No distributions were made to the general partners for the quarters and six
months ended June 30, 2002 and 2001. No amounts distributed to the limited
partners for the six months ended June 30, 2002 and 2001 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.
Total liabilities of the Partnership, including distributions payable,
were $543,405 at June 30, 2002, as compared to $595,264 at December 31, 2001.
The decrease in liabilities at June 30, 2002 was primarily due to a decrease in
distributions payable to the limited partners at June 30, 2002, as described
above. The general partners believe that the Partnership has sufficient cash on
hand to meet its current working capital needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Total rental revenues were $613,198 for the six months ended June 30,
2002, as compared to $814,071 for the six months ended June 30, 2001, of which
$292,900 and $408,539 were earned during the second quarter of 2002 and 2001,
respectively. Rental revenues decreased during the quarter and six months ended
June 30, 2002, as compared to the same periods of 2001, partially as a result of
the sales of several Properties during 2001 and 2002. Rental revenues are
expected to remain at reduced amounts due to the fact that the Partnership used
the majority of these net sales proceeds to pay liabilities of the Partnership
and to make distributions to the limited partners.
The decrease in rental revenues during the quarter and six months ended
June 30, 2002, as compared to the same periods of 2001, was also partially due
to the fact that in 2002, two of the Partnership's tenants, Paragon of Michigan,
Inc. and Houlihan's, Inc. filed for bankruptcy, ceased rental payments and
rejected the one lease each had with the Partnership. As a result of the
rejected leases, the Partnership stopped recording rental revenue relating to
these Properties. The Partnership will not recognize any rental revenues from
these vacant Properties until the Properties are re-leased or sold, and the
proceeds are reinvested in additional Properties. The lost revenues resulting
from the rejected leases will have an adverse effect on the results of
operations of the Partnership if the Partnership is unable to re-lease the
Properties in a timely manner. The general partners are currently seeking a
replacement tenant for the vacant Properties.
During the six months ended June 30, 2002 and 2001, the Partnership
also earned $32,506 and $87,897, respectively, in contingent rental income, of
which $5,486 and $77,516 was earned during the quarters ended June 30 2002 and
2001, respectively. The decrease in contingent rental income was primarily a
result of a decrease in gross sales of certain restaurant Properties with leases
requiring the payment of contingent rental income.
During the six months ended June 30, 2002, two lessees of the
Partnership, Golden Corral Corporation, and IHOP Properties, Inc., each
contributed more than 10% of the Partnership's total rental revenues (including
rental revenues from the Partnership's consolidated joint venture and the
Partnership's share of rental revenues from Properties owned by unconsolidated
joint ventures and Properties owned with affiliates of the general partners as
tenants-in-common). It is anticipated that, based on the minimum rental payments
required by the leases, IHOP Properties, Inc. will continue to contribute more
than 10% of the Partnership's total rental revenues. In addition, five
restaurant chains, Golden Corral Family Steakhouse Restaurants ("Golden
Corral"), IHOP, KFC, Taco Bell, and Pizza Hut, each accounted for more than 10%
of the Partnership's total rental revenues, (including rental revenues from the
Partnership's consolidated joint venture and the Partnership's share of the
rental revenues from Properties owned by unconsolidated joint ventures and
Properties owned with affiliates of the general partners as tenants-in-common).
It is anticipated that these five restaurant chains, each will continue to
account for more than 10% of total rental revenues to which the Partnership is
entitled under the terms of the leases. Any failure of these lessees or any of
these restaurant chains could materially affect the Partnership's income, if the
Partnership is not able to re-lease these Properties in a timely manner.
During the six months ended June 30, 2002 and 2001, the Partnership
earned $102,559 and $69,233, respectively, attributable to net income earned by
unconsolidated joint ventures, $51,929 and $20,012 of which was earned during
the quarters ended June 30, 2002 and 2001. Net income earned by unconsolidated
joint ventures was lower during the quarter and six months ended June 30, 2001,
as compared to the same periods of 2002 primarily due to the fact that during
the quarter and six months ended June 30, 2001, Titusville Joint Venture (in
which the Partnership owns a 73.4% interest) recorded a provision for write-down
of assets of approximately $38,300. The Property owned by the joint venture
became vacant during 1997. Titusville Joint Venture had previously recorded a
provision for write-down of assets relating to this Property. The increase in
the provision during 2001 represented the difference between the Property's
carrying value and its fair value. In January 2002, Titusville Joint Venture
sold its property, to an unrelated third party for $180,000 and received net
sales proceeds of approximately $165,600 resulting in a gain of approximately
$4,900 to the joint venture. The Partnership and the joint venture partner
dissolved the joint venture in accordance with the joint venture agreement and
the Partnership received approximately $106,500 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 these
proceeds to pay liabilities of the Partnership and make distributions, as
described above in "Capital Resources."
Operating expenses, including depreciation expense and provision for
write-down of assets, were $421,685 and $294,521 for the six months ended June
30, 2002 and 2001, respectively, of which $218,055 and $132,374 was incurred
during the quarters ended June 30, 2002 and 2001. The increase in operating
expenses during the quarter and six months ended June 30, 2002, as compared to
the same periods of 2001, was partially due to the fact that during the six
months ended 2002, the Partnership recorded a provision for write-down of assets
of $46,356 relating to the Property in Fayetteville, North Carolina. The
provision represented the difference between the carrying value of the Property
and its fair value. In January, the tenant of this property, Houlihan's, Inc.,
filed for bankruptcy and rejected the one lease it had with the Partnership, as
described above. In addition, during the quarter ended June 30, 2002, the
Partnership recorded a provision for write-down of assets of $79,649 relating to
the Property in Altus, Oklahoma, the lease for which is scheduled to expire in
October 2002. The provision represented the difference between the carrying
value of the Property and its fair value. The increase in operating expenses
during the six months ended June 30, 2002, as compared to the same period of
2001, was partially offset by a decrease in the costs incurred for
administrative expenses for servicing the Partnership and its Properties and a
decrease in depreciation expense as a result of the sales of two Properties
during 2001. The increase in operating expenses was also partially due to the
fact that the Partnership incurred Property expenses, such as legal fees, real
estate taxes, insurance, and maintenance relating to the two vacant Properties,
the leases for which were rejected, as described above. The general partners
anticipate that the Partnership will continue to incur these expenses related to
the vacant Properties until such time as the Partnership executes a new lease
for the Properties or until the Partnership sells the Properties and the sales
proceeds are reinvested in additional Properties. The general partners are
currently seeking new tenants for the vacant Properties. In addition, the
increase in operating expenses during the six months ended June 30, 2002, was
partially due to an increase in the amount of state tax expense relating to
certain states in which the Partnership conducts business.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the six months ended June 30, 2002, the Partnership accepted a
promissory note in connection with the sale of its Property in Montgomery,
Alabama. The general partners believe that the estimated fair value of the
mortgage note at June 30, 2002 approximated the outstanding principal amounts.
The Partnership is exposed to equity loss in the event of changes in interest
rates. The following table presents the expected cash flows of principal that
are sensitive to these changes.
Mortgage Note
Fixed Rate
-------------------
2002 $ 8,000
2003 16,000
2004 16,000
2005 280,000
2006 --
Thereafter --
-------------------
$ 320,000
===================
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
-----------------
Item 2. Changes in Securities. Inapplicable.
---------------------
Item 3. Defaults upon Senior Securities. Inapplicable.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
---------------------------------------------------
Item 5. Other Information. Inapplicable.
-----------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
3.1 Certificate of Limited Partnership of CNL Income
Fund III, Ltd. (Included as Exhibit 3.1 to
Amendment No. 1 to the Registration Statement No.
33-15374 on Form S-11 and incorporated herein by
reference.)
3.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with
the Securities and Exchange Commission on April
5, 1993, and incorporated herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income
Fund III, Ltd. (Included as Exhibit 4.1 to
Amendment No. 1 to Registration Statement No.
33-15374 on Form S-11 and incorporated herein by
reference.)
4.2 Amended and Restated Agreement and Certificate of
Limited Partnership of CNL Income Fund III, Ltd.
(Included as Exhibit 3.2 to Form 10-K filed with
the Securities and Exchange Commission on April
5, 1993, 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 April 5,
1993, 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 10,
2001, and incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF
Partners, LP to CNL Restaurants XVIII, Inc.
(Filed herewith.)
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the
quarter ended June 30, 2002.
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 6th day of August, 2002.
CNL INCOME FUND III, 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)
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
The undersigned, James M. Seneff, Jr., the Chief Executive Officer of CNL Realty
Corporation, the corporate general partner of CNL Income Fund III, Ltd. (the
"Partnership"), has executed this certification in connection with the filing
with the Securities and Exchange Commission of the Partnership's Quarterly
Report on Form 10-Q for the period ending June 30, 2002 (the "Report"). The
undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Partnership.
Date: August 6, 2002 /s/ James M. Seneff, Jr.
--------------- ----------------------------------
Name: James M. Seneff, Jr.
Title: Chief Executive Officer
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
The undersigned, Robert A. Bourne, the President and Treasurer of CNL Realty
Corporation, the corporate general partner of CNL Income Fund III, Ltd. (the
"Partnership"), has executed this certification in connection with the filing
with the Securities and Exchange Commission of the Partnership's Quarterly
Report on Form 10-Q for the period ending June 30, 2002 (the "Report"). The
undersigned hereby certifies that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Partnership.
Date: August 6, 2002 /s/ Robert A. Bourne
------------------------------ ----------------------------
Name: Robert A. Bourne
Title: President and Treasurer
EXHIBIT INDEX
Exhibit Number
(c) Exhibits
3.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to the
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
3.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 5, 1993, and incorporated
herein by reference.)
4.1 Certificate of Limited Partnership of CNL Income Fund III,
Ltd. (Included as Exhibit 4.1 to Amendment No. 1 to
Registration Statement No. 33-15374 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement and Certificate of Limited
Partnership of CNL Income Fund III, Ltd. (Included as
Exhibit 3.2 to Form 10-K filed with the Securities and
Exchange Commission on April 5, 1993, 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 April 5, 1993, 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 10, 2001, and incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF Partners,
LP to CNL Restaurants XVIII, Inc. (Filed herewith.)