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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, 2002
--------------------------------------------------------------------------
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
---------------------------------------
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 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Item 4. Controls and Procedures 13
Part II.
Other Information 14-15
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
2002 2001
------------------- -------------------
ASSETS
Land and buildings on operating leases, net $ 8,306,797 $ 8,642,179
Net investment in direct financing leases -- 279,721
Real estate held for sale -- 1,175,155
Investment in joint ventures 2,083,524 2,196,170
Mortgage note receivable 640,000 --
Cash and cash equivalents 1,272,534 1,242,931
Receivables, less allowance for doubtful accounts
of $37,194 and $28,216, respectively 21,312 27,528
Due from related parties -- 9,754
Accrued rental income 90,233 74,755
Other assets 30,805 31,923
------------------- -------------------
$ 12,445,205 $ 13,680,116
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 5,450 $ 12,786
Real estate taxes payable 11,194 12,050
Distributions payable 375,000 437,500
Due to related parties 196,091 128,985
Rents paid in advance 17,352 3,943
------------------- -------------------
Total liabilities 605,087 595,264
Minority interest 125,328 127,430
Partners' capital 11,714,790 12,957,422
------------------- -------------------
$ 12,445,205 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------- ------------- ---------------- --------------
Revenues:
Rental income from operating leases $ 261,289 $ 339,876 $ 814,299 $ 1,047,114
Earned income from direct financing leases 2,218 3,243 16,257 32,330
Contingent rental income 20,834 1,134 53,340 89,031
Lease termination income 7,980 80,000 7,980 80,000
Interest and other income 4,841 4,742 18,078 20,861
------------- ------------- ---------------- --------------
297,162 428,995 909,954 1,269,336
------------- ------------- ---------------- --------------
Expenses:
General operating and administrative 46,143 25,326 157,351 164,655
Property expenses 10,398 1,858 40,457 5,212
State and other taxes 292 230 23,372 12,768
Depreciation 56,309 64,315 168,009 195,897
Provision for write-down of assets -- 38,721 46,355 38,721
------------- ------------- ---------------- --------------
113,142 130,450 435,544 417,253
------------- ------------- ---------------- --------------
Income Before Gain (Loss) on Sale of Assets, Minority
Interest in Income of Consolidated Joint Venture
and Equity in Earnings of Unconsolidated Joint
Ventures 184,020 298,545 474,410 852,083
Gain (Loss) on Sale of Assets -- 229,029 (9,945 ) 229,029
Minority Interest in Income of Consolidated
Joint Venture (4,352 ) (4,277 ) (12,943 ) (12,926 )
Equity in Earnings of Unconsolidated Joint Ventures 52,707 37,865 155,266 107,098
------------- ------------- ---------------- --------------
Income from Continuing Operations 232,375 561,162 606,788 1,175,284
------------- ------------- ---------------- --------------
Discontinued Operations (Note 7):
Income from discontinued operations, net 9,294 34,983 35,810 105,011
Loss on disposal of discontinued operations, net (80,580 ) -- (160,230 ) --
------------- ------------- ---------------- --------------
(71,286 ) 34,983 (124,420 ) 105,011
------------- ------------- ---------------- --------------
Net Income $ 161,089 $ 596,145 $ 482,368 $ 1,280,295
============= ============= ================ ==============
Income (Loss) Per Limited Partner Unit:
Continuing Operations $ 4.65 $ 11.22 $ 12.14 $ 23.51
Discontinued Operations (1.43 ) 0.70 (2.49 ) 2.10
------------- ------------- ---------------- --------------
Total $ 3.22 $ 11.92 $ 9.65 $ 25.61
============= ============= ================ ==============
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
Nine Months Ended Year Ended
September 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 482,368 918,047
Distributions ($34.50 and $48.00 per
limited partner unit, respectively) (1,725,000 ) (2,400,000 )
--------------------- -------------------
11,343,419 12,586,051
--------------------- -------------------
Total partners' capital $ 11,714,790 $ 12,957,422
===================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2002 2001
----------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 938,433 $ 1,295,190
----------------- ---------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating leases (25,200 ) --
Collections on mortgage note receivable 320,000 --
Proceeds from sale of assets 492,394 750,550
Liquidating distribution from joint venture 106,521 --
----------------- ---------------
Net cash provided by investing activities 893,715 750,550
----------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,787,500 ) (1,312,500 )
Distributions to holders of minority interest (15,045 ) (15,021 )
----------------- ---------------
Net cash used in financing activities (1,802,545 ) (1,327,521 )
----------------- ---------------
Net Increase in Cash and Cash Equivalents 29,603 718,219
Cash and Cash Equivalents at Beginning of Period 1,242,931 578,746
----------------- ---------------
Cash and Cash Equivalents at End of Period $ 1,272,534 $ 1,296,965
================= ===============
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Deferred real estate disposition fee incurred and unpaid at
end of period $ 45,300 $ 23,250
================= ===============
Mortgage note accepted in exchange for sale of asset $ 960,000 $ --
================= ===============
Distributions declared and unpaid at end of
period $ 375,000 $ 1,087,500
================= ===============
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 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 nine months ended September 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 nine months ended September 30, 2002, the Partnership
established a provision for write-down of assets of $46,355 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 Nine Months Ended September 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 $66,300 in cash and $320,000 in the form of a promissory
note, see Note 5) resulting in a loss of $9,945 during the nine months
ended September 30, 2002. In connection with the sale, the Partnership
incurred a deferred, subordinated, real estate disposition fee of
$12,000 (see Note 8). This property was identified for sale as of
December 31, 2001.
4. Net Investment in Direct Financing Leases:
-----------------------------------------
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 Notes 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 bore interest at a rate of ten percent per annum.
In August 2002, the Partnership received a balloon payment which
included the outstanding principal balance and accrued interest.
In connection with the sale of its property in Canton Township,
Michigan, the Partnership accepted a promissory note in the principal
sum of $640,000, collateralized by a mortgage on the property (see Note
7). The promissory note bears interest at a rate of 10.5% per annum.
The balance of the note, plus any accrued interest, is due in December
2002.
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 Nine Months Ended September 30, 2002 and 2001
7. Discontinued Operations:
-----------------------
In July 2002, the Partnership entered into an agreement with an
unrelated third party to sell the Golden Corral property in Altus,
Oklahoma. In connection with the anticipated sale of the property, the
Partnership recorded a loss on disposal of discontinued operations of
approximately $79,600 during the quarter and six months ended June 30,
2002. In September 2002, the Partnership sold this property for
$310,000 and received net sales proceeds of approximately $298,500. In
connection with the sale, the Partnership incurred a deferred,
subordinated, real estate disposition fee of $9,300 (see Note 8).
In September 2002, the Partnership sold its Red Oaks Steakhouse
property in Canton Township, Michigan, to an unrelated third party for
$800,000. The Partnership received net sales proceeds of approximately
$722,300 (consisting of approximately $82,300 in cash and $640,000 in
the form of a promissory note, see Note 5) resulting in a loss on
disposal of discontinued operations of approximately $80,600 during the
quarter and nine months ended September 30, 2002. In connection with
the sale, the Partnership incurred a deferred, subordinated, real
estate disposition fee of $24,000 (see Note 8). The financial results
for these two properties are reflected as Discontinued Operations in
the accompanying financial statements.
The operating results of the discontinued operations for the above
properties are as follows:
Quarter Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
--------------- -------------- ------------------ ---------------
Rental revenues $ 15,342 $ 38,727 $ 61,491 $ 116,473
Expenses (6,048 ) (3,744 ) (25,681 ) (11,462 )
Gain (Loss) on disposal of assets (80,580 ) -- (160,230 ) --
--------------- -------------- ------------------ ---------------
Income (loss) from discontinued
operations $ (71,286 ) $ 34,983 $ (124,420 ) $105,011
=============== ============== ================== ===============
8. 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 nine months ended September 30, 2002, the
Partnership incurred deferred, subordinated real estate disposition
fees of $45,300 as a result of the Partnership's sale of the properties
in Montgomery, Alabama, Altus, Oklahoma and Canton Township, Michigan.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2002 and 2001
9. 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
September 30:
2002 2001
--------------- ---------------
IHOP Properties, Inc. $ 209,980 $ 210,092
Golden Corral Corp. 117,230 224,840
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
------------ -------------
KFC $ 215,013 $ 188,839
IHOP 209,980 210,092
Golden Corral Family
Steakhouse Restaurants 199,714 375,920
Taco Bell 129,501 N/A
Pizza Hut 115,930 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 September 30, 2001,
the Partnership owned 18 Properties directly and seven Properties indirectly
through joint venture or tenancy in common arrangements. As of September 30,
2002, the Partnership owned 15 Properties directly and six Properties indirectly
through joint venture or tenancy in common arrangements.
Capital Resources
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) was $938,433 and $1,295,190 for the nine
months ended September 30, 2002 and 2001, respectively. The decrease in cash
from operating activities for the nine months ended September 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 in "Results of
Operations."
Other sources and uses of capital included the following during the
nine months ended September 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 $66,300 in cash and $320,000
in the form of a promissory note) resulting in a loss of $9,945 during the nine
months ended September 30, 2002. The promissory note bore interest at a rate of
ten percent per annum. In August 2002, the Partnership received a balloon
payment which included the outstanding principal balance and accrued interest.
This Property was identified for sale as of December 31, 2001. The Partnership
used these sales proceeds to pay liabilities of the Partnership.
In July 2002, the Partnership entered into an agreement with an
unrelated third party to sell the Golden Corral Property in Altus, Oklahoma. In
connection with the anticipated sale of the Property, the Partnership recorded a
loss on disposal of discontinued operations of approximately $76,600 during the
quarter and six months ended June 30, 2002. In September 2002, the Partnership
sold this property for $310,000 and received net sales proceeds of approximately
$298,500. The Partnership intends to use these sales proceeds to pay liabilities
of the Partnership.
In September 2002, the Partnership sold its Red Oaks Steakhouse
Property in Canton Township, Michigan, to an unrelated third party for $800,000.
The Partnership received net sales proceeds of approximately $722,300
(consisting of approximately $82,300 in cash and $640,000 in the form of a
promissory note) resulting in a loss on disposal of discontinued operations of
approximately $80,600 during the quarter and nine months ended September 30,
2002. The Partnership intends to use these sales proceeds to pay liabilities of
the Partnership.
In connection with the sales of the Properties in Montgomery, Alabama;
Altus, Oklahoma and Canton Township, Michigan, the Partnership incurred
deferred, subordinated, real estate disposition fees of $45,300. Payment of the
real estate disposition fees is subordinated to the receipt by the limited
partners of their aggregate, cumulative 10% Preferred Return, plus their
adjusted capital contributions.
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
September 30, 2002, the Partnership had $1,272,534 invested in such short-term
investments, as compared to $1,242,931 at December 31, 2001. The funds remaining
at September 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 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 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.
Total liabilities of the Partnership, including distributions payable,
were $605,087 at September 30, 2002, as compared to $595,264 at December 31,
2001. The net change in liabilities was due to an increase in amounts due to
related parties at September 30, 2002, as compared to December 31, 2001,
partially offset by a decrease in distributions payable to the limited partners.
The general partners believe that the Partnership has sufficient cash on hand to
meet its current working capital needs.
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 cash from operations, and for the nine months ended September
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, and for the nine months ended September 30, 2001, the net sales
proceeds from the 2001 sale of the Property in Schererville, Indiana, the
Partnership declared distributions to limited partners of $1,725,000 and
$1,962,500 for the nine months ended September 30, 2002 and 2001, respectively,
($375,000 and $1,087,500 for the quarters ended September 30, 2002 and 2001,
respectively). This represents distributions of $34.50 and $39.25 per unit for
the nine months ended September 30, 2002 and 2001, respectively, ($7.50 and
$21.75 per unit for each applicable quarter). Distributions for the nine months
ended September 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. Distributions for the nine months ended September 30,
2001 included a special distribution of $650,000 as a result of the distribution
of the net sales proceeds from the 2001 sale of the Property in Schererville,
Indiana. These amounts were 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 nine
months ended September 30, 2002 and 2001. No amounts distributed to the limited
partners for the nine months ended September 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.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
Total rental revenues were $830,556 for the nine months ended September
30, 2002, as compared to $1,079,444 for the nine months ended September 30,
2001, of which $263,507 and $343,119 were earned during the third quarter of
2002 and 2001, respectively. Rental revenues decreased during the quarter and
nine months ended September 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 nine months
ended September 30, 2002, as compared to the same periods of 2001, was also
partially due to the fact that in 2002, one of the Partnership's tenants,
Houlihan's, Inc. filed for bankruptcy, ceased rental payments and rejected the
one lease it had with the Partnership. As a result of the rejected lease, the
Partnership stopped recording rental revenue relating to this Property. The
Partnership will not recognize any rental revenues from this vacant Property
until the Property is re-leased or sold, and the proceeds are reinvested in an
additional Property. The lost revenues resulting from the rejected lease will
have an adverse effect on the results of operations of the Partnership if the
Partnership is unable to re-lease the Property in a timely manner. The general
partners are currently seeking a replacement tenant for the vacant Property.
During the nine months ended September 30, 2002 and 2001, the
Partnership also earned $53,340 and $89,031, respectively, in contingent rental
income, of which $20,834 and $1,134 were earned during the quarters ended
September 30, 2002 and 2001, respectively. The decrease in contingent rental
income during the nine months ended September 30, 2002, and the increase in
contingent rental income during the quarter ended September 30, 2002, was
primarily due to the fact that in accordance with Staff Accounting Bulletin No.
101, the Partnership recognized certain percentage rental income amounts when
certain defined thresholds were met.
In August 2002, the lease for the Property in Witchita, Kansas, which
was scheduled to expire in November 2002, was terminated by the Partnership and
the tenant. The Partnership re-leased this Property to a new tenant with terms
substantially the same as the Partnership's other leases. In June 2001, the
lease for the Property in Washington, Illinois, which was scheduled to expire in
November 2002, was terminated by the Partnership and the tenant. The Partnership
re-leased this Property to a new tenant with terms substantially the same as the
Partnership's other leases. In addition, in September 2001, the Partnership sold
its Property in Schererville, Indiana and released the tenant from further
obligation under its lease. In connection with these transactions, during the
nine months ended September 30, 2002 and 2001, the Partnership received
approximately $8,000 and $80,000, respectively, in lease termination income in
consideration for the Partnership releasing the tenants from their obligations
under each lease.
During the nine months ended September 30, 2002, two lessees of the
Partnership, IHOP Properties, Inc., and Golden Corral Corporation, 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, IHOP, Golden Corral Family Steakhouse Restaurants ("Golden
Corral"), 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 nine months ended September 30, 2002 and 2001, the
Partnership earned $155,266 and $107,098, respectively, attributable to net
income earned by unconsolidated joint ventures, $52,707 and $37,865 of which was
earned during the quarters ended September 30, 2002 and 2001. Net income earned
by unconsolidated joint ventures was lower during the quarter and nine months
ended September 30, 2001, as compared to the same periods of 2002 primarily due
to the fact that during the nine months ended September 30, 2001, Titusville
Joint Venture (in which the Partnership owned 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 $435,544 and $417,253 for the nine months ended
September 30, 2002 and 2001, respectively, of which $113,142 and $130,450 were
incurred during the quarters ended September 30, 2002 and 2001. The increase in
operating expenses during the nine months ended September 30, 2002, as compared
to the same period of 2001, was partially due to the fact that during the nine
months ended September 30, 2002, the Partnership recorded a provision for
write-down of assets of $46,355 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. During the quarter and nine months ended
September 30, 2001, the Partnership recorded a provision for write-down of
assets of $38,721 relating to the Property in Montgomery, Alabama. During 2001,
the tenant of this Property experienced financial difficulties and ceased making
rental payments. The provision represented the difference between the carrying
value of the Property and its fair value. In May 2002, the Partnership sold this
Property, as described above in "Capital Resources."
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 Properties in Montgomery,
Alabama and Fayetteville, North Carolina. In May 2002, the Partnership sold the
Property in Montgomery, Alabama, as described above in "Capital Resources." The
general partners anticipate that the Partnership will continue to incur these
expenses related to the vacant Property in Fayetteville, North Carolina until
such time as the Partnership executes a new lease for the Property or until the
Partnership sells the Property. The general partners are currently seeking a new
tenant for this Property. In addition, the increase in operating expenses during
the nine months ended September 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. The increase in operating expenses during the
nine months ended September 30, 2002, as compared to the same period of 2001,
was partially offset by a decrease in depreciation expense during the quarter
and nine months ended September 30, 2002, as a result of the sales of Properties
during 2001 and 2002.
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.
During the nine months ended September 30, 2002, the Partnership
identified and sold two Properties that met the criteria of this standard and
were classified as Discontinued Operations in the accompanying financial
statements. The Partnership intends to use these sales proceeds to pay
liabilities of the Partnership.
As a result of the sale of the Property in Montgomery, Alabama, the
Partnership recognized a loss on sale of assets of $9,945 during the nine months
ended September 30, 2002, as described above in "Capital Resources." This
Property had been identified for sale as of December 31, 2001. As a result of
the 2001 sale of the Property in Schererville, Indiana, the Partnership
recognized a gain of $229,029, during the quarter and nine months ended
September 30, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
During the nine months ended September 30, 2002, the Partnership
accepted a promissory note in connection with the sale of its Property in Canton
Township, Michigan. The general partners believe that the estimated fair value
of the mortgage note at September 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 $ 640,000
2003 --
2004 --
2005 --
2006 --
Thereafter --
-------------------
$ 640,000
===================
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 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 within 90 days prior to the
filing of this Quarterly Report on Form 10-Q and have determined that such
disclosure controls and procedures are effective.
Subsequent to the above evaluation, there were no significant changes
in internal controls or other factors that could significantly affect these
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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.
(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.)
99.1 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.)
99.2 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) Reports on Form 8-K
No reports of Form 8-K were filed during the
quarter ended September 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 November, 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 RULE 13a-14 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James M. Seneff, Jr., the Chief Executive Officer of CNL Realty
Corporation, the corporate general partner of CNL Income Fund III, Ltd. (the
"registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 6, 2002
/s/ James M. Seneff, Jr.
- ---------------------------
James M. Seneff, Jr.
Chief Executive Officer
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
I, Robert A. Bourne, President and Treasurer of CNL Realty Corporation,
the corporate general partner of CNL Income Fund III, Ltd. (the "registrant")
certify that:
1. I have reviewed this quarterly report on Form 10-Q of the
registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 6, 2002
/s/ Robert A. Bourne
- -----------------------
Robert A. Bourne
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. (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.)
99.1 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.)
99.2 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 99.1
EXHIBIT 99.2