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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, 2003
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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 _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes ____ No X
CONTENTS
Page
Part I.
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Item 4. Controls and Procedures 11
Part II.
Other Information 12-13
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
September 30, December 31,
2003 2002
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 7,205,933 $ 7,362,460
Real estate held for sale -- 368,737
Investment in joint ventures 2,076,955 2,084,178
Cash and cash equivalents 730,518 1,994,246
Receivables 6,400 10,195
Accrued rental income 112,745 95,861
Other assets 39,242 32,861
------------------- -------------------
$ 10,171,793 $ 11,948,538
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 9,750 21,199
Real estate taxes payable 10,289 11,892
Distributions payable 351,563 1,357,500
Due to related parties 191,571 243,170
Rents paid in advance and deposits 62,485 35,424
------------------- -------------------
Total liabilities 625,658 1,669,185
Minority interest 122,534 124,632
Partners' capital 9,423,601 10,154,721
------------------- -------------------
$ 10,171,793 $ 11,948,538
=================== ===================
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,
2003 2002 2003 2002
------------- ----------- --------------- --------------
Revenues:
Rental income from operating leases $ 257,657 $ 261,288 $ 772,959 $ 803,131
Earned income from direct financing leases -- 2,218 -- 16,257
Contingent rental income 5,109 20,834 50,826 53,340
Interest and other income 1,610 4,841 3,484 18,078
Termination fee income -- 7,980 -- 7,980
------------- ----------- --------------- --------------
264,376 297,161 827,269 898,786
------------- ----------- --------------- --------------
Expenses:
General operating and administrative 37,460 46,194 131,820 158,002
Property related 2,522 56 5,203 2,591
State and other taxes 1,899 292 4,232 23,372
Depreciation 52,176 52,175 156,528 156,525
------------- ----------- --------------- --------------
94,057 98,717 297,783 340,490
------------- ----------- --------------- --------------
Income Before Loss on Sale of Assets, Minority Interest
in Income of Consolidated Joint Venture and Equity
in Earnings of Unconsolidated Joint Ventures 170,319 198,444 529,486 558,296
Loss on Sale of Assets -- -- -- (9,945 )
Minority Interest in Income of Consolidated
Joint Venture (4,325 ) (4,352 ) (12,880 ) (12,943 )
Equity in Earnings of Unconsolidated Joint Ventures 52,645 52,707 158,861 155,266
------------- ----------- --------------- --------------
Income from Continuing Operations 218,639 246,799 675,467 690,674
------------- ----------- --------------- --------------
Discontinued Operations:
Loss from discontinued operations -- (5,130 ) (4,123 ) (127,726 )
Gain (Loss) on disposal of discontinued operations -- (80,580 ) 2,225 (80,580 )
------------- ----------- --------------- --------------
-- (85,710 ) (1,898 ) (208,306 )
------------- ----------- --------------- --------------
Net Income $ 218,639 $ 161,089 $ 673,569 $ 482,368
============= =========== =============== ==============
Income (Loss) per Limited Partner Unit:
Continuing operations $ 4.37 $ 4.94 $ 13.51 $ 13.81
Discontinued operations -- (1.72 ) (0.04 ) (4.16 )
------------- ----------- --------------- --------------
$ 4.37 $ 3.22 $ 13.47 $ 9.65
============= =========== =============== ==============
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,
2003 2002
--------------------- ------------------
General partners:
Beginning balance $ 371,371 $ 371,371
Net income -- --
--------------------- ------------------
371,371 371,371
--------------------- ------------------
Limited partners:
Beginning balance 9,783,350 12,586,051
Net income 673,569 279,799
Distributions ($28.09 and $61.65 per
limited partner unit, respectively) (1,404,689 ) (3,082,500 )
--------------------- ------------------
9,052,230 9,783,350
--------------------- ------------------
Total partners' capital $ 9,423,601 $ 10,154,721
===================== ==================
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,
2003 2002
---------------- --------------
Net Cash Provided by Operating Activities $ 778,540 $ 938,433
---------------- --------------
Cash Flows from Investing Activities:
Additions to real estate properties with operating leases -- (25,200 )
Proceeds from sale of assets 383,336 492,394
Collections on mortgage note receivable -- 320,000
Liquidating distribution from joint venture -- 106,521
---------------- --------------
Net cash provided by investing activities 383,336 893,715
---------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,410,626 ) (1,787,500 )
Distributions to holder of minority interests (14,978 ) (15,045 )
---------------- --------------
Net cash used in financing activities (2,425,604 ) (1,802,545 )
---------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,263,728 ) 29,603
Cash and Cash Equivalents at Beginning of Period 1,994,246 1,242,931
---------------- --------------
Cash and Cash Equivalents at End of Period $ 730,518 $ 1,272,534
================ ==============
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Deferred real estate disposition fee incurred and unpaid at
end of period $ 12,375 $ 45,300
================ ==============
Mortgage note accepted in exchange for sale of assets $ -- $ 960,000
================ ==============
Distributions declared and unpaid at end of period $ 351,563 $ 375,000
================ ==============
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, 2003 and 2002
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of the general partners, necessary for a fair
statement of the results for the interim periods presented. Operating
results for the quarter and nine months ended September 30, 2003 may
not be indicative of the results that may be expected for the year
ending December 31, 2003. Amounts as of December 31, 2002, 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, 2002.
The Partnership accounts for its 69.07% interest in Tuscawilla Joint
Venture using the consolidation method. Minority interest 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.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities" to expand upon and strengthen existing
accounting guidance that addresses when a company should include the
assets, liabilities and activities of another entity in its financial
statements. To improve financial reporting by companies involved with
variable interest entities (more commonly referred to as
special-purpose entities or off-balance sheet structures), FIN 46
requires that a variable interest entity be consolidated by a company
if that company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003, and to older entities, in the first
fiscal year or interim period ending after December 15, 2003. The
general partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the
Partnership's unconsolidated joint ventures, which are currently
accounted for under the equity method. However, such consolidation is
not expected to significantly impact the Partnership's results of
operations.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities
and Equity" ("FAS 150"). FAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. FAS 150 will require
issuers to classify certain financial instruments as liabilities (or
assets in some circumstances) that previously were classified as
equity. One requirement of FAS 150 is that minority interests for
majority owned finite lived entities be classified as a liability and
recorded at fair market value. FAS 150 initially applied immediately to
all financial instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first interim
period beginning after June 15, 2003. Effective October 29, 2003, the
FASB deferred implementation of FAS 150 as it applies to minority
interests of finite lived Partnerships. The deferral of these
provisions is expected to remain in effect while these interests are
addressed in either Phase II of the FASB's Liabilities and Equity
project or Phase II of the FASB's Business Combinations project;
therefore, no specific timing for the implementation of these
provisions has been stated. The implementation of the currently
effective aspects of FAS 150 did not have an impact on the
Partnership's results of operations. The implementation of the
provisions of FAS 150 that have been deferred is not expected to have a
material impact on the Partnership's results of operations.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2003 and 2002
2. Reclassification
Certain items in the prior year's financial statements have been
reclassified to conform to 2003 presentation. These reclassifications
had no effect on total partners' capital or net income.
3. Discontinued Operations
During 2002, the Partnership identified for sale three properties that
were classified as Discontinued Operations in the accompanying
financial statements. The Partnership sold two of the three properties
during 2002. In February 2003, the Partnership sold the third property,
and recorded a gain on disposal of assets of approximately $2,200. The
Partnership had recorded provisions for write-down of assets in
previous years relating to this property.
The operating results of the discontinued operations for these
properties are as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------- --------------- -------------- ----------------
Rental revenues $ -- $ 15,342 $ -- $ 72,659
Expenses -- (20,472 ) (4,123 ) (74,380 )
Provision for write-down of assets -- -- -- (126,005 )
------------- --------------- -------------- ----------------
Loss from discontinued operations $ -- $ (5,130 ) $ (4,123 ) $ (127,726 )
============= =============== ============== ================
4. Related Party Transactions
An affiliate of the Partnership is entitled to receive a deferred,
subordinated real estate disposition fee, payable upon the sale of one
or more properties, based on the lesser of one-half of a competitive
real estate commission or three percent of the sales price if the
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, 2003, the
Partnership incurred a deferred, subordinated real estate disposition
fee of $12,375 as a result of the Partnership's sale of the property in
Fayetteville, North Carolina.
5. 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:
2003 2002
-------------- ---------------
IHOP Properties, Inc. $ 209,478 $ 209,980
Golden Corral Corp. N/A 117,230
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 2003 and 2002
5. Concentration of Credit Risk - Continued
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 September 30:
2003 2002
----------- -------------
IHOP $ 209,478 $ 209,980
KFC 206,373 215,013
Pizza Hut 166,271 115,930
Taco Bell 134,173 129,501
Golden Corral Family
Steakhouse Restaurants N/A 199,714
The information denoted by N/A indicates that for each period
presented, the tenant or chain 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, 2002,
the Partnership owned 15 Properties directly and six Properties indirectly
through joint venture or tenancy in common arrangements. As of September 30,
2003, the Partnership owned 14 Properties directly and six Properties indirectly
through joint venture or tenancy in common arrangements.
Capital Resources
Cash from operating activities was $778,540 and $938,433 for the nine
months ended September 30, 2003 and 2002, respectively. The decrease in cash
from operating activities during the nine months ended September 30, 2003, as
compared to the same period of 2002, was a result of changes in the
Partnership's working capital.
Other sources and uses of cash included the following during the nine
months ended September 30, 2003.
In February 2003, the Partnership sold its Property in Fayetteville,
North Carolina, to a third party and received net sales proceeds of
approximately $383,300, resulting in a gain on disposal of assets of
approximately $2,200 during the nine months ended September 30, 2003. The
Partnership had recorded provisions for write-down of assets in previous years
relating to this asset. In connection with the sale, the Partnership incurred a
deferred, subordinated real estate disposition fee of $12,375. 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 distributed the sales proceeds
as a special distribution to the limited partners, as described below.
At September 30, 2003, the Partnership had $730,518 in cash and cash
equivalents, as compared to $1,994,246 at December 31, 2002. At September 30,
2003, these funds were held in a demand deposit account at a commercial bank.
The decrease in cash and cash equivalents was primarily a result of the
Partnership distributing to the limited partners, in the form of a special
distribution as described below, sales proceeds that were held at December 31,
2002. The funds remaining at September 30, 2003, after the payment of
distributions and other liabilities, will be used to meet the Partnership's
working capital needs.
Short-Term Liquidity
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will 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.
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 nine
months ended September 30, 2003, the net sales proceeds from the sale of the
Property in Fayetteville, North Carolina, 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, the Partnership declared distributions to limited partners of
$1,404,689 and $1,725,000 for the nine months ended September 30, 2003 and 2002,
respectively, ($351,563 and $375,000 for the quarters ended September 30, 2003
and 2002, respectively). This represents distributions of $28.09 and $34.50 per
unit for the nine months ended September 30, 2003 and 2002, respectively, ($7.03
and $7.50 per unit for each applicable quarter). Distributions for the nine
months ended September 30, 2003 included a special distribution of $350,000 as a
result of the distribution of the net sales proceeds from the 2003 sale of the
Property in Fayetteville, North Carolina. 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 2002 liquidating distribution received from
Titusville Joint Venture. These special distributions were 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 sales of the Properties, 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. Due to the sales of Properties and
current and anticipated future cash from operations, distributions of net cash
flow were adjusted commencing during the quarters ended March 31, 2002 and 2003.
No distributions were made to the general partners for the quarters and nine
months ended September 30, 2003 and 2002. No amounts distributed to the limited
partners for the nine months ended September 30, 2003 and 2002 are required to
be or have been treated by the Partnership as a return of capital for purposes
of calculating the limited partners' return on their adjusted capital
contributions. The Partnership intends to continue to make distributions of cash
available for distribution to the limited partners on a quarterly basis.
Total liabilities, including distributions payable, were $625,658 at
September 30, 2003, as compared to $1,669,185 at December 31, 2002. The decrease
in liabilities at September 30, 2003 was due to the Partnership paying a special
distribution to the limited partners that had been accrued at December 31, 2002
and due to a decrease in amounts due to related parties at September 30, 2003,
as compared to December 31, 2002. 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 $772,959 during the nine months ended
September 30, 2003, as compared to $819,388 during the same period of 2002,
$257,657 and $263,506 of which were earned during the third quarters of 2003 and
2002, respectively. Rental revenues were lower during the quarter and nine
months ended September 30, 2003 due to the Partnership selling its Property in
Montgomery, Alabama in May 2002. The tenant of this Property experienced
financial difficulties during 2002. Rental revenues were also lower during the
quarter and nine months ended September 30, 2003 due to the Partnership
terminating the leases relating to the Properties in Hastings, Nebraska and
Wichita, Kansas during 2002. Each lease was scheduled to expire in 2002. In
connection with the terminated lease in Wichita, Kansas, the Partnership
received approximately $8,000 in lease termination income in consideration for
the Partnership releasing the tenant from its obligation under the lease. The
Partnership re-leased both of these Properties during 2002, each to a new tenant
with slightly lower rents.
The Partnership also earned $50,826 in contingent rental income during
the nine months ended September 30, 2003, as compared to $53,340 during the same
period of 2002, $5,109 and $20,834 of which were earned during the third
quarters of 2003 and 2002, respectively. The decrease in contingent rental
income during the quarter ended September 30, 2003, as compared to the same
period of 2002, was primarily due to a decrease in the reported gross sales of
the restaurants with leases that require the payment of contingent rental
income.
During the nine months ended September 30, 2003, IHOP Properties, Inc.
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, this tenant will continue to contribute more than 10% of
the Partnership's total rental revenues. In addition, four restaurant chains,
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 four 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 this lessee or any of
these restaurant chains will materially affect the Partnership's income if the
Partnership is not able to re-lease these Properties in a timely manner.
The Partnership also earned $158,861 attributable to net income earned
by unconsolidated joint ventures during the nine months ended September 30,
2003, as compared to $155,266 during the same period of 2002, $52,645 and
$52,707 of which were earned during the third quarters of 2003 and 2002,
respectively. Net income earned by unconsolidated joint ventures during the nine
months ended September 30, 2003, remained constant, as compared to same period
in 2002, because there were no changes in the leased Properties owned by the
joint ventures and the tenancies in common.
The Partnership earned $3,484 in interest and other income during the
nine months ended September 30, 2003, as compared to $18,078 during the same
period of 2002, $1,610 and $4,841 of which were earned during the third quarters
of 2003 and 2002, respectively. During the nine months ended September 30, 2002,
interest and other income was higher because the Partnership earned interest on
a mortgage note receivable held in connection with the 2002 sale of the Property
in Montgomery, Alabama. The mortgage note receivable was paid in full in August
2002. In addition, the Partnership distributed sales proceeds during 2002 that
had been held in interest bearing bank accounts.
Operating expenses, including depreciation expense, were $297,783
during the nine months ended September 30, 2003, as compared to $340,490 during
the same period of 2002, $94,057 and $98,717 of which were incurred during the
third quarters of 2003 and 2002, respectively. Operating expenses were lower
during the nine months ended September 30, 2003, due to a decrease in the amount
of state tax expense relating to several states in which the Partnership
conducts business and a decrease in the costs incurred for administrative
expenses for servicing the Partnership and its Properties.
As a result of the sale of the Property in Montgomery, Alabama, the
Partnership recognized a loss on sale of assets of approximately $9,900 during
the nine months ended September 30, 2002. This Property was identified for sale
as of December 31, 2001. Because this Property was identified for sale prior to
the January 2002 implementation of Statement of Financial Accounting Standards
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," the
results of operations relating to this Property were included as Income from
Continuing Operations in the accompanying financial statements.
During the year ended December 31, 2002, the Partnership identified for
sale three Properties that were classified as Discontinued Operations in the
accompanying financial statements. The Partnership recognized a net rental loss
(rental revenues less Property related expenses and provision for write-down of
assets) of $5,130 and $127,726 during the quarter and nine months ended
September 30, 2002, respectively, relating to these three Properties. The net
rental loss during the nine months ended September 30, 2002, was primarily a
result of the Partnership recording provisions for write-down of assets. The
Partnership recorded provisions for write-down of assets of approximately
$46,400 and $79,700 relating to the Properties in Fayetteville, North Carolina
and Altus, Oklahoma, respectively. The tenant of the Fayetteville Property filed
for bankruptcy in January 2002 and rejected the lease related to this Property.
The Partnership sold the Properties in Altus, Oklahoma and Canton Township,
Michigan in September 2002 and recognized a loss on disposal of assets of
approximately $80,600 relating to the Property in Canton Township, Michigan. In
February 2003, the Partnership sold the Property in Fayetteville, North
Carolina, and recorded a gain on disposal of assets of approximately $2,200. The
Partnership had recorded provisions for write-down of assets in previous years
relating to this Property. The Partnership recognized a net rental loss of
$4,123 during the nine months ended September 30, 2003 relating to this
Property.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities (more commonly
referred to as special-purpose entities or off-balance sheet structures), FIN 46
requires that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. Prior to FIN 46, a company generally included another entity in
its consolidated financial statements only if it controlled the entity through
voting interests. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003, and to older
entities, in the first fiscal year or interim period ending after December 15,
2003. The general partners believe adoption of this standard may result in
either consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
In May 2003, the FASB issued FASB Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. FAS 150 will require issuers to classify certain
financial instruments as liabilities (or assets in some circumstances) that
previously were classified as equity. One requirement of FAS 150 is that
minority interests for majority owned finite lived entities be classified as a
liability and recorded at fair market value. FAS 150 initially applied
immediately to all financial instruments entered into or modified after May 31,
2003, and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred
implementation of FAS 150 as it applies to minority interests of finite lived
Partnerships. The deferral of these provisions is expected to remain in effect
while these interests are addressed in either Phase II of the FASB's Liabilities
and Equity project or Phase II of the FASB's Business Combinations project;
therefore, no specific timing for the implementation of these provisions has
been stated. The implementation of the currently effective aspects of FAS 150
did not have an impact on the Partnership's results of operations. The
implementation of the provisions of FAS 150 that have been deferred is not
expected to have a material impact on the Partnership's results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The general partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in the
Partnership's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. The principal executive
and financial officers of the corporate general partner have evaluated the
Partnership's disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q and have determined that such
disclosure controls and procedures are effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
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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.
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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.)
31.1 Certification of Chief Executive Officer of
Corporate General Partner Pursuant to Rule 13a-14
as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of
Corporate General Partner Pursuant to Rule 13a-14
as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of
Corporate General Partner Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of
Corporate General Partner Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Filed herewith.)
(b) Reports on Form 8-K
No reports of Form 8-K were filed during the quarter ended
September 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November, 2003.
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)
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.)
31.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to Rule 13a-14 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
32.2 Certification of Chief Financial Officer of Corporate
General Partner Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2