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 March 31, 2004
----------------------------------
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 _____
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
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 7
Item 4. Controls and Procedures 7-8
Part II.
Other Information 9-10
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
March 31, December 31,
2004 2003
------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 7,101,581 $ 7,153,757
Investment in joint ventures 2,069,740 2,073,601
Cash and cash equivalents 700,737 771,278
Receivables -- 11,793
Accrued rental income 124,001 118,373
Other assets 36,806 33,865
------------------- -------------------
$ 10,032,865 $ 10,162,667
=================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 18,118 $ 4,758
Real estate taxes payable 13,658 10,070
Distributions payable 351,563 351,563
Due to related parties 200,665 190,544
Rents paid in advance and deposits 58,168 67,831
------------------- -------------------
Total liabilities 642,172 624,766
Minority interest 121,217 121,860
Partners' capital 9,269,476 9,416,041
------------------- -------------------
$ 10,032,865 $ 10,162,667
=================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended
March 31,
2004 2003
--------------- ---------------
Revenues:
Rental income from operating leases $ 257,652 $ 257,652
Contingent rental income 17,682 23,363
Interest and other income 734 593
--------------- ---------------
276,068 281,608
--------------- ---------------
Expenses:
General operating and administrative 58,431 53,581
Property related 549 963
State and other taxes 7,592 2,313
Depreciation and amortization 52,700 52,176
--------------- ---------------
119,272 109,033
--------------- ---------------
Income before minority interest and equity in earnings
of unconsolidated joint ventures 156,796 172,575
Minority interest (4,176) (4,359)
Equity in earnings of unconsolidated joint ventures 52,378 53,401
--------------- ---------------
Income from continuing operations 204,998 221,617
--------------- ---------------
Discontinued operations:
Loss from discontinued operations -- (4,123)
Gain on disposal of discontinued operations -- 2,225
--------------- ---------------
-- (1,898)
--------------- ---------------
Net income $ 204,998 $ 219,719
=============== ===============
Income (loss) per limited partner unit:
Continuing operations $ 4.10 $ 4.43
Discontinued operations -- (0.04)
--------------- ---------------
$ 4.10 $ 4.39
=============== ===============
Weighted average number of limited partner
units outstanding 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
Quarter Ended Year Ended
March 31, December 31,
2004 2003
------------------- ------------------
General partners:
Beginning balance $ 371,371 $ 371,371
Net income -- --
------------------- ------------------
$ 371,371 $ 371,371
------------------- ------------------
Limited partners:
Beginning balance 9,044,670 9,783,350
Net income 204,998 1,017,572
Distributions ($7.03 and $35.13 per
limited partner unit, respectively) (351,563) (1,756,252)
------------------- ------------------
8,898,105 9,044,670
------------------- ------------------
Total partners' capital $ 9,269,476 $ 9,416,041
=================== ==================
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31,
2004 2003
---------------- --------------
Net cash provided by operating activities $ 285,841 $ 235,256
---------------- --------------
Cash flows from investing activities:
Proceeds from sale of assets -- 383,336
---------------- --------------
Net cash provided by investing activities -- 383,336
---------------- --------------
Cash flows from financing activities:
Distributions to limited partners (351,563) (1,357,500)
Distributions to holders of minority interest (4,819) (5,044)
---------------- --------------
Net cash used in financing activities (356,382) (1,362,544)
---------------- --------------
Net decrease in cash and cash equivalents (70,541) (743,952)
Cash and cash equivalents at beginning of quarter 771,278 1,994,246
---------------- --------------
Cash and cash equivalents at end of quarter $ 700,737 $ 1,250,294
================ ==============
Supplemental schedule of non-cash investing and financing activities:
Deferred real estate disposition fee incurred and unpaid at
end of quarter $ -- $ 12,375
================ ==============
Distributions declared and unpaid at end of quarter $ 351,563 $ 701,563
================ ==============
See accompanying notes to condensed financial statements.
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership) NOTES
TO CONDENSED FINANCIAL STATEMENTS Quarters
Ended March 31, 2004 and 2003
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of the general partners, necessary for a fair
statement of the results for the interim periods presented. Operating
results for the quarter ended March 31, 2004 may not be indicative of
the results that may be expected for the year ending December 31, 2004.
Amounts as of December 31, 2003, included in the financial statements,
have been derived from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund III, Ltd. (the "Partnership") for the year ended December
31, 2003.
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 joint venture. All significant intercompany accounts and
transactions have been eliminated.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January
2003) ("FIN 46R"), "Consolidation of Variable Interest Entities"
requiring existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries. Application of FIN 46R is
required in financial statements of public entities that have interests
in variable interest entities for periods ending after March 15, 2004.
The Partnership has adopted FIN 46R as of March 31, 2004. The
Partnership was not the primary beneficiary of a variable interest
entity at the time of adoption of FIN 46R, therefore the adoption had
no effect on the balance sheet, partners' capital or net income.
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 March 31, 2004 and
2003, the Partnership owned 14 Properties directly and six Properties indirectly
through joint venture or tenancy in common arrangements.
Capital Resources
Net cash provided by operating activities was $285,841 and $235,256 for
the quarters ended March 31, 2004 and 2003, respectively. The increase in net
cash provided by operating activities during the quarter ended March 31, 2004,
was a result of changes in the Partnership's working capital, such as the timing
of transactions relating to the collection of receivables and the payment of
expenses.
At March 31, 2004, the Partnership had $700,737 in cash and cash
equivalents, as compared to $771,278 at December 31, 2003. At March 31, 2004,
these funds were held in demand deposit accounts at a commercial bank. The funds
remaining at March 31, 2004, 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
quarter ended March 31, 2003, the net sales proceeds from the sale of the
Property in Fayetteville, North Carolina, the Partnership declared distributions
to limited partners of $351,563 and $701,563 for the quarters ended March 31,
2004 and 2003, respectively. This represents distributions of $7.03 and $14.03
per unit for the quarters ended March 31, 2004 and 2003, respectively.
Distributions for the quarter ended March 31, 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.
This special distribution was effectively a return of a portion of the limited
partners' investment, although, in accordance with the Partnership agreement, it
was applied to the limited partners' unpaid cumulative 10% Preferred Return. As
a result of the sales of the Properties during previous years, 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 quarter ended March 31, 2003. No distributions
were made to the general partners for the quarters ended March 31, 2004 and
2003. No amounts distributed to the limited partners for the quarters ended
March 31, 2004 and 2003 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 $642,172 at
March 31, 2004, as compared to $624,766 at December 31, 2003. 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
Rental revenues from continuing operations remained constant at
$257,652 during each of the quarters ended March 31, 2004 and 2003 because the
change in the leased Property portfolio related to a Property that was accounted
for as discontinued operations.
The Partnership also earned $17,682 in contingent rental income during
the quarter ended March 31, 2004, as compared to $23,363 during the same period
of 2003.
The Partnership earned $52,378 attributable to net income earned by
unconsolidated joint ventures during the quarter ended March 31, 2004, as
compared to $53,401 during the same period of 2003. These amounts remained
constant, because there were no changes in the leased Property portfolio owned
by the joint ventures and the tenancies in common.
Operating expenses, including depreciation and amortization expense,
were $119,272 during the quarter ended March 31, 2004, as compared to $109,033
during the same period of 2003. Operating expenses were higher during the
quarter ended March 31, 2004, as compared to the same period of 2003, because
the Partnership incurred additional general operating and administrative
expenses, including legal fees, and additional state taxes relating to states in
which the Partnership conducts business.
The Partnership recognized a loss from discontinued operations
(property related expenses in excess of rental revenue) of $4,123 during the
quarter ended March 31, 2003, relating to the Property in Fayetteville, North
Carolina. The Partnership sold this Property in February 2003 and recorded a
gain on disposal of discontinued operations of approximately $2,200. The
Partnership had recorded provisions for write-down of assets in previous years
relating to this Property.
The general partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the limited
partners.
In December 2003, the Financial Accounting Standards Board issued a
revision to FASB Interpretation No. 46 (originally issued in January 2003) ("FIN
46R"), "Consolidation of Variable Interest Entities" requiring existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries. Application of FIN 46R is required in financial statements of
public entities that have interests in variable interest entities for periods
ending after March 15, 2004. The Partnership has adopted FIN 46R as of March 31,
2004. The Partnership was not the primary beneficiary of a variable interest
entity at the time of adoption of FIN 46R, therefore the adoption had no effect
on the balance sheet, partners' capital or net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
The general partners maintain a set of disclosure controls and
procedures designed to ensure that information required to be disclosed in 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.
-----------------
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 between CNL Income Fund
III, Ltd. and CNL Investment Company. (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
March 31, 2004.
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 7th day of May, 2004.
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 between CNL Income Fund
III, Ltd. and CNL Investment Company. (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