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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 June 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
0-19140
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CNL Income Fund VII, Ltd.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2963871
- ---------------------------------- -----------------------------
(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 8
Part II.
Other Information 9-10
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
June 30, December 31,
2003 2002
------------------ -------------------
ASSETS
Real estate properties with operating leases, net $ 10,997,670 $ 11,109,588
Net investment in direct financing leases 2,284,806 2,344,317
Investment in joint ventures 9,034,696 9,083,991
Cash and cash equivalents 948,938 972,797
Receivables 592 68,597
Accrued rental income 1,031,083 1,042,794
Other assets 85,112 90,801
------------------ -------------------
$ 24,382,897 $ 24,712,885
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 13,773 $ 4,551
Distributions payable 675,000 675,000
Due to related parties 14,371 13,151
Rents paid in advance 20,413 41,145
------------------ -------------------
Total liabilities 723,557 733,847
Minority interest 137,492 138,945
Partners' capital 23,521,848 23,840,093
------------------ -------------------
$ 24,382,897 $ 24,712,885
================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------- ------------ ------------- ---------------
Revenues:
Rental income from operating leases $ 372,748 $ 373,160 $ 744,623 $ 745,549
Earned income from direct financing leases 70,375 73,851 141,660 148,505
Interest and other income 966 14,762 1,502 23,145
------------- ------------ ------------- ---------------
444,089 461,773 887,785 917,199
------------- ------------ ------------- ---------------
Expenses:
General operating and administrative 58,080 60,508 129,081 133,397
Property related 3,499 43,955 4,688 49,123
State and other taxes -- 6,970 31,806 29,446
Depreciation 55,960 55,957 111,918 111,915
------------- ------------ ------------- ---------------
117,539 167,390 277,493 323,881
------------- ------------ ------------- ---------------
Income Before Minority Interest in Income of
Consolidated Joint Venture and Equity in
Earnings of Unconsolidated Joint Ventures 326,550 294,383 610,292 593,318
Minority Interest in Income of Consolidated
Joint Venture (4,636 ) (4,682 ) (9,352 ) (9,245 )
Equity in Earnings of Unconsolidated Joint Ventures 217,242 244,877 430,815 400,865
------------- ------------ ------------- ---------------
Net Income $ 539,156 $ 534,578 $1,031,755 $ 984,938
============= ============ ============= ===============
Income Per Limited Partner Unit $ 0.018 $ 0.018 $ 0.034 $ 0.033
============= ============ ============= ===============
Weighted Average Number of Limited Partner
Units Outstanding 30,000,000 30,000,000 30,000,000 30,000,000
============= ============ ============= ===============
See accompanying notes to condensed financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
Six Months Ended Year Ended
June 30, December 31,
2003 2002
-------------------- ------------------
General partners:
Beginning balance $ 230,931 $ 230,931
Net income -- --
-------------------- ------------------
230,931 230,931
-------------------- ------------------
Limited partners:
Beginning balance 23,609,162 23,965,640
Net income 1,031,755 2,343,522
Distributions ($0.045 and $0.090 per
limited partner unit, respectively) (1,350,000 ) (2,700,000 )
-------------------- ------------------
23,290,917 23,609,162
-------------------- ------------------
Total partners' capital $ 23,521,848 $ 23,840,093
==================== ==================
See accompanying notes to condensed financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2003 2002
---------------- ---------------
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 1,336,946 $ 1,312,001
---------------- ---------------
Cash Flows from Investing Activities:
Investment in joint venture -- (933,447 )
Return of capital from joint venture -- 129,888
---------------- ---------------
Net cash used in investing activities -- (803,559 )
---------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,350,000 ) (1,350,000 )
Distributions to holder of minority interest (10,805 ) (10,593 )
---------------- ---------------
Net cash used in financing activities (1,360,805 ) (1,360,593 )
---------------- ---------------
Net Decrease in Cash and Cash Equivalents (23,859 ) (852,151 )
Cash and Cash Equivalents at Beginning of Period 972,797 1,747,363
---------------- ---------------
Cash and Cash Equivalents at End of Period $ 948,938 $ 895,212
================ ===============
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period $ 675,000 $ 675,000
================ ===============
See accompanying notes to condensed financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 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 six months ended June 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 VII, Ltd. (the "Partnership") for the year ended December
31, 2002.
The Partnership accounts for its 83% interest in San Antonio #849 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, 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 beginning
after June 15, 2003. The general partners believe adoption of this
standard may result in either consolidation or additional disclosure
requirements with respect to 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.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund VII, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on August 18, 1989, to acquire for cash, either
directly or through joint venture and tenancy in common arrangements, both newly
constructed and existing restaurants, as well as land upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of national and regional fast-food restaurant chains. The leases
generally are triple-net leases, with the lessees responsible for all repairs
and maintenance, property taxes, insurance and utilities. As of June 30, 2003
and 2002, the Partnership owned 18 Properties directly and 17 Properties
indirectly through joint venture or tenancy in common arrangements.
Capital Resources
For the six months ended June 30, 2003 and 2002, the Partnership
generated cash from operating activities of $1,336,946 and $1,312,001,
respectively. At June 30, 2003, the Partnership had $948,938 in cash and cash
equivalents, as compared to $972,797 at December 31, 2002. At June 30, 2003,
these funds were held in demand deposit accounts at commercial banks. The funds
remaining at June 30, 2003, after payment of distributions and other
liabilities, will be used to invest in an additional Property and 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 continue to generate 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 funds are available for distribution. Based
on current and anticipated future cash from operations, the Partnership declared
distributions to the limited partners of $1,350,000 for each of the six months
ended June 30, 2003 and 2002 ($675,000 for each applicable quarter). This
represents distributions of $0.045 per unit for each of the six months ended
June 30, 2003 and 2002 ($0.023 per unit for each applicable quarter). No
distributions were made to the general partners for the quarters and six months
ended June 30, 2003 and 2002. No amounts distributed to the limited partners for
the six months ended June 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 of the Partnership, including distributions payable,
were $723,557 at June 30, 2003, as compared to $733,847 at 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 $886,283 during the six months ended June
30, 2003, as compared to $894,054 during the same period of 2002, $443,123 and
$447,011 of which were earned during the second quarter of 2003 and 2002,
respectively. Rental revenues during the quarter and six months ended June 30,
2003 remained constant, as compared to the quarter and six months ended June 30,
2002, since there was no change in the leased property portfolio.
During the six months ended June 30, 2003 and 2002, the Partnership
also earned $1,502 and $23,145, respectively, in interest and other income, of
which $966 and $14,762 were earned during the quarters ended June 30, 2003 and
2002, respectively. The decrease in interest and other income during the quarter
and six months ended June 30, 2003, as compared to the same period of 2002, was
due to a decrease in the average cash balance as a result of the reinvestment of
sales proceeds in additional Properties through joint venture arrangements
during 2002, the collection of a promissory note, as well as a decline in
interest rates. In addition, interest and other income were higher during the
quarter and six months ended June 30, 2002 because the Partnership recorded as
income amounts received from the State of Ohio for a right of way taking
relating to a parcel of land on its Property in Toledo, Ohio.
The Partnership also earned $430,815 attributable to net income earned
by unconsolidated joint ventures during the six months ended June 30, 2003, as
compared to $400,865 during the same period of 2002, $217,242 and $244,877 of
which were earned during the quarters ended June 30, 2003 and 2002,
respectively. Net income earned by joint ventures was higher during the six
months ended June 30, 2003 due to earnings related to Arlington Joint Venture
which the Partnership acquired in June 2002. The increase in net income earned
by joint ventures during the six months ended June 30, 2003 was also partially
attributable to the fact that the tenant of the Property owned by Duluth Joint
Venture, in which the Partnership owns a 56% interest, began making rental
payments to the joint venture during the second quarter of 2002 and the joint
venture recognized these past due amounts as rental revenues. The tenant of the
Property had previously experienced financial difficulties and ceased making
rental payments to the joint venture. As a result, Duluth Joint Venture stopped
recording rental revenues during the quarter ended March 31, 2002. The increase
in net income earned by joint ventures was partially offset because CNL
Restaurant Investments II, in which the Partnership owns an 18% interest, sold
two Properties in June 2002. These sales resulted in a net gain of $258,505 to
the joint venture and the Partnership recorded its pro-rata share of the gain as
equity in earnings during 2002.
Operating expenses, including depreciation expense, were $277,493
during the six months ended June 30, 2003, as compared to $323,881 during the
same period of 2002, $117,539 and $167,390 of which were incurred during the
quarters ended June 30, 2003 and 2002, respectively. Operating expenses were
higher during the quarter and six months ended June 30, 2002, because the
Partnership elected to reimburse the tenant of the Properties in Odessa, El Paso
and Harlingen, Texas for certain renovation costs.
In January 2003, 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 beginning after June 15, 2003. The general partners believe
adoption of this standard may result in either consolidation or additional
disclosure requirements with respect to 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.
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. Default 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 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 4.1
to Registration Statement No. 33-31482 on Form S-11
and incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 4.1
to Registration Statement No. 33-31482 on Form S-11
and incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited
Partnership of CNL Income Fund VII, Ltd. (Included
as Exhibit 4.2 to Form 10-K filed with the
Securities and Exchange Commission on April 1, 1996,
and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund VII,
Ltd. and CNL Investment Company (Included as Exhibit
10.1 to Form 10-K filed with the Securities and
Exchange Commission on April 1, 1996, and
incorporated herein by reference.)
10.2 Assignment of 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 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 13,
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 on Form 8-K were filed during the quarter ended
June 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 8th day of August, 2003
CNL INCOME FUND VII, 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 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of
CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to
Registration Statement No. 33-31482 on Form S-11 and
incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership
of CNL Income Fund VII, Ltd. (Included as Exhibit 4.2
to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein
by reference.)
10.1 Management Agreement between CNL Income Fund VII, Ltd.
and CNL Investment Company (Included as Exhibit 10.1
to Form 10-K filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated herein
by reference.)
10.2 Assignment of 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 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 13, 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