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
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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 7
Part II.
Other Information 8-9
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
March 31, December 31,
2004 2003
------------------ -------------------
ASSETS
Real estate properties with operating leases, net $ 15,440,197 $ 15,516,336
Net investment in direct financing leases 3,021,881 3,057,744
Investment in joint ventures 5,215,444 5,226,092
Cash and cash equivalents 1,054,996 995,838
Receivables -- 94,390
Accrued rental income 1,063,858 1,059,756
Other assets 73,328 85,335
------------------ -------------------
$ 25,869,704 $ 26,035,491
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 24,288 $ 6,324
Real estate taxes payable 9,068 3,656
Distributions payable 675,000 675,000
Due to related parties 28,938 11,333
Rents paid in advance 66,205 81,463
Deferred rental income 84,233 85,574
------------------ -------------------
Total liabilities 887,732 863,350
Minority interests 1,803,955 1,803,381
Partners' capital 23,178,017 23,368,760
------------------ -------------------
$ 25,869,704 $ 26,035,491
================== ===================
See accompanying notes to condensed financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
Quarter Ended
March 31,
2004 2003
--------------- ---------------
Revenues:
Rental income from operating leases $ 504,037 $ 500,694
Earned income from direct financing leases 92,529 96,662
Contingent rental income 2,037 627
Interest and other income 202 536
--------------- ---------------
598,805 598,519
--------------- ---------------
Expenses:
General operating and administrative 81,697 71,001
Property related 1,567 5,509
State and other taxes 28,966 31,806
Depreciation and amortization 77,051 78,030
--------------- ---------------
189,281 186,346
--------------- ---------------
Income before minority interests and equity in earnings of
unconsolidated joint ventures 409,524 412,173
Minority interests (48,902) (46,195)
Equity in earnings of unconsolidated joint ventures 123,635 126,621
--------------- ---------------
Net income $ 484,257 $ 492,599
=============== ===============
Income per limited partner unit $ 0.016 0.016
=============== ===============
Weighted average number of limited partner
units outstanding 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
Quarter Ended Year Ended
March 31, December 31,
2004 2003
------------------- ------------------
General partners:
Beginning balance $ 230,931 $ 230,931
Net income -- --
------------------- ------------------
230,931 230,931
------------------- ------------------
Limited partners:
Beginning balance 23,137,829 23,609,162
Net income 484,257 2,228,667
Distributions ($0.023 and $0.090 per
limited partner unit, respectively) (675,000) (2,700,000)
------------------- ------------------
22,947,086 23,137,829
------------------- ------------------
Total partners' capital $ 23,178,017 $ 23,368,760
=================== ==================
See accompanying notes to condensed financial statements.
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Quarter Ended
March 31,
2004 2003
-------------- ---------------
Net cash provided by operating activities $ 782,486 $ 762,831
-------------- ---------------
Cash flows from financing activities:
Distributions to limited partners (675,000) (675,000)
Distributions to holders of minority interests (48,328) (48,673)
-------------- ---------------
Net cash used in financing activities (723,328) (723,673)
-------------- ---------------
Net increase in cash and cash equivalents 59,158 39,158
Cash and cash equivalents at beginning of quarter 995,838 988,102
-------------- ---------------
Cash and cash equivalents at end of quarter $ 1,054,996 $ 1,027,260
============== ===============
Supplemental schedule of non-cash financing activities:
Distributions declared and unpaid at end of
quarter $ 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 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 VII, Ltd. (the "Partnership") for the year ended December
31, 2003.
The Partnership accounts for its 83% interest in San Antonio #849 Joint
Venture, its 79% interest in CNL Mansfield Joint Venture, its 56%
interest in Duluth Joint Venture, its 68.75% interest in CNL VII, XV
Columbus Joint Venture and its 79% interest in Arlington Joint Venture
using the consolidation method. Minority interests represent the
minority joint venture partners' proportionate share of the equity in
the consolidated joint ventures. 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. The primary beneficiary of
a variable interest entity is the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected residual
returns, or both, as a result of holding variable interests, which are
the ownership, contractual, or other pecuniary interests in an entity
that change with changes in the fair value of the entity's net assets
excluding variable interests. Prior to FIN 46R, a company generally
included another entity in its financial statements only if it
controlled the entity through voting interests. 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,
which resulted in the consolidation of certain previously
unconsolidated joint ventures. FIN 46R does not require, but does
permit restatement of previously issued financial statements. The
Partnership has restated prior year's financial statements to maintain
comparability between the periods presented. These restatements had no
effect on partners' capital or net income.
2. Reclassification
Certain items in the prior year's financial statements have been
reclassified to conform to 2004 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 March 31, 2004
and 2003, the Partnership owned 18 Properties directly and 17 Properties
indirectly through joint venture or tenancy in common arrangements.
Capital Resources
For the quarters ended March 31, 2004 and 2003, net cash provided by
operating activities was $782,486 and $762,831, respectively.
At March 31, 2004, the Partnership had $1,054,996 in cash and cash
equivalents, as compared to $995,838 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 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 such funds are available for distribution.
Based primarily on current cash from operations, the Partnership declared
distributions to the limited partners of $675,000 for each of the quarters ended
March 31, 2004 and 2003. This represents distributions for each applicable
quarter of $0.023 per unit. 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 $887,732 at
March 31, 2004, as compared to $863,350 at December 31, 2003. The increase in
liabilities was the result of an increase in accounts payable and accrued
expenses, real estate taxes payable, and amounts due to related parties. The
increase was partially offset by a decrease in rents paid in advance. 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 were $596,566 during the
quarter ended March 31, 2004, as compared to $597,356 during the same period of
2003. Rental revenues from continuing operations during the quarter ended March
31, 2004, as compared to the quarter ended March 31, 2003, remained relatively
constant, as there was no change in the leased property portfolio.
In December 2003, Waving Leaves, Inc., the tenant of the Properties in
Orrville, Akron, Minerva and Seville, Ohio filed for Chapter 11 bankruptcy
protection and rejected the lease of the Property in Orrville, Ohio. As of May
3, 2004, the Partnership has received from the guarantor all rental payments
relating to these four leases. The lost revenues that would result if the
guarantor were to cease making rental payments on any of these leases will have
an adverse effect on the results of operations of the Partnership if the
Partnership is not able to re-lease the Properties in a timely manner.
The Partnership earned $123,635 attributable to net income earned by
unconsolidated joint ventures during the quarter ended March 31, 2004, as
compared to $126,621 during the same period of 2003. Net income earned by
unconsolidated joint ventures during 2004, as compared to the same period of
2003, remained relatively constant, as there were no changes in the property
portfolio owned by the joint ventures and tenancies in common.
Operating expenses, including depreciation and amortization expense,
were $189,281 during the quarter ended March 31, 2004, as compared to $186,346
during the same period of 2003. The increase in operating expenses during the
quarter ended March 31, 2004, was partially due to the Partnership incurring
additional general operating and administrative expenses, including legal fees.
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. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, which are the ownership, contractual, or other pecuniary
interests in an entity that change with changes in the fair value of the
entity's net assets excluding variable interests. Prior to FIN 46R, a company
generally included another entity in its financial statements only if it
controlled the entity through voting interests. 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, which resulted in the
consolidation of certain previously unconsolidated joint ventures. FIN 46R does
not require, but does permit restatement of previously issued financial
statements. The Partnership has restated prior year's financial statements to
maintain comparability between the periods presented. These restatements had no
effect on 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. Default 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 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
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 11th day of May, 2004
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