10-K 1 if3.txt CNL INCOME FUND III, LTD. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-16850 CNL INCOME FUND III, LTD. (Exact name of registrant as specified in its charter) Florida 59-2809460 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 450 South Orange Avenue Orlando, Florida 32801-3336 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 540-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Name of exchange on which registered: None Not Applicable Securities registered pursuant to section 12(g) of the Act: Units of limited partnership interest ($500 per Unit) (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes___ No X Aggregate market value of the voting stock held by nonaffiliates of the registrant: The registrant registered an offering of 50,000 units of limited partnership interest (the "Units") on Form S-11 under the Securities Act of 1933, as amended. Since no established market for such Units exists, there is no market value for such Units. Each Unit was originally sold at $500 per Unit. DOCUMENTS INCORPORATED BY REFERENCE: None PART I Item 1. Business CNL Income Fund III, Ltd. (the "Registrant" or the "Partnership") is a limited partnership which was organized pursuant to the laws of the State of Florida on June 1, 1987. The general partners of the Partnership are Robert A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida corporation (the "General Partners"). Beginning on August 10, 1987, the Partnership offered for sale up to $25,000,000 in limited partnership interests (the "Units") (50,000 Units at $500 per Unit) pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended. The offering terminated on April 29, 1988, as of which date the maximum offering proceeds of $25,000,000 had been received from investors who were admitted to the Partnership as limited partners (the "Limited Partners"). The Partnership was organized primarily to acquire both newly constructed and existing restaurant properties, as well as properties 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 "Restaurant Chains"). Net proceeds to the Partnership from its offering of Units, after deduction of organizational and offering expenses, totalled $22,125,102, and were used to acquire 32 Properties, including interests in two Properties owned by joint ventures in which the Partnership is a co-venturer. As of December 31, 1999, the Partnership owned 21 Properties directly and seven Properties indirectly through joint venture or tenancy-in-common arrangements. During 2000, the Partnership sold its Property in Plant City, Florida. During 2001, the Partnership sold its Properties in Schererville, Indiana and Washington, Illinois. During 2002, Titusville Joint Venture, in which the Partnership owned a 73.4% interest, sold its Property and the Partnership and the joint venture partner liquidated the joint venture. In addition, during 2002, the Partnership sold its Properties in Montgomery, Alabama; Altus, Oklahoma; and Canton Township, Michigan. As of December 31, 2002, the Partnership owned 15 Properties directly and six Properties indirectly through joint venture or tenancy-in-common arrangements. In February 2003, the Partnership sold its Property in Fayetteville, North Carolina. Generally, the Properties are leased on a triple-net basis with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. The Partnership holds its Properties until the General Partners determine that the sale or other disposition of the Properties is advantageous in view of the Partnership's investment objectives. In deciding whether to sell Properties, the General Partners consider factors such as potential capital appreciation, net cash flow and federal income tax considerations. Certain lessees have been granted options to purchase Properties, generally at the Property's then fair market value after a specified portion of the lease term has elapsed. The Partnership has no obligation to sell all or any portion of a Property at any particular time, except as may be required under Property or joint venture purchase options granted to certain lessees. Leases Although there are variations in the specific terms of the leases, the following is a summarized description of the general structure of the Partnership's leases. The leases of the Properties owned by the Partnership and joint ventures in which the Partnership is a co-venturer provide for initial terms ranging from 3 to 20 years (the average being 17 years), and expire between 2006 and 2019. Generally, leases are on a triple-net basis, with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases of the Properties generally provide for minimum base annual rental payments (payable in monthly installments) ranging from approximately $23,000 to $191,900. The majority of the leases provide for percentage rent, based on sales in excess of a specified amount, to be paid annually. In addition, some leases provide for increases in the annual base rent during the lease term. Generally, the leases of the Properties provide for two to four five-year renewal options subject to the same terms and conditions as the initial lease. Lessees of 16 of the Partnership's 21 Properties also have been granted options to purchase Properties at each Property's then fair market value, or pursuant to a formula based on the original cost of the Property, if greater, after a specified portion of the lease term has elapsed. Fair market value will be determined through an appraisal by an independent firm. The leases generally provide that, in the event the Partnership wishes to sell the Property subject to that lease, the Partnership must first offer the lessee the right to purchase the Property on the same terms and conditions, and for the same price, as any offer which the Partnership has received for the sale of the Property. In January 2002, Houlihan's Restaurant, Inc., filed for bankruptcy and rejected the one lease it has with the Partnership. In February 2003, the Partnership sold this Property to a third party. In addition, in January 2002, Paragon of Michigan, Inc. filed for bankruptcy and in February 2002, rejected the one lease it has with the Partnership. In September 2002, the Partnership sold this Property to a third party. In addition, the Partnership sold its Properties in Altus, Oklahoma and Montgomery, Alabama during the year ended December 31, 2002. The Partnership used the sales proceeds from the three sales during 2002 to pay liabilities of the Partnership and to make a special distribution to the Limited Partners. Major Tenants During 2002, two lessees of the Partnership, Winston's GC No. 1, Inc., and IHOP Properties, Inc., each contributed more than 10% of the Partnership's total rental revenues (including rental revenues from the Partnership's consolidated joint venture and the Partnership's share of rental revenues from Properties owned by unconsolidated joint ventures and Properties owned with affiliates of the General Partners as tenants-in-common). As of December 31, 2002, Winston's GC No. 1, Inc. was the lessee under a lease relating to one restaurant, and IHOP Properties Inc. was the lessee under leases relating to four restaurants. It is anticipated that, based on the minimum rental payments required by the leases, these two lessees will each continue to contribute more than 10% of the Partnership's total rental revenues in 2003. In addition, four Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), IHOP, KFC, and Taco Bell each accounted for more than 10% of the Partnership's total rental revenues in 2002 (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). In 2003, 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 these lessees or any of these Restaurant Chains could materially affect the Partnership's income, if the Partnership is not able to re-lease these Properties in a timely manner. As of December 31, 2002, IHOP Properties, Inc. leased Properties with an aggregate carrying value in excess of 20% of the total assets of the Partnership. Joint Venture and Tenancy in Common Arrangements The Partnership has entered into the following joint venture and tenancy in common arrangements as of December 31, 2002:
Entity Name Year Ownership Partners Property Tuscawilla Joint Venture 1987 69.07 % Various Third Party Partners Winter Springs, FL CNL Income Fund III, Ltd., and CNL 1997 33.00 % CNL Income Fund IX, Ltd. Englewood, CO Income Fund IX, Ltd., Tenants in Common CNL Income Fund III, Ltd., CNL 1997 9.84% CNL Income Fund VII, Ltd. Miami, FL Income Fund VII, Ltd., CNL CNL Income Fund X, Ltd. Income Fund X, Ltd., and CNL CNL Income Fund XIII, Ltd. Income Fund XIII, Ltd., Tenants in Common CNL Income Fund II, Ltd., CNL Income 1998 25.87% CNL Income Fund II, Ltd., Overland Park, KS Fund III, Ltd., and CNL Income CNL Income Fund VI, Ltd. Fund VI, Ltd., Tenants in Common RTO Joint Venture 1998 46.88% CNL Income Fund V, Ltd. Orlando, FL CNL Income Fund III, Ltd., and CNL 1999 20.00% CNL Income Fund VI, Ltd Baytown, TX Income Fund VI, Ltd., Tenants in Common
Each joint venture and tenancy in common was formed to hold one Property. Each CNL Income Fund is an affiliate of the General Partners and is a limited partnership organized pursuant to the laws of the state of Florida. The Partnership has management control of Tuscawilla Joint Venture and shares management control equally with the affiliates of the General Partners for the other joint ventures and tenancy in common arrangements. The joint venture and tenancy in common arrangements provide for the Partnership and its joint venture or tenancy in common partners to share in all costs and benefits in proportion to each partner's percentage interest in the business entity. The Partnership and its partners are also jointly and severally liable for all debts, obligations and other liabilities of the joint venture or tenancy in common. Net cash flow from operations is distributed to each joint venture or tenancy in common partner in accordance with its respective percentage interest in the business entity. Each joint venture has an initial term of 20 years and, after the expiration of the initial term, continues in existence from year to year unless terminated at the option of either joint venturer by an event of dissolution. Events of dissolution include the bankruptcy, insolvency or termination of any joint venturer, sale of the Property owned by the joint venture and mutual agreement of the Partnership and its joint venture partner to dissolve the joint venture. Any liquidation proceeds, after paying joint venture debts and liabilities and funding reserves for contingent liabilities, will be distributed first to the joint venture partners with positive capital account balances in proportion to such balances until such balances equal zero, and thereafter in proportion to each joint venture partner's percentage interest in the joint venture. The joint venture and tenancy in common agreements restrict each party's ability to sell, transfer to assign its joint venture or tenancy in common interest without first offering it for sale to its partner, either upon such terms and conditions as to which the parties may agree or, in the event the parties cannot agree, on the same terms and conditions as any offer from a third party to purchase such joint venture or tenancy in common interest. In January 2002, Titusville Joint Venture, in which the Partnership owned a 73.4% interest, sold its Property to a third party and received net sales proceeds of approximately $165,600, resulting in a gain of $4,900 to the joint venture. In addition, in January 2002, the Partnership and the joint venture partner liquidated Titusville Joint Venture and the Partnership received its pro rata share of the liquidation proceeds. No gain or loss was recorded relating to the liquidation. The use of joint venture and tenancy in common arrangements allows the Partnership to fully invest its available funds at times at which it would not have sufficient funds to purchase an additional property, or at times when a suitable opportunity to purchase an additional property is not available. The use of joint venture and tenancy in common arrangements also provides the Partnership with increased diversification of its portfolio among a greater number of properties. In addition, tenancy in common arrangements may allow the Partnership to defer the gain for federal income tax purposes upon the sale of the property if the proceeds are reinvested in an additional property. Certain Management Services RAI Restaurants, Inc. (formerly known as CNL Restaurants XVIII, Inc.), an affiliate of the General Partners, provided certain services relating to management of the Partnership and its Properties pursuant to a management agreement with the Partnership. CNL APF Partners, LP assigned its rights in, and its obligations under, the management agreement with the Partnership to RAI Restaurants, Inc. ("Advisor") effective January 1, 2002. All of the terms and conditions of the management agreement, including the payment of fees, remained unchanged. Under this agreement, the Advisor is responsible for collecting rental payments, inspecting the Properties and the tenants' books and records, assisting the Partnership in responding to tenant inquiries and notices, and providing information to the Partnership about the status of the leases and the Properties. The Advisor also assists the General Partners in negotiating the leases. For these services, the Partnership had agreed to pay the Advisor an annual fee of one-half of one percent of Partnership assets (valued at cost) under management, not to exceed the lesser of one percent of gross rental revenues or competitive fees for comparable services. Under the management agreement, the property management fee is subordinated to receipt by the Limited Partners of an aggregate, ten percent, cumulative, noncompounded annual return on their adjusted capital contributions (the "10% Preferred Return"), calculated in accordance with the Partnership's limited partnership agreement (the "Partnership Agreement"). In any year in which the Limited Partners have not received the 10% Preferred Return, no property management fee will be paid. The property management agreement continues until the Partnership no longer owns an interest in any Properties unless terminated at an earlier date upon 60 days' prior notice by either party. Competition The fast-food and family-style restaurant business is characterized by intense competition. The restaurants on the Partnership's Properties compete with independently owned restaurants, restaurants which are part of local or regional chains, and restaurants in other well-known national chains, including those offering different types of food and service. Employees The Partnership has no employees. The officers of CNL Realty Corporation and the officers and employees of CNL American Properties Fund, Inc., the parent Company of the Advisor, perform certain services for the Partnership. In addition, the General Partners have available to them the resources and expertise of the officers and employees of CNL Financial Group, Inc., a diversified real estate company, and its affiliates, who may also perform certain services for the Partnership. Item 2. Properties As of December 31, 2002, the Partnership owned 21 Properties. Of the 21 Properties, 15 are owned by the Partnership in fee simple, two are owned through joint venture arrangements and four are owned through tenancy in common arrangements. See Item 1. Business - Joint Venture and Tenancy in Common Arrangements. The Partnership is not permitted to encumber its Properties under the terms of its partnership agreement. Reference is made to the Schedule of Real Estate and Accumulated Depreciation for a listing of the Properties and their respective costs, including acquisition fees and certain acquisition expenses. Description of Properties Land. The Partnership's Property sites range from approximately 11,800 to 67,300 square feet depending upon building size and local demographic factors. Sites purchased by the Partnership are in locations zoned for commercial use which have been reviewed for traffic patterns and volume. The following table lists the Properties owned by the Partnership, either directly or indirectly through joint venture or tenancy in common arrangements, as of December 31, 2002 by state. More detailed information regarding the location of the Properties is contained in the Schedule of Real Estate and Accumulated Depreciation filed for the year ended December 31, 2002. State Number of Properties Alabama 1 Arizona 1 California 1 Colorado 1 Florida 4 Georgia 1 Kansas 2 Minnesota 1 Missouri 1 Nebraska 1 North Carolina 1 Texas 6 -------------- TOTAL PROPERTIES 21 ============== Buildings. Each of the Properties owned by the Partnership, either directly or indirectly, through joint venture or tenancy in common arrangements, includes a building that is one of a Restaurant Chain's approved designs. The buildings generally are rectangular and are constructed from various combinations of stucco, steel, wood, brick and tile. Building sizes range from approximately 1,900 to 7,900 square feet. Generally, all buildings on Properties acquired by the Partnership are freestanding and surrounded by paved parking areas. Buildings are suitable for conversion to various uses, although modifications may be required prior to use for other than restaurant operations. As of December 31, 2002, the Partnership had no plans for renovation of the Properties. Depreciation expense is computed for buildings and improvements using the straight line method using depreciable lives of 31.5 and 39 years for federal income tax purposes. As of December 31, 2002, the aggregate cost of the Properties owned by the Partnership and its consolidated joint venture, and the unconsolidated joint ventures (including the Properties owned through tenancy in common arrangements) for federal income tax purposes was $10,644,779 and $7,858,323, respectively. The following table lists the Properties owned by the Partnership, either directly or indirectly through joint venture or tenancy in common arrangements, as of December 31, 2002 by Restaurant Chain. Restaurant Chain Number of Properties Burger King 1 Chevy's Fresh Mex 1 Darryl's 1 Golden Corral 1 IHOP 4 KFC 4 Pizza Hut 4 Ruby Tuesday 1 Taco Bell 2 Other 2 -------------- TOTAL PROPERTIES 21 ============== The General Partners consider the Properties to be well-maintained and sufficient for the Partnership's operations. The General Partners believe that the Properties are adequately covered by insurance. In addition, the General Partners have obtained contingent liability and property coverage for the Partnership. This insurance is intended to reduce the Partnership's exposure in the unlikely event a tenant's insurance policy lapses or is insufficient to cover a claim relating to the Property. Leases. The Partnership leases the Properties to operators of selected national and regional fast-food restaurant chains. The leases are generally on a long-term "triple net" basis, meaning that the tenant is responsible for repairs, maintenance, property taxes, utilities and insurance. At December 31, 2002, 2001, 2000, 1999, and 1998, the Properties were 95%, 96%, 96%, 98% and 98%, occupied, respectively. The following is a schedule of the average rent per Property for each of the years ended December 31:
2002 2001 2000 1999 1998 ------------- ------------- --------------- -------------- -------------- Rental Revenues (1)(2) $ 1,536,998 $ 1,869,205 $1,947,948 $ 1,939,767 $ 1,798,973 Properties (2) 20 24 26 27 27 Average Rent per Property $ 76,850 $ 77,884 $ 74,921 $ 71,843 $ 66,629
(1) Rental revenues include the Partnership's share of rental revenues from the Properties owned through joint venture arrangements and the Properties owned through tenancy in common arrangements. (2) Excludes Properties that were vacant at December 31, and that did not generate rental revenues during the year ended December 31. The following is a schedule of lease expirations for leases in place as of December 31, 2002 for the next ten years and thereafter.
Percentage of Expiration Number Annual Rental Gross Annual Year of Leases Revenues Rental Income ---------------- --------------- --------------------- ------------------------- 2003 -- -- -- 2004 -- -- -- 2005 -- -- -- 2006 2 $ 126,249 10.02% 2007 4 190,856 15.15% 2008 5 370,481 29.40% 2009 -- -- -- 2010 1 46,651 3.70% 2011 -- -- -- 2012 2 49,351 3.92% Thereafter 6 476,434 37.81% ---------- --------------- ------------- Total (1) 20 $ 1,260,022 100.00% ========== =============== =============
(1) Excludes one Property which was vacant at December 31, 2002 and sold in February 2003. Leases with Major Tenants. The terms of each of the leases with the Partnership's major tenants as of December 31, 2002 (see Item 1. Business - Major Tenants), are substantially the same as those described in Item 1. Business - Leases. IHOP Properties, Inc. leases four IHOP restaurants. The initial term of each lease is 20 years (expiring between 2017 and 2019) and the average minimum base annual rent is approximately $147,700 (ranging from approximately $120,200 to $174,300). Winston's GC No. 1, Inc. leases one Golden Corral restaurant. The initial term of the lease is 15 years (expiring in 2013) and a minimum base annual rent of approximately $110,000. Item 3. Legal Proceedings Neither the Partnership, nor its General Partners or any affiliate of the General Partners, nor any of their respective Properties, is party to, or subject to, any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters (a) As of March 10, 2003, there were 2,021 holders of record of the Units. There is no public trading market for the Units, and it is not anticipated that a public market for the Units will develop. During 2002, Limited Partners who wished to sell their Units may have offered the Units for sale pursuant to the Partnership's distribution reinvestment plan (the "Plan"), and Limited Partners who wished to have their distributions used to acquire additional Units (to the extent Units were available for purchase), may have done so pursuant to such Plan. The General Partners have the right to prohibit transfers of Units. From inception through December 31, 2002, the price paid for any Unit transferred pursuant to the Plan ranged from $382.50 to $475 per Unit. The price paid for any Units transferred other than pursuant to the Plan was subject to negotiation by the purchaser and the selling Limited Partner. The Partnership will not redeem or repurchase Units. The following table reflects, for each calendar quarter, the high, low and average sales prices for transfers of Units during 2002 and 2001 other than pursuant to the Plan, net of commissions.
2002 (1) 2001 (1) ----------------------------------- ------------------------------------ High Low Average High Low Average -------- --------- ---------- -------- --------- ----------- First Quarter $298 $ 212 $ 228 $297 $297 $297 Second Quarter 215 215 215 340 286 313 Third Quarter 323 215 237 301 263 288 Fourth Quarter 181 181 181 264 264 264
(1) A total of 615 and 204 Units were transferred other than pursuant to the Plan for the years ended December 31, 2002 and 2001, respectively. The capital contribution per Unit was $500. All cash available for distribution will be distributed to the partners pursuant to the provisions of the Partnership Agreement. For the years ended December 31, 2002 and 2001, the Partnership declared cash distributions of $3,082,500 and $2,400,000, respectively, to the Limited Partners. Distributions during 2002 and 2001 included $1,600,000 and $650,000, respectively, in special distributions, as a result of the distribution of net sales proceeds from the 2002 sales of the properties in Montgomery, Alabama; Altus, Oklahoma; and Canton Township, Michigan, the liquidating distribution received from Titusville Joint Venture and the 2001 sales of the properties in Washington, Illinois and Schererville, Indiana. These amounts were applied toward the Limited Partners' cumulative 10% Preferred Return. No distributions have been made to the General Partners to date. 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 preferred return. The reduced number of Properties for which the Partnership receives rental payments, as well as ongoing operations, reduced the Partnership's revenues. The decrease in Partnership revenues, combined with the fact that a significant portion of the Partnership's expenses are fixed in nature, resulted in a decrease in cash distributions to the Limited Partners commencing during the quarters ended March 31, 2002 and December 31, 2002. No amounts distributed to the Limited Partners for the years ended December 31, 2002 and 2001, are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the Limited Partners' return on their adjusted capital contributions. No distributions have been made to the General Partners to date. As indicated in the chart below, these distributions were declared at the close of each of the Partnership's calendar quarters. These amounts include monthly distributions made in arrears for the Limited Partners electing to receive such distributions on this basis. 2002 2001 ------------- -------------- First Quarter $ 975,000 $ 437,500 Second Quarter 375,000 437,500 Third Quarter 375,000 1,087,500 Fourth Quarter 1,357,500 437,500 The Partnership intends to continue to make distributions of cash available for distribution to the Limited Partners on a quarterly basis, although the General Partners, in their sole discretion, may elect to pay distributions monthly. (b) Not applicable. Item 6. Selected Financial Data
2002 2001 2000 1999 1998 ------------- ------------- -------------- -------------- ------------- Year ended December 31: Continuing Operations: Revenues $1,274,989 $1,561,515 $ 1,451,913 $ 1,509,847 $ 1,431,319 Equity in earnings of unconsolidated joint ventures 207,800 139,219 23,956 170,966 22,708 Income from continuing operations (1) 1,016,488 974,444 1,035,999 1,453,338 1,514,271 Discontinued Operations (4): Revenues 72,147 312,617 311,885 313,429 332,227 Income (Loss) from discontinued operations (3) (736,689 ) (56,397 ) 277,433 277,333 222,612 Net income 279,799 918,047 1,313,432 1,730,671 1,736,883 Net income (loss) per unit: Continuing operations $ 20.33 $ 19.49 $ 20.72 $ 29.06 $ 30.29 Discontinued operations (14.73 ) (1.13 ) 5.55 5.55 4.45 ------------- ------------- -------------- -------------- ------------- Total $ 5.60 $ 18.36 $ 26.27 $ 34.61 $ 34.74 ============= ============= ============== ============== ============= Cash distributions declared (2) $3,082,500 $ 2,400,000 $ 2,475,000 $ 2,000,000 $ 3,477,747 Cash distributions declared per unit (2) 61.65 48.00 49.50 40.00 69.55 At December 31: Total assets $11,948,538 $13,680,116 $15,157,134 $16,472,518 $ 16,701,732 Total partners' capital 10,154,721 12,957,422 14,439,375 15,600,943 15,870,272
(1) Income from continuing operations for the years ended December 31, 2001, 2000, 1999, and 1998, includes gains on sale of assets of $297,741, $16,855, $293,512, and $497,321, respectively, and a loss on sale of assets of $9,945 during the year ended December 31, 2002. In addition, income from continuing operations for the years ended December 31, 2001, and 1998, includes provision for write-down of assets of $553,673 and $25,821, respectively. (2) Distributions for the years ended December 31, 2002, 2001, 2000 and 1998, include a special distribution to the Limited Partners of $1,600,000, $650,000, $600,000 and $1,477,747, respectively, as a result of the distribution of the net sales proceeds from Properties sold. (3) Income (loss) from discontinued operations includes $647,285 and $331,304 for the years ended December 31, 2002 and 2001, respectively, from provisions for write-down of assets. Income from discontinued operations includes $113,780 for the year ended December 31, 2002 from loss on sale of discontinued operations. (4) Certain items in prior years' financial statements have been reclassified to conform to 2002 presentation. These reclassifications had no effect on total net income. The results of operations relating to Properties that were either disposed of or were classified as held for sale as of December 31, 2002 are reported as discontinued operations. The results of operations relating to Properties that were identified for sale as of December 31, 2001 but sold subsequently are reported as continuing operations. The above selected financial data should be read in conjunction with the financial statements and related notes contained in Item 8 hereof. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Partnership 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 restaurant Properties were to be constructed, to be leased primarily to operators of selected national and regional fast-food Restaurant Chains. The leases generally are triple-net leases, with the lessees generally responsible for all repairs and maintenance, property taxes, insurance and utilities. The leases of the Properties provide for minimum base annual rental amounts (payable in monthly installments) ranging from approximately $23,000 to $191,900. The majority of the leases provide for percentage rent based on sales in excess of a specified amount. In addition, some leases provide for increases in the annual base rent during the lease term. As of December 31, 2002, the Partnership owned 15 Properties directly and six Properties indirectly through joint venture or tenancy-in-common arrangements. As of December 31, 2001, the Partnership owned 18 Properties directly and seven Properties indirectly through joint venture or tenancy in common arrangements. As of December 31, 2000, the Partnership owned 20 Properties directly and seven Properties indirectly through joint venture or tenancy in common arrangements. Capital Resources Cash from operating activities of $1,433,388, $1,747,573, and $1,617,213, during the years ended December 31, 2002, 2001, and 2000, respectively. The decrease in cash from operating activities during 2002, as compared to 2001, was primarily a result of changes in income and expenses. The increase in cash from operating activities during 2001, as compared to 2000, was the result of changes in the Partnership's working capital and changes in income and expenses. Other sources and uses of cash included the following during the years ended December 31, 2002, 2001, and 2000. During 2000, the Partnership sold its Property in Plant City, Florida, to the tenant, and received net sales proceeds of approximately $492,100, resulting in a gain of approximately $16,900. In connection with the sale of this Property, the Partnership incurred a deferred, subordinated, real estate disposition fee of $15,296. The Partnership distributed these net sales proceeds as a special distribution to the Limited Partners. During 2001, the Partnership sold its Properties in Schererville, Indiana and Washington, Illinois and received net sales proceeds of approximately $1,336,700, resulting in a total gain of approximately $297,700. In connection with these sales, the Partnership incurred deferred, subordinated, real estate disposition fees of $40,928, and received $60,000 from one of the former tenants in consideration of the Partnership releasing the tenant from its obligation under the terms of its lease. The Partnership distributed the net sales proceeds from these sales as special distributions to the Limited Partners, as described below. In January 2002, Titusville Joint Venture, in which the Partnership owned a 73.40% interest, sold its Property, which had been vacant since 1997, to a third party and received net sales proceeds of approximately $165,600 resulting in a gain of approximately $4,900 to the joint venture. The Partnership and the joint venture partner dissolved the joint venture in accordance with the joint venture agreement and the Partnership received approximately $106,500 representing its pro rata share of the joint venture's liquidating distribution. No gain or loss was recorded relating to the dissolution of the joint venture. The Partnership distributed the liquidation proceeds as a special distribution to the Limited Partners, as described below. In addition, during 2002, the Partnership sold its Properties in Montgomery, Alabama; Altus, Oklahoma, and Canton Township, Michigan, each to a third party and received net sales proceeds of approximately $1,419,100, resulting in a net loss of approximately $167,100 during the year ended December 31, 2002. The Property in Montgomery, Alabama was identified for sale as of December 31, 2001 and the Properties in Altus, Oklahoma and Canton Township, Michigan were identified for sale during 2002. The net sales proceeds from the sale of the Property in Montgomery, Alabama included cash and $320,000 in the form of a promissory note. The promissory note bore interest at a rate of ten percent per annum. In August 2002, the Partnership received a balloon payment which included the outstanding principal balance and accrued interest. In addition, the net sales proceeds from the sale of the Property in Canton Township, Michigan included $640,000 in the form of a promissory note. This promissory note bore interest at a rate of 10.5% per annum. In December 2002, the Partnership negotiated for an early payoff at a reduced amount and received a balloon payment which included $606,800 of the outstanding principal balance. The Partnership wrote off the accrued interest of $16,800 and remaining principal balance of $33,200. The Partnership used the sales proceeds from these three sales to make a special distribution to the Limited Partners and to pay liabilities of the Partnership In connection with the sales of the Properties in Montgomery, Alabama; Altus, Oklahoma and Canton Township, Michigan, the Partnership incurred deferred, subordinated, real estate disposition fees of $45,300. Payment of the real estate disposition fees is subordinated to the receipt by the Limited Partners of their aggregate, cumulative 10% Preferred Return, plus their adjusted capital contributions. None of the Properties owned by the Partnership, or the joint ventures or tenancy in common arrangements in which the Partnership owns an interest, are or may be encumbered. Subject to certain restrictions on borrowings from the General Partners, however, the Partnership may borrow, in the discretion of the General Partners, for the purpose of maintaining the operations of the Partnership. The Partnership will not encumber any of the Properties in connection with any borrowings or advances. The Partnership also will not borrow under circumstances which would make the Limited Partners liable to creditors of the Partnership. Affiliates of the General Partners from time to time incur certain operating expenses on behalf of the Partnership for which the Partnership reimburses the affiliates without interest. Currently, rental income from the Partnership's Properties is invested in money market accounts or other short-term, highly liquid investments such as demand deposit accounts at commercial banks, money market accounts and certificates of deposit with less than a 90-day maturity date, pending reinvestment in additional Properties, paying Partnership expenses, or making distributions to the partners. At December 31, 2002, the Partnership had $1,994,246 invested in such short-term investments as compared to $1,242,931 at December 31, 2001. The increase in cash and cash equivalents at December 31, 2002, as compared to December 31, 2001, was partially a result of the Partnership holding the net sales proceeds from the sale of the Canton Township, Michigan, as described above. As of December 31, 2002, the average interest rate earned on the rental income deposited in demand deposit accounts at commercial banks was approximately one percent annually. The funds remaining at December 31, 2002, after payment of distributions and other liabilities will be used to meet the Partnership's working capital needs. In February 2003, the Partnership sold its Property in Fayetteville, North Carolina, to a third party and received net sales proceeds of approximately $371,000, resulting in a gain of approximately $2,200. Short-Term Liquidity The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership. The Partnership's investment strategy of acquiring Properties for cash and generally 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 net cash flow in excess of operating expenses. Due to low operating expenses and ongoing cash flow, the General Partners do not believe that working capital reserves are necessary at this time. In addition, because the leases for the Partnership's Properties are generally on a triple-net basis, it is not anticipated that a permanent reserve for maintenance and repairs will be established at this time. To the extent, however, that the Partnership has insufficient funds for such purposes, the General Partners will contribute to the Partnership an aggregate amount of up to one percent of the offering proceeds for maintenance and repairs. 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 to the extent that the General Partners determine that such funds are available for distribution. Based primarily on current and anticipated future cash from operations and, for the years ended December 31, 2002, 2001, and 2000, a portion of the sales proceeds received from the sales of Properties, the Partnership declared distributions to the Limited Partners of $3,082,500, $2,400,000, and $2,475,000, for the years ended December 31, 2002, 2001, and 2000, respectively. This represents distributions of $61.65, $48.00, and $49.50, per Unit for the years ended December 31, 2002, 2001, and 2000, respectively. Distributions for 2002 included $1,600,000 in special distributions as a result of the distribution of net sales proceeds from the 2002 sales of the Properties in Montgomery, Alabama; Altus, Oklahoma; and Canton Township, Michigan, the liquidating distribution received from Titusville Joint Venture, and the 2001 sale of the Property in Washington, Illinois. Distributions for 2001 included $650,000 as a result of the distribution of the net sales proceeds from the sale of the Property in Schererville, Indiana. Distributions for 2000 included $600,000 from the sale of the Property in Plant City, Florida. 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. The reduced number of Properties for which the Partnership receives rental payments, as well as ongoing operations, reduced the Partnership's revenues. The decrease in Partnership revenues, combined with the fact that a significant portion of the Partnership's expenses are fixed in nature, resulted in a decrease in cash distributions to the Limited Partners during 2002 and 2001. No amounts distributed to the Limited Partners for the years ended December 31, 2002, 2001, or 2000 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. During 2000, the General Partners waived their right to receive future distributions from the Partnership, including both distributions of operating cash flow and distributions of liquidation proceeds, to the extent that the cumulative amount of such distributions would exceed the balance in the General Partners' capital account as of December 31, 1999. Accordingly, the General Partners were not allocated any net income during the years ended December 31, 2002 or 2001. At December 31, 2002 and 2001, the Partnership owed $10,652 and $4,211, respectively, to affiliates for operating expenses and accounting and administrative services. As of March 14, 2003, these amounts had been reimbursed to affiliates. In addition, during the years ended December 31, 2002 and 2001, the Partnership incurred $45,300 and $40,928, respectively, in real estate disposition fees due to an affiliate as a result of services provided in connection with the sale of several Properties, as described above. The payment of such fees is deferred until the Limited Partners have received the sum of their cumulative 10% Preferred Return and their adjusted capital contributions. Other liabilities, including distributions payable, were $1,426,015 at December 31, 2002, as compared to $466,279 at December 31, 2001. The increase at December 31, 2002, as compared to December 31, 2001, was primarily a result of the Partnership declaring a special distribution 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. Critical Accounting Policies The Partnership's leases are accounted for under the provisions of Statement of Accounting Standard No. 13, "Accounting for Leases" ("FAS 13"), and have been accounted for using either the direct financing or the operating methods. FAS 13 requires management to estimate the economic life of the leased property, the residual value of the leased property and the present value of minimum lease payments to be received from the tenant. In addition, management assumes that all payments to be received under its leases are collectible. Changes in management's estimates or assumption regarding collectibility of lease payments could result in a change in accounting for the lease at the inception of the lease. The Partnership accounts for its unconsolidated joint ventures using the equity method of accounting. Under generally accepted accounting principles, the equity method of accounting is appropriate for entities that are partially owned by the Partnership, but for which operations of the investee are shared with other partners. The Partnership's joint venture agreements require the consent of all partners on all key decisions affecting the operations of the underlying Property. Management reviews the Partnership's Properties and investments in unconsolidated entities periodically for impairment at least once a year or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment is based on the carrying amount of the Property or investment at the date it is tested for recoverability compared to the sum of the estimated future cash flows expected to result from its operation and sale through the expected holding period. If an impairment is indicated, the asset is adjusted to its estimated fair value. When the Partnership makes the decision to sell or commits to a plan to sell a Property within one year, its operating results are reported as discontinued operations. Results of Operations Comparison of year ended December 31, 2002 to year ended December 31, 2001 Total rental revenues were $1,077,046 during the year ended December 31, 2002 as compared to $1,262,340 for the same period of 2001. Rental revenues were lower during 2002, as compared to 2001, because the Partnership sold several Properties during 2001 and 2002. Rental revenues are expected to remain at reduced amounts due to the fact that the Partnership used the majority of these net sales proceeds to pay liabilities of the Partnership and to make distributions to the Limited Partners. The Partnership also earned $171,047 in contingent rental income during the year ended December 31, 2002, as compared to $195,533 during the same period of 2001. The decrease in contingent rental income during 2002 was due to the Partnership deferring the recognition of certain percentage rental income until the tenants' gross sales meet certain defined thresholds. In August 2002, the lease for the Property in Wichita, Kansas, which was scheduled to expire in November 2002, was terminated by the Partnership and the tenant. The Partnership re-leased this Property to a new tenant with terms substantially the same as the Partnership's other leases. In June 2001, the lease for the Property in Washington, Illinois, which was scheduled to expire in November 2002, was terminated by the Partnership and the tenant. The Partnership re-leased this Property to a new tenant with terms substantially the same as the Partnership's other leases. In addition, in September 2001, the Partnership sold its Property in Schererville, Indiana and released the tenant from further obligation under its lease. In connection with these transactions, during the years ended December 31, 2002 and 2001, the Partnership received approximately $8,000 and $80,000, respectively, in lease termination income, in consideration for the Partnership releasing the tenants from their obligations under each lease. The Partnership recognized income of $207,800, attributable to net income from unconsolidated joint ventures in which the Partnership is a co-venturer, during the year ended December 31, 2002, as compared to $139,219 during the same period of 2001. Net income earned by unconsolidated joint ventures was lower during the year ended December 31, 2001, as compared to the same period of 2002 because during 2001, Titusville Joint Venture, in which the Partnership owned a 73.4% interest, recorded a provision for write-down of assets of approximately $38,300. The Property owned by the joint venture became vacant during 1997. Titusville Joint Venture had previously recorded a provision for write-down of assets relating to this Property. The increase in the provision during 2001 represented the difference between the Property's net carrying value and its estimated fair value. In January 2002, Titusville Joint Venture sold its Property to a third party and received net sales proceeds of approximately $165,600 resulting in a gain of approximately $4,900 to the joint venture. The Partnership and the joint venture partner dissolved the joint venture in accordance with the joint venture agreement and the Partnership received approximately $106,500 representing its pro rata share of the joint venture's liquidating distribution. No gain or loss was recorded relating to the dissolution of the joint venture. The Partnership used these proceeds to pay liabilities of the Partnership and make distributions. During 2002, two lessees of the Partnership, Winston's GC No. 1, Inc., and IHOP Properties, Inc., each contributed more than 10% of the Partnership's total rental revenues (including rental revenues from the Partnership's consolidated joint venture and the Partnership's share of rental revenues from Properties owned by unconsolidated joint ventures and Properties owned with affiliates of the General Partners as tenants-in-common). As of December 31, 2002, Winston's GC No. 1, Inc. was the lessee under a lease relating to one restaurant, and IHOP Properties Inc. was the lessee under leases relating to four restaurants. It is anticipated that, based on the minimum rental payments required by the leases, these two lessees will each continue to contribute more than 10% of the Partnership's total rental revenues in 2003. In addition, four Restaurant Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), IHOP, KFC, and Taco Bell each accounted for more than 10% of the Partnership's total rental revenues in 2002 (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). In 2003, 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 these lessees or any of these Restaurant Chains could materially affect the Partnership's income, if the Partnership is not able to re-lease these Properties in a timely manner. The Partnership earned $18,916 in interest and other income during the year ended December 31, 2002, as compared to $23,642 during the same period of 2001. Operating expenses, including depreciation expense and provision for write-down of assets, were $439,066 for the year ended December 31, 2002, as compared to $1,006,751 for the same period of 2001. Operating expenses were higher during 2001, as compared to 2002, partially because the Partnership recorded a provision for write-down of assets of approximately $553,700 relating to the Property in Montgomery, Alabama during 2001. The tenant of this Property experienced financial difficulties and vacated the Property. The provision represented the difference between the net carrying value of the Property at December 31, 2001 and its estimated fair value. In addition, the Partnership incurred property expenses such as insurance, repairs and maintenance, legal fees and real estate taxes relating to this Property. In May 2002, the Partnership sold this Property. In addition, operating expenses were lower during 2002, as compared to 2001, because depreciation was lower as a result of the sale of several Properties during 2001 and 2002. The decrease in operating expenses during the year ended December 31, 2002 was partially offset by an increase in the amount of state tax expense relating to certain states in which the Partnership conducts business. As a result of Property sales during 2002 and 2001 the Partnership recognized a loss on sale of assets of $9,945 and a gain on sale of assets of $297,741, during the years ended December 31, 2002, and 2001, respectively. These Properties had been identified for sale as of December 31, 2001. Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its estimated fair value. If an impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. The statement also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported as a discontinued operation if the disposal activity was initiated subsequent to the adoption of the Standard. During the year ended December 31, 2002, the Partnership identified three Properties that met the criteria of this standard and were classified as Discontinued Operations in the accompanying financial statements. In July 2002, the Partnership entered into an agreement with a third party to sell its Property in Altus, Oklahoma. In connection with the anticipated sale of the Property, the Partnership recorded a provision for write-down of assets of approximately $79,700 during the year ended December 31, 2002. In September 2002, the Partnership sold this Property and its Property in Canton Township, Michigan, to a third party resulting in a loss on disposal of discontinued operations of approximately $80,600 during the year ended December 31, 2002. The Partnership accepted a mortgage note receivable relating to the sale of the Property in Canton Township, Michigan. In December 2002, when the Partnership negotiated for an early payoff at a reduced amount and received a balloon payment, the Partnership wrote off the accrued interest of $16,800 and remaining principal balance of $33,200, which the Partnership recorded as an additional loss on disposal of discontinued operations of as of December 31, 2002. In December 2002, the Partnership entered into an agreement with a third party to sell its Property in Fayetteville, North Carolina. As a result, the Partnership reclassified the asset from real estate properties with operating leases to real estate held for sale. The reclassified asset was recorded at the lower of its carrying amount or fair value, less cost to sell. In addition, the Partnership stopped recording depreciation once the Property was placed up for sale. In connection with the anticipated sale of the Property, the Partnership recorded a provision for write-down of assets of approximately $567,600 during the year ended December 31, 2002. The Partnership had recorded provisions for write-down of assets in previous years, including approximately $331,300 during the year ended December 31, 2001. The provisions represented the difference between each Property's net carrying value and its estimated fair value. The financial results for these three Properties are reflected as Discontinued Operations in the accompanying financial statements. The Partnership used the sales proceeds from the sale of the Properties in Altus, Oklahoma and Canton Township, Michigan to make a special distribution to the Limited Partners and to pay liabilities of the Partnership. In February 2003, the Partnership sold the Property in Fayetteville, North Carolina. The Partnership intends to use these sales proceeds to pay liabilities of the Partnership. Comparison of year ended December 31, 2001 to year ended December 31, 2000 Total rental revenues were $1,262,340 during the year ended December 31, 2001 as compared to $1,343,808 for the same period of 2000. Rental revenues were lower during 2001, as compared to 2000, because the Partnership sold several Properties during 2001 and 2000. In addition, rental revenues were lower during 2001, because the tenant of the Property in Montgomery, Alabama experienced financial difficulties and as a result the Partnership stopped recording rental revenues. In May 2002 the Partnership sold this Property. The Partnership also earned $195,533, in contingent rental income during the year ended December 31, 2001, as compared to $67,909 during the same period of 2000. Contingent rental income was higher during 2001, as compared to 2000, because of an increase in gross sales of certain restaurant Properties requiring the payment of contingent rental income. During the year ended December 31, 2001, the Partnership received approximately $80,000 in lease termination income, in consideration for the Partnership releasing the tenant of the Property in Washington, Illinois, from its obligations under its lease, as described above. The Partnership recognized income of $139,219, attributable to net income from unconsolidated joint ventures in which the Partnership is a co-venturer during the year ended December 31, 2001, as compared to $23,956 during the same period of 2000. During 1997, the operator of the Property owned by Titusville Joint Venture, in which the Partnership owns a 73.4% interest, vacated the Property and ceased operations. During 2001 and 2000, Titusville Joint Venture recorded a provision for write-down of assets for its Property of approximately $73,600 and $227,100, respectively. The provisions represented the difference between the Property's net carrying value and its estimated fair value. In January 2002, Titusville Joint Venture sold its Property, as described above. The Partnership earned $23,642 in interest and other income during the year ended December 31, 2001, as compared to $40,196 during the same period of 2000. Interest and other income were lower during 2001 primarily due to a decrease in the average cash balances during 2001 as a result of the special distributions. Operating expenses, including depreciation expense and provision for write-down of assets, were $1,006,751, for the year ended December 31, 2001, as compared to $439,351 during the same period of 2000. Operating expenses were higher during 2001, as compared to 2000, because the Partnership recorded a provision for write-down of assets of approximately $553,700 during the year ended December 31, 2001, relating to the Property in Montgomery, Alabama, as described above. Operating expenses were also higher during 2001 due to an increase in the costs incurred for administrative expenses for servicing the Partnership and its Properties. During 2000, the Partnership incurred $27,320 in transaction costs related to the General Partners retaining financial and legal advisors to assist them in evaluating and negotiating the proposed merger with APF. On March 1, 2000, the merger discussions were terminated. As a result of the Properties sales during 2001 and 2000 the Partnership recognized a gain on sale of assets of $297,741 and $16,855, during the years ended December 31, 2001 and 2000, respectively. The restaurant industry has been relatively resilient during this volatile time with steady performance during 2002. However, the industry remains in a state of cautious optimism. Restaurant operators expect their business to be better in 2003, according to a nationwide survey conducted by the National Restaurant Association, but are concerned by the budget deficits being experienced by many states and the potential of new taxes on the industry to alleviate the situation. The Partnership's leases as of December 31, 2002 are generally triple-net leases and, in general, contain provisions that the General Partners believe mitigate the adverse effect of inflation. Such provisions include clauses requiring the payment of percentage rent based on certain restaurant sales above a specified level and/or automatic increases in base rent at specified times during the term of the lease. Inflation, overall, has had a minimal effect on the results of operations of the Partnership. Continued inflation may cause capital appreciation of the Partnership's Properties. Inflation and changing prices, however, also may have an adverse impact on the sales of the restaurants and on potential capital appreciation of the Properties. 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 considered 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. Consolidation of variable interests entities will provide more complete information about the resources, obligations, risks and opportunities of the consolidated company. 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. Management believes adoption of this standard may result in either consolidation or additional disclosure requirements with respect to the Partnership's unconsolidated joint ventures or Properties held with affiliates of the General Partners as tenants-in-common, 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 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data CNL INCOME FUND III, LTD. (A Florida Limited Partnership) CONTENTS Page Report of Independent Certified Public Accountants 18 Financial Statements: Balance Sheets 19 Statements of Income 20 Statements of Partners' Capital 21 Statements of Cash Flows 22-23 Notes to Financial Statements 24-37 Report of Independent Certified Public Accountants To the Partners CNL Income Fund III, Ltd. In our opinion, the accompanying balance sheets and the related statements of income, of partners' capital and of cash flows present fairly, in all material respects, the financial position of CNL Income Fund III, Ltd. (a Florida limited partnership) at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and the financial statement schedule are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1 to the financial statements, on January 1, 2002, the Partnership adopted Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." /s/ PricewaterhouseCoopers LLP Orlando, Florida January 31, 2003, except for Note 12, for which the date is February 10, 2003 CNL INCOME FUND III, LTD. (A Florida Limited Partnership) BALANCE SHEETS
December 31, 2002 2001 ------------------ ---------------- ASSETS Real estate properties with operating leases, net $ 7,362,460 $ 7,692,179 Net investment in direct financing leases -- 279,721 Real estate held for sale 368,737 2,125,155 Investment in joint ventures 2,084,178 2,196,170 Cash and cash equivalents 1,994,246 1,242,931 Receivables, less allowance for doubtful accounts of $28,216 in 2001 10,165 27,528 Due from related parties 30 9,754 Accrued rental income 95,861 74,755 Other assets 32,861 31,923 ------------------ ---------------- $ 11,948,538 $ 13,680,116 ================== ================ LIABILITIES AND PARTNERS' CAPITAL Accounts payable $ 21,199 $ 12,786 Real estate taxes payable 11,892 12,050 Distributions payable 1,357,500 437,500 Due to related parties 243,170 128,985 Rents paid in advance and deposits 35,424 3,943 ------------------ ---------------- Total liabilities 1,669,185 595,264 Minority interest 124,632 127,430 Partners' capital 10,154,721 12,957,422 ------------------ ---------------- $ 11,948,538 $ 13,680,116 ================== ================
See accompanying notes to financial statements. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF INCOME
Year Ended December 31, 2002 2001 2000 -------------- -------------- -------------- Revenues: Rental income from operating leases $ 1,060,789 $ 1,221,725 $ 1,284,989 Earned income from direct financing leases 16,257 40,615 58,819 Contingent rental income 171,047 195,533 67,909 Lease termination income 7,980 80,000 -- Interest and other income 18,916 23,642 40,196 -------------- -------------- -------------- 1,274,989 1,561,515 1,451,913 -------------- -------------- -------------- Expenses: General operating and administrative 186,618 193,031 135,678 Property expenses 19,425 10,749 12,539 State and other taxes 24,322 14,395 11,645 Depreciation 208,701 234,903 252,169 Provisions for write-down of assets -- 553,673 -- Transaction costs -- -- 27,320 -------------- -------------- -------------- 439,066 1,006,751 439,351 -------------- -------------- -------------- Income before Gain (Loss) on Sale of Assets, Minority Interest in Income of Consolidated Joint Venture, and Equity in Earnings of Unconsolidated Joint Ventures 835,923 554,764 1,012,562 Gain (Loss) on Sale of Assets (9,945 ) 297,741 16,855 Minority Interest in Income of Consolidated Joint Venture (17,290 ) (17,280 ) (17,374 ) Equity in Earnings of Unconsolidated Joint Ventures 207,800 139,219 23,956 -------------- -------------- -------------- Income from Continuing Operations 1,016,488 974,444 1,035,999 -------------- -------------- -------------- Discontinued Operations (Note 6): Income from discontinued operations (622,909 ) (56,397 ) 277,433 Loss on disposal of discontinued operations (113,780 ) -- -- -------------- -------------- -------------- (736,689 ) (56,397 ) 277,433 -------------- -------------- -------------- Net Income $ 279,799 $ 918,047 $ 1,313,432 ============== ============== ============== Income (Loss) Per Limited Partner Unit Continuing Operations $ 20.33 $ 19.49 $ 20.72 Discontinued Operations (14.73 ) (1.13 ) 5.55 -------------- -------------- -------------- Total $ 5.60 $ 18.36 $ 26.27 ============== ============== ============== Weighted Average Number of Limited Partner Units Outstanding 50,000 50,000 50,000 ============== ============== ==============
See accompanying notes to financial statements. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF PARTNERS' CAPITAL Years Ended December 31, 2002, 2001, and 2000
General Partners Limited Partners ------------------------------ --------------------------------------------------------------- Accumulated Accumulated Syndication Contributions Earnings Contributions Distributions Earnings Costs -------------- ------------- ---------------- ------------- ------------ ------------ Balance, December 31, 1999 $ 161,500 $ 209,871 $ 25,000,000 $ (28,627,387 ) $ 21,721,857 $(2,864,898 ) Distributions to limited partners ($49.50 per limited partner unit) -- -- -- (2,475,000 ) -- -- Net income -- -- -- -- 1,313,432 -- ------------ -------------- --------------- ---------------- ------------ ------------- Balance, December 31, 2000 161,500 209,871 25,000,000 (31,102,387 ) 23,035,289 (2,864,898 ) Distributions to limited partners ($48.00 per limited partner unit) -- -- -- (2,400,000 ) -- -- Net income -- -- -- -- 918,047 -- ------------ -------------- --------------- ---------------- ----------- ------------- Balance, December 31, 2001 161,500 209,871 25,000,000 (33,502,387 ) 23,953,336 (2,864,898 ) Distributions to limited partners ($61.65 per limited partner unit) -- -- -- (3,082,500 ) -- -- Net income -- -- -- -- 279,799 -- ------------ -------------- --------------- ---------------- ------------- -------------- Balance, December 31, 2002 $ 161,500 $ 209,871 $ 25,000,000 $ (36,584,887 ) $ 24,233,135 $ (2,864,898 ) ============ ============= =============== ================ ============== ==============
See accompanying notes to financial statements. ------------ Total ------------- $ 15,600,943 (2,475,000 ) 1,313,432 ------------- 14,439,375 (2,400,000 ) 918,047 ------------- 12,957,422 (3,082,500 ) 279,799 ------------- $10,154,721 ============= CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF CASH FLOWS
Year Ended December 31, 2002 2001 2000 --------------- --------------- --------------- Increase (Decrease) in Cash and Cash Equivalents Cash Flows From Operating Activities: Net income $ 279,799 $ 918,047 $ 1,313,432 --------------- --------------- --------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 239,520 269,355 286,621 Amortization of investment in direct financing leases 6,634 20,457 18,870 Minority interest in income of consolidated joint venture 17,290 17,280 17,374 Equity in earnings of unconsolidated joint ventures, net of distributions 15,195 38,911 182,955 Loss (Gain) on sale of assets 123,725 (297,741 ) (16,855 ) Provision for write-down of assets 647,285 884,977 -- Decrease (increase) in receivables 17,363 (21,748 ) (5,122 ) Decrease (increase) in due from related parties -- 6,956 (14,410 ) Decrease (increase) in accrued rental income (21,106 ) (57,270 ) (63,505 ) Decrease in other assets (938 ) 1,553 1,774 Increase (decrease) in accounts payable and real estate taxes payable 8,255 (142 ) (64,141 ) Decrease in due to related parties 68,885 (4,496 ) (44,524 ) Increase (decrease) in rents paid in advance and deposits 31,481 (28,566 ) 4,744 --------------- --------------- --------------- Total adjustments 1,153,589 829,526 303,781 --------------- --------------- --------------- Net Cash Provided by Operating Activities 1,433,388 1,747,573 1,617,213 --------------- --------------- --------------- Cash Flows From Investing Activities: Additions to real estate properties with operating leases (25,200 ) -- -- Collections on mortgage note receivable 926,800 -- -- Proceeds from sale of assets 492,394 1,336,681 507,365 Liquidating distribution from joint venture 106,521 -- -- --------------- --------------- --------------- Net cash provided by investing activities 1,500,515 1,336,681 507,365 --------------- --------------- --------------- Cash Flows From Financing Activities: Distributions to limited partners (2,162,500 ) (2,400,000 ) (2,537,500 ) Distributions to holder of minority interest (20,088 ) (20,069 ) (20,065 ) --------------- --------------- --------------- Net cash used in financing activities (2,182,588 ) (2,420,069 ) (2,557,565 ) --------------- --------------- --------------- Net Increase (Decrease) in Cash and Cash Equivalents 751,315 664,185 (432,987 ) Cash and Cash Equivalents at Beginning of Year 1,242,931 578,746 1,011,733 --------------- --------------- --------------- Cash and Cash Equivalents at End of Year $ 1,994,246 $ 1,242,931 $ 578,746 =============== =============== ===============
See accompanying notes to financial statements. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31, 2002 2001 2000 -------------- ------------- -------------- Supplemental Schedule on Non-Cash Investing and Financing Activities Deferred real estate disposition fee incurred and unpaid at end of year $ 45,300 $ 40,928 $ 15,296 ============== ============= ============== Mortgage note accepted in exchange for sale of assets $ 960,000 $ -- $ -- ============== ============= ============== Distributions declared and unpaid at end of year $ 1,357,500 $ 437,500 $ 437,500 ============== ============= ==============
See accompanying notes to financial statements. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001, and 2000 1. Significant Accounting Policies: Organization and Nature of Business - CNL Income Fund III, Ltd. (the "Partnership") is a Florida limited partnership that was organized for the purpose of acquiring both newly constructed and existing restaurant properties, as well as properties upon which restaurants were to be constructed, which are leased primarily to operators of national and regional fast-food restaurant chains. The general partners of the Partnership are CNL Realty Corporation (the "Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne. Mr. Seneff and Mr. Bourne are also 50% shareholders of the Corporate General Partner. The general partners have responsibility for managing the day-to-day operations of the Partnership. Real Estate and Lease Accounting - The Partnership records the acquisitions of real estate properties at cost, including acquisition and closing costs. The real estate properties are leased to third parties on a triple-net basis, whereby the tenant is generally responsible for all operating expenses relating to the property, including property taxes, insurance, maintenance and repairs. During the years ended December 31, 2002, 2001, and 2000, tenants paid directly to real estate taxing authorities approximately $120,600, $139,800, and $170,800, respectively, in real estate taxes in accordance with the terms of their triple net leases with the Partnership. The leases of the Partnership provide for base minimum annual rental payments payable in monthly installments. In addition, certain leases provide for contingent rental revenues based on the tenants' gross sales in excess of a specified threshold. The partnership defers recognition of the contingent rental revenues until the defined thresholds are met. The leases are accounted for using either the direct financing or the operating methods. Such methods are described below: Direct financing method - Leases accounted for using the direct financing method are recorded at their net investment (which at the inception of the lease generally represents the cost of the asset). Unearned income is deferred and amortized to income over the lease terms so as to produce a constant periodic rate of return on the Partnership's net investment in the leases. For the leases classified as direct financing leases, the building portions of the property leases are accounted for as direct financing leases while the land portion of these leases are operating leases. Operating method - Real estate property leases accounted for using the operating method are recorded at cost, revenue is recognized as rentals are earned and depreciation is charged to operations as incurred. Buildings are depreciated on the straight-line method over their estimated useful lives of 30 years. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the lease term commencing on the date the property is placed in service. Accrued rental income represents the aggregate amount of income recognized on a straight-line basis in excess of scheduled rental payments to date. Substantially all leases are for 15 to 20 years and provide for minimum and contingent rentals. The lease options generally allow tenants to renew the leases for two or four successive five-year periods subject to the same terms and conditions as the initial lease. Most leases also allow the tenant to purchase the property at fair market value after a specified portion of the lease has elapsed. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001, and 2000 1. Significant Accounting Policies - Continued: When the properties are sold, the related cost and accumulated depreciation for operating leases and the net investment for direct financing leases, plus any accrued rental income, are removed from the accounts and gains or losses from sales are reflected in income. The general partners of the Partnership review properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through operations. The general partners determine whether an impairment in value has occurred by comparing the estimated future undiscounted cash flows, including the residual value of the property, with the carrying cost of the individual property. If an impairment is indicated, the assets are adjusted to their estimated fair value. When the collection of amounts recorded as rental or other income is considered to be doubtful, a provision is made to increase the allowance for doubtful accounts. If amounts are subsequently determined to be uncollectible, the corresponding receivable and allowance for doubtful accounts are decreased accordingly. Investment in Joint Ventures - 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. The Partnership's investments in RTO Joint Venture, and a property in each of Englewood, Colorado, Miami, Florida, Overland Park, Kansas, and Baytown, Texas held as tenants-in-common with affiliates of the general partners, are accounted for using the equity method since each joint venture or tenancy in common agreement requires the consent of all partners on all key decisions affecting the operations of the underlying property. Cash and Cash Equivalents - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds (some of which are backed by government securities). Cash equivalents are stated at cost plus accrued interest, which approximates market value. Cash accounts maintained on behalf of the Partnership in demand deposits at commercial banks and money market funds may exceed federally insured levels; however, the Partnership has not experienced any losses in such accounts. Income Taxes - Under Section 701 of the Internal Revenue Code, all income, expenses and tax credit items flow through to the partners for tax purposes. Therefore, no provision for federal income taxes is provided in the accompanying financial statements. The Partnership is subject to certain state taxes on its income and property. Additionally, for tax purposes, syndication costs are included in Partnership equity and in the basis of each partner's investment. For financial reporting purposes, syndication costs represent a reduction of Partnership equity and a reduction in the basis of each partner's investment. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001, and 2000 1. Significant Accounting Policies - Continued: Use of Estimates - The general partners of the Partnership have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. The more significant areas requiring the use of management estimates relate to the allowance for doubtful accounts and future cash flows associated with long-lived assets. Actual results could differ from those estimates. Reclassification - Certain items in the prior years' financial statements have been reclassified to conform to 2002 presentation, including a change in presentation of the statement of cash flows from the direct to the indirect method. These reclassifications had no effect on partners' capital, net income or cash flows. Statement of Financial Accounting Standards No. 144 ("FAS 144") - Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its estimated fair value. If an impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. The statement also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported as a discontinued operation if the disposal activity was initiated subsequent to the adoption of the Standard. FASB Interpretation No. 46 ("FIN 46") - 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 considered 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. Consolidation of variable interests entities will provide more complete information about the resources, obligations, risks and opportunities of the consolidated company. 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. Management believes adoption of this standard may result in either consolidation or additional disclosure requirements with respect to the Partnership's unconsolidated joint ventures or properties held with affiliates of the general partners as tenants-in-common, which are currently accounted for under the equity method. However, such consolidation is not expected to significantly impact the Partnership's results of operations. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001, and 2000 2. Real Estate Properties with Operating Leases: Real estate properties with operating leases consisted of the following at December 31: 2002 2001 ---------------- -------------- Land $ 3,781,959 $ 3,902,977 Buildings 6,178,603 6,178,603 ---------------- -------------- 9,960,562 10,081,580 Less accumulated depreciation (2,598,102 ) (2,389,401 ) ---------------- -------------- $ 7,362,460 $ 7,692,179 ================ ============== During the year ended December 31, 2001, the Partnership recorded a provision for write-down of assets of approximately $244,700 relating to the property located in Montgomery, Alabama, the building portion of which is classified as a direct financing lease. The tenant of this property experienced financial difficulties and vacated the property. The provision represented the difference between the net carrying value of the property at December 31, 2001 and its estimated fair value. In May 2002, the Partnership sold this property to a third party for $400,000. The Partnership received net sales proceeds of approximately $398,300 (consisting of approximately $66,300 in cash and $320,000 in the form of a promissory note) resulting in a loss of $9,945 during the year ended December 31, 2002. In connection with the sale, the Partnership incurred a deferred, subordinated, real estate disposition fee of $12,000. This property was identified for sale as of December 31, 2001. The following is a schedule of the future minimum lease payments to be received on noncancellable operating leases at December 31, 2002: 2003 $ 1,008,102 2004 1,010,322 2005 1,021,423 2006 938,777 2007 896,446 Thereafter 3,073,615 --------------------- $ 7,948,685 ===================== 3. Net Investment in Direct Financing Leases: The following lists the components of net investment in direct financing leases at December 31:
2002 2001 ----------- ------------- Minimum lease payments receivable $ -- $ 840,786 Estimated residual value -- 153,230 Less unearned income -- (714,295 ) ----------- ------------- Net investment in direct financing leases $ -- $ 279,721 =========== =============
CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001, and 2000 3. Net Investment in Direct Financing Leases - Continued: During the year ended December 31, 2001 the Partnership recorded a provision of $308,972 for impairment of the carrying value of the property in Montgomery, Alabama, because the tenant of this property experienced financial difficulties and vacated the property. The provision represented the difference between the property's net carrying value at December 31, 2001 and its estimated fair value. In May 2002, the Partnership sold this property to a third party. In connection with the sale, the gross investment (minimum lease payments receivable and the estimated residual value) and unearned income relating to the building were removed from the accounts and the loss from the sale of the property was reflected in operating results. 4. Mortgage Notes Receivable: In connection with the sale of its property in Montgomery, Alabama, the Partnership accepted a promissory note in the principal sum of $320,000, collateralized by a mortgage on the property. The promissory note bore interest at a rate of ten percent per annum. In August 2002, the Partnership received a balloon payment which included the outstanding principal balance and accrued interest. In connection with the sale of its property in Canton Township, Michigan, the Partnership accepted a promissory note in the principal sum of $640,000, collateralized by a mortgage on the property. The promissory note bore interest at a rate of 10.5% per annum. In December 2002, the Partnership negotiated for an early payoff at a reduced amount and received a balloon payment which included $606,800 of the outstanding principal balance. The Partnership wrote off the accrued interest of $16,800 and remaining principal balance of $33,200. 5. Investment in Joint Ventures: As of December 31, 2001, the Partnership had a 73.4% and 46.88% interest in the profits and losses of Titusville Joint Venture and RTO joint Venture, respectively. The remaining interests in the Titusville Joint Venture and the RTO Joint Venture, are held by affiliates of the general partners. Also, the Partnership has a 33%, a 9.84%, a 25.87%, and 20% interest in the profits and losses of a property in each of Englewood, Colorado; Miami, Florida; Overland Park, Kansas; and Baytown, Texas, respectively, held as tenants-in-common with affiliates of the general partners. In January 2002, Titusville Joint Venture, in which the Partnership owned a 73.4% interest, sold its property, which had been vacant since 1997, to a third party and received net sales proceeds of approximately $165,600, resulting in a gain of approximately $4,900 to the joint venture. The Partnership and the joint venture partner dissolved the joint venture and the Partnership received approximately $106,500 representing its pro rata share of the joint venture's liquidating distribution. No gain or loss was recorded relating to the dissolution of the joint venture. This property was identified for sale as of December 31, 2001. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, 2000 5. Investment in Joint Ventures - Continued: As of December 31, 2002, RTO Joint Venture, and the Partnership and affiliates, as tenants-in-common in four separate tenancy-in-common arrangements, each owned and leased one property to operators of national fast-food or family-style restaurants. The following presents the combined, condensed financial information for these joint venture and tenancy in common arrangements at:
December 31, December 31, 2002 2001 -------------- --------------- Real estate properties with operating leases, net $ 4,174,084 $ 4,233,200 Net investment in direct financing Leases 3,318,332 3,347,560 Cash 21,217 9,615 Receivables -- 67,370 Accrued rental income 378,316 316,362 Other assets 122 1,189 Liabilities 28,002 26,301 Partners' capital 7,864,069 7,948,995 Years ended December 31, 2002 2001 2000 -------------- ---------------- --------------- Revenues $ 824,515 $ 874,954 $ 852,871 Expenses (74,104 ) (68,292 ) (65,960 ) -------------- ---------------- --------------- Net income $ 750,411 $ 806,662 $ 786,911 ============== ================ ===============
The Partnership recognized income of $207,800, $139,219, and $23,956, for the years ended December 31, 2002, 2001, and 2000, respectively, from these joint ventures and properties held as tenants in common. 6. Discontinued Operations: In July 2002, the Partnership entered into an agreement with a third party to sell the Golden Corral property in Altus, Oklahoma. In connection with the anticipated sale of the property, the Partnership recorded a provision for write-down of assets of approximately $79,700 during the quarter ended June 30, 2002. In September 2002, the Partnership sold this property and received net sales proceeds of approximately $298,500. In connection with the sale, the Partnership incurred a deferred, subordinated, real estate disposition fee of $9,300. In September 2002, the Partnership sold its Red Oaks Steakhouse property in Canton Township, Michigan, to a third party for $800,000. The Partnership received net sales proceeds of approximately $722,300 (consisting of approximately $82,300 in cash and $640,000 in the form of a promissory note), resulting in a loss on disposal of discontinued operations of approximately $80,600 during the year ended December 31, 2002. In connection with the sale, the Partnership incurred a deferred, subordinated, real estate disposition fee of $24,000. The Partnership accepted a mortgage note receivable relating to the sale of this property. In December 2002, when the Partnership negotiated for an early payoff at a reduced amount and received a balloon payment, the Partnership wrote off the accrued interest of $16,800 and remaining principal balance of $33,200. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, 2000 6. Discontinued Operations - Continued: In December 2002, the Partnership entered into an agreement with a third party to sell its property in Fayetteville, North Carolina. As a result, the Partnership reclassified the asset from land and building on operating leases to real estate held for sale. The reclassified asset was recorded at the lower of its carrying amount or fair value, less cost to sell. In addition, the Partnership stopped recording depreciation once the property was placed up for sale. In connection with the anticipated sale of the property, the Partnership recorded a provision for write-down of assets of approximately $567,600 during the quarter ended December 31, 2002. The Partnership had recorded provisions for write-down of assets in previous years, including approximately $331,300 during the year ended December 31, 2001 relating to this property. The provisions represented the difference between the property's net carrying value and its then estimated fair value. The financial results for these three properties are reflected as Discontinued Operations in the accompanying financial statements. The operating results of the discontinued operations for the above properties are as follows:
Year Ended December 31, 2002 2001 2000 ---------------- ------------------ --------------- Rental revenues $ 72,147 $ 312,617 $ 311,885 Expenses (47,771 ) (37,710 ) (34,452 ) Provision for write-down of assets (647,285 ) (331,304 ) -- Loss on disposal of assets (113,780 ) -- -- ---------------- ------------------ --------------- Income (loss) from discontinued operations $ (736,689 ) $ (56,397 ) $ 277,433 ================ ================== ===============
7. Allocations and Distributions: From inception through December 31, 1999, generally, all net income and net losses of the Partnership, excluding gains and losses from the sale of properties, were allocated 99% to the limited partners and one percent to the general partners. From inception through December 31, 1999, distributions of net cash flow were made 99% to the limited partners and one percent to the general partners. However, the one percent of net cash flow distributed to the general partners was subordinated to receipt by the limited partners of an aggregate, 10%, noncumulative, noncompounded annual return on their adjusted capital contributions (the "10% Preferred Return"). From inception through December 31, 1999, generally, net sales proceeds from the sale of properties not in liquidation of the Partnership, to the extent distributed, were distributed first to the limited partners in an amount sufficient to provide them with their cumulative 10% Preferred Return, plus the return of their adjusted capital contributions. The general partners then received, to the extent previously subordinated and unpaid, a one percent interest in all prior distributions of net cash flow and a return of their capital contributions. Any remaining sales proceeds were distributed 95% to the limited partners and five percent to the general partners. Any gain from the sale of a property not in liquidation of the Partnership was, in general, allocated in the same manner as net sales proceeds are distributable. Any loss from the sale of a property was, in general, allocated first, on a pro rata basis, to partners with positive balances in their capital accounts; and thereafter, 95% to the limited partners and five percent to the general partners. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, 2000 7. Allocations and Distributions - Continued: Generally, net sales proceeds from a liquidating sale of properties will be used in the following order: (i) first to pay and discharge all of the Partnership's liabilities to creditors, (ii) second, to establish reserves that may be deemed necessary for any anticipated or unforeseen liabilities or obligations of the Partnership, (iii) third, to pay all of the Partnership's liabilities, if any, to the general and limited partners, (iv) fourth, after allocations of net income, gains and/or losses, to distribute to the partners with positive capital accounts balances, in proportion to such balances, up to amounts sufficient to reduce such positive balances to zero, and (v) thereafter, any funds remaining shall then be distributed 95% to the limited partners and five percent to the general partners. Effective January 1, 2000, the general partners waived their right to receive future distributions from the Partnership, including both distributions of operating cash flow and distributions of liquidation proceeds, to the extent that the cumulative amount of such distributions would exceed the balance in the general partners' capital account as of December 31, 1999. Accordingly, for years commencing January 1, 2000 and after, the Partnership's net income will be allocated entirely among the limited partners. However, if losses are allocated to the general partners in a year, an amount of income equal to the sum of such losses may be allocated to the general partner in succeeding years. Accordingly, the general partners were not allocated any net income during the years ended December 31, 2002, 2001, and 2000. During the years ended December 31, 2002, 2001, and 2000, the Partnership declared distributions to the limited partners of $3,082,500, $2,400,000, and $2,475,000, respectively. Distributions for the years ended December 31, 2002, 2001, and 2000, included $1,600,000, $650,000 and $600,000, respectively in a special distribution, as a result of the distribution of net sales proceeds from the 2002 sales of the properties in Montgomery, Alabama; Altus, Oklahoma, and Canton Township, Michigan, the liquidating distribution received from Titusville Joint Venture, the 2001 sales of the properties in Washington, Illinois and Schererville, Indiana and the 2000 sale of the property in Plant City, Florida. These amounts were applied toward the limited partners' cumulative 10% Preferred Return. No distributions have been made to the general partners to date. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, and 2000 8. Income Taxes: The following is a reconciliation of net income for financial reporting purposes to net income for federal income tax purposes for the years ended December 31:
2002 2001 2000 ------------- ------------- ------------- Net income for financial reporting purposes $ 279,799 $ 918,047 $ 1,313,432 Effect of timing differences relating to deprecation 3,962 (12,508 ) (10,755 ) Provision for write-down of assets 647,285 884,977 -- Direct financing leases recorded as operating leases for tax reporting purposes 6,634 20,457 18,870 Effect of timing differences relating to gains/losses on real estate property sales (467,924 ) (21,271 ) 12,471 Effect of timing differences relating to equity in earnings of unconsolidated joint ventures (436,140 ) (134 ) 123,152 Effect of timing differences relating to allowance for doubtful accounts (28,216 ) 28,216 (8,797 ) Accrued rental income (21,106 ) (57,270 ) (63,505 ) Deduction of transaction costs for tax reporting purposes -- -- (132,882 ) Rents paid in advance 12,580 (28,566 ) 4,744 Effect of timing differences relating to minority interest of consolidated joint venture (133 ) (133 ) (257 ) ------------- ------------- ------------- Net income (loss) for federal income tax purposes $ (3,259 ) $1,731,815 $ 1,256,473 ============= ============= =============
CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, and 2000 9. Related Party Transactions: One of the individual general partners, James M. Seneff, Jr., is one of the principal shareholders of CNL Holdings, Inc. The other individual general partner, Robert A. Bourne, serves as President and Treasurer of CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings, Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL American Properties Fund, Inc. ("APF") served as the Partnership's advisor until January 1, 2002, when it assigned its rights and obligations under a management agreement to RAI Restaurants, Inc. (formerly known as CNL Restaurants XVIII, Inc.). RAI Restaurants, Inc. ("the Advisor") is a wholly owned subsidiary of APF. The individual general partners are stockholders and directors of APF. The Advisor provides services pursuant to a management agreement with the Partnership. In connection therewith, the Partnership has agreed to pay the Advisor an annual, noncumulative, subordinated management fee of one-half of one percent of the Partnership assets under management (valued at cost) annually. The property management fee is limited to one percent of the sum of gross operating revenues from joint ventures or competitive fees for comparable services. In addition, these fees are incurred and payable only after the limited partners receive their aggregate, noncumulative 10% Preferred Return. Due to the fact that these fees are noncumulative, if the limited partners do not receive their 10% Preferred Return in any particular year, no property management fees will be due or payable for such year. As a result of such threshold, no property management fees were incurred during the years ended December 31, 2002, 2001 and 2000. The Advisor is also 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 years ended December 31, 2002, 2001 and 2000, the Partnership incurred $45,300, $40,928 and $15,296, respectively, in deferred, subordinated real estate disposition fees as a result of the Partnership's sale of the properties in Montgomery, Alabama; Altus, Oklahoma; Canton Township, Michigan; and the properties in Schererville, Indiana and Washington, Illinois and the property in Plant City, Florida, respectively. The Partnership's Advisor and its affiliates provided accounting and administrative services. The Partnership incurred $133,609, $130,412, and $75,583, for the years ended December 31, 2002, 2001, and 2000, respectively, for such services. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, and 2000 9. Related Party Transactions - Continued: The amount due to related parties consisted of the following at December 31:
2002 2001 --------------- ---------------- Due to the Advisor: Expenditures incurred on behalf of the Partnership $ 780 $ 1,761 Accounting and administrative services 9,866 2,450 Deferred, subordinated real estate disposition fees 170,074 124,774 Other 62,450 -- --------------- ---------------- $ 243,170 $ 128,985 =============== ================
10. 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 years ended December 31:
2002 2001 2000 -------------- ---------------- -------------- IHOP Properties, Inc. $ 279,795 $ 280,071 $ 280,573 Winston's GC No. 1, Inc. 204,252 261,191 N/A Golden Corral Corp. N/A 267,273 322,038
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 years ended December 31:
2002 2001 2000 --------------- ---------------- -------------- Golden Corral Family Steakhouse Restaurants $ 320,971 $ 528,464 $ 429,016 IHOP 279,795 280,071 280,573 KFC 279,300 253,969 263,688 Taco Bell 178,897 N/A N/A
The information denoted by N/A indicates that for each period presented, the tenants or chains did not represent more than 10% of the Partnership's total rental and earned income. Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant concepts, default by any one of these lessees or restaurant chains could significantly impact the results of operations of the Partnership if the Partnership is not able to re-lease the properties in a timely manner. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, and 2000 11. Selected Quarterly Financial Data: The following table presents selected unaudited quarterly financial data for each full quarter during the years ended December 31, 2002 and 2001.
2002 Quarter First Second Third Fourth Year ------------------------------- ----------- ------------- ------------ ------------- --------------- Continuing Operations (1): Revenues $ 311,235 $ 290,390 $ 297,673 $ 375,691 $ 1,274,989 Equity in earnings of unconsolidated joint ventures 50,630 51,929 52,707 52,534 207,800 Income from continuing Operations (3) 222,644 221,233 247,363 325,248 1,016,488 Discontinued Operations (1): Revenues 41,974 15,342 14,831 -- 72,147 Loss from discontinued Operations (3) (26,638 ) (95,960 ) (86,274 ) (527,817 ) (736,689 ) Net Income (Loss) (3) 196,006 125,273 161,089 (202,569 ) 279,799 Net Income (Loss) per limited partner unit: Continuing operations $ 4.45 $ 4.42 $ 4.95 $ 6.51 $ 20.33 Discontinued operations (0.53 ) (1.92 ) (1.73 ) (10.55 ) (14.73 ) ----------- ------------- ------------ ------------- --------------- Total $ 3.92 $ 2.50 $ 3.22 $ (4.04 ) $ 5.60 =========== ============= ============ ============= ===============
CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, and 2000 11. Selected Quarterly Financial Data - Continued:
2001 Quarter First Second Third Fourth Year ------------------------------- ----------- ------------- ------------ ------------- --------------- Continuing Operations (1): Revenues $ 348,369 $ 414,315 $ 389,608 $ 409,223 $ 1,561,515 Equity in earnings of unconsolidated joint ventures 49,221 20,012 37,865 32,121 139,219 Income (Loss) from continuing operations (2) 240,007 306,196 526,886 (98,645 ) 974,444 Discontinued operations (1): Revenues 77,749 77,654 78,114 79,100 312,617 Income (Loss) from discontinued operations (3) 68,906 69,041 69,259 (263,603 ) (56,397 ) Net Income (Loss) 308,913 375,237 596,145 (362,248 ) 918,047 Net Income (Loss) per limited partner unit: Continuing operations $ 4.80 $ 6.12 $ 10.54 $ (1.97 ) $ 19.49 Discontinued operations 1.38 1.38 1.39 (5.28 ) (1.13 ) ----------- ------------- ------------ ------------- --------------- Total $ 6.18 $ 7.50 $ 11.93 $ (7.25 ) $ 18.36 =========== ============= ============ ============= ===============
(1) Certain items in the quarterly financial data have been reclassified to conform to the 2002 presentation. This reclassification had no effect on net income. The results of operations relating to properties that were either disposed of or were classified as held for sale as of December 31, 2002 are reported as discontinued operations for all periods presented. The results of operations relating to properties that were identified for sale as of December 31, 2001 but sold subsequently are reported as continuing operations. (2) In December 2001, the Partnership recorded a provision for write-down of assets of approximately $553,700 relating to the property in Montgomery, Alabama. The tenant of this property experienced financial difficulties and vacated the property during the fourth quarter of 2001. The provision represented the difference between the net carrying value of the property and its estimated fair value. The Partnership sold this property in May 2002. (3) In December 2001, the Partnership recorded a provision for write-down of assets of approximately $331,300 relating to the property in Fayetteville, North Carolina. In March 2002, the Partnership entered into an agreement to sell this property. Based on the pending contract, the Partnership recorded an additional provision for write-down of assets of approximately $46,300 during the quarter ended March 31, 2002. This contract was subsequently terminated and in December 2002, the Partnership entered into a new agreement to sell this property. Based on the pending contract, the Partnership recorded an additional provision for write-down of assets of approximately $521,300 during the fourth quarter of 2002. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED Years Ended December 31, 2002, 2001, and 2000 12. Subsequent Event: In February 2003, the Partnership sold its property in Fayetteville, North Carolina, to a third party and received net sales proceeds of approximately $371,000, resulting in a gain of approximately $2,200. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The General Partners of the Registrant are James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, a Florida corporation. The General Partners manage and control the Partnership's affairs and have general responsibility and the ultimate authority in all matters affecting the Partnership's business. The Partnership has available to it the services, personnel and experience of CNL American Properties Fund, Inc. ("APF"), CNL Fund Advisors, Inc., CNL Financial Group, Inc. and their affiliates, all of which are affiliates of the General Partners. James M. Seneff, Jr., age 56. Since 1971, Mr. Seneff has been active in the acquisition, development, and management of real estate projects and, directly or through an affiliated entity, has served as a general partner or co-venturer in over 100 real estate ventures. These ventures have involved the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has served as Director and Chairman of the Board of APF, a public, unlisted real estate investment trust, since 1994. Mr. Seneff served as Chief Executive Officer of APF from 1994 through August 1999, and has served as co-Chief Executive Officer of APF since December 2000. Mr. Seneff served as Chairman of the Board and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the Partnership's advisor, until it merged with a wholly-owned subsidiary of APF in September 1999, and in June 2000, was re-elected to those positions of CNL Fund Advisors, Inc. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent company of CNL Financial Group, Inc. (formerly CNL Group, Inc.), a diversified real estate company, and has served as a Director, Chairman of the Board and Chief Executive Officer of CNL Financial Group, Inc. since its formation in 1980. CNL Financial Group, Inc. is the parent company, either directly or indirectly through subsidiaries, of CNL Real Estate Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL Securities Corp., all of which are engaged in the business of real estate finance. Mr. Seneff also serves as a Director, Chairman of the Board and Chief Executive Officer of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust, as well as, CNL Hospitality Corp., its advisor. In addition, he serves as a Director, Chairman of the Board and Chief Executive Officer of CNL Retirement Properties, Inc., a public, unlisted real estate investment trust and its advisor, CNL Retirement Corp. Since 1992, Mr. Seneff has also served as a Director, Chairman of the Board and Chief Executive Officer of Commercial Net Lease Realty, Inc., a public real estate investment trust that is listed on the New York Stock Exchange. Mr. Seneff has also served as a Director, Chairman of the Board and Chief Executive Officer of CNL Securities Corp. since 1979; CNL Investment Company since 1990; and CNL Institutional Advisors, Inc., a registered investment advisor for pension plans, since 1990. Mr. Seneff formerly served as a Director of First Union National Bank of Florida, N.A., and currently serves as the Chairman of the Board of CNL Bank, an independent, state-chartered commercial bank. Mr. Seneff previously served on the Florida State Commission on Ethics and is a former member and past Chairman of the State of Florida Investment Advisory Council, which recommends to the Florida Board of Administration investments for various Florida employee retirement funds. The Florida Board of Administration, Florida's principal investment advisory and money management agency, oversees the investment of more than $60 billion of retirement funds. Mr. Seneff received his degree in Business Administration from Florida State University in 1968. Robert A. Bourne, age 55. Mr. Bourne has participated as a general partner or co-venturer in over 100 real estate ventures involved in the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Bourne is a Director of APF. Mr. Bourne served as President of APF from 1994 through February 1999. He also served as Treasurer from February 1999 through August 1999 and from May 1994 through December 1994. He also served in various executive positions with CNL Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of APF including, President from 1994 through September 1997, and Director from 1994 through August 1999. Mr. Bourne serves as President and Treasurer of CNL Financial Group, Inc.; Director, Vice Chairman of the Board, and Treasurer , and from 1997 until June 2002 served as President, of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust; as well as, Director, Vice Chairman of the Board, and Treasurer, and from 1997 until June 2002 served as President, of CNL Hospitality Corp., its advisor. In addition, Mr. Bourne serves as Director, Vice Chairman of the Board, and Treasurer, and from 1997 until June 2002 served as President, of CNL Retirement Properties, Inc., a public, unlisted real estate investment trust; as well as, a Director, Vice Chairman of the Board, and Treasurer, and from 1997 until June 2002 served as President, of its advisor, CNL Retirement Corp. Mr. Bourne also serves as a Director of CNL Bank. He has served as a Director since 1992, Vice Chairman of the Board since February 1996, Secretary and Treasurer from February 1996 through 1997, and President from July 1992 through February 1996, of Commercial Net Lease Realty, Inc., a public real estate investment trust listed on the New York Stock Exchange. Mr. Bourne also serves as Director, President and Treasurer for various affiliates of CNL Financial Group, Inc. including, CNL Investment Company, CNL Securities Corp. and CNL Institutional Advisors, Inc., a registered investment advisor for pension plans. Mr. Bourne began his career as a certified public accountant employed by Coopers & Lybrand, Certified Public Accountants, from 1971 through 1978, where he attained the position of Tax Manager in 1975. Mr. Bourne graduated from Florida State University in 1970 where he received a B.A. in Accounting, with honors. Curtis B. McWilliams, age 47. Mr. McWilliams has served as Co-Chief Executive Officer of APF since December 2000 and previously served as Chief Executive Officer from September 1999 through December 2000. Prior to the acquisition of CNL Fund Advisors, Inc., Mr. McWilliams served as President of APF from February 1999 until September 1999. From February 1998 to February 1999, he served as Executive Vice President of APF. Mr. McWilliams joined CNL Financial Group, Inc. in April 1997 and served as an Executive Vice President from October 1997 until September 1999. In addition, Mr. McWilliams served as President of CNL Fund Advisors, Inc. and CNL Financial Services, Inc., a corporation engaged in the business of real estate financing, from April 1997 until the acquisition of such entities by wholly-owned subsidiaries of APF in September 1999. From September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch & Co. The majority of his career at Merrill Lynch & Co. was in the Investment Banking division where he served as a Managing Director. Mr. McWilliams received a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master of Business Administration degree with a concentration in finance from the University of Chicago in 1983. Steven D. Shackelford, age 39. Mr. Shackelford was promoted to Executive Vice President of APF in June 2000. He served as Senior Vice President from September 1999 until his promotion in June 2000. Mr. Shackelford has served as Chief Financial Officer since January 1997 and has served as Secretary and Treasurer of APF since September 1999. He also served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996 to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior manager in the national office of Price Waterhouse LLP where he was responsible for advising foreign clients seeking to raise capital and a public listing in the United States. From August 1992 to March 1995, he was a manager in the Paris, France office of Price Waterhouse, serving several multi-national clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor of Arts degree in Accounting, with honors, and a Master of Business Administration degree from Florida State University and is a certified public accountant. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the General Partners, the officers of the corporate General Partner, and persons who own more than ten percent of a registered class of the Partnership's equity securities (collectively, the "Reporting Persons"), to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are required by SEC regulation to furnish the Partnership with copies of all Forms 3, 4 and 5 that they file. Based solely on the General Partners' review of the copies of such forms the Partnership has received and written representations from certain Reporting Persons that they were not required to file Forms 5 for the last fiscal year, the General Partners believe that all Reporting Persons complied with all filing requirements applicable to them with respect to transactions during fiscal 2002. Item 11. Executive Compensation Other than as described in Item 13, the Partnership has not paid and does not intend to pay any executive compensation to the General Partners or any of their affiliates. There are no compensatory plans or arrangements regarding termination of employment or change of control. Item 12. Security Ownership of Certain Beneficial Owners and Management As of March 10, 2003 no person was known to the Registrant to be a beneficial owner of more than five percent of the Units. The following table sets forth, as of March 10, 2003 the beneficial ownership interests of the General Partners in the Registrant.
Title of Class Name of Partner Percent of Class General Partnership Interests James M. Seneff, Jr. 45% Robert A. Bourne 45% CNL Realty Corporation 10% -------- 100% ========
Neither the General Partners, nor any of their affiliates, owns any interest in the Registrant, except as noted above. The Partnership does not have any equity compensation plans. Item 13. Certain Relationships and Related Transactions The table below summarizes the types, recipients, methods of computation and amounts of compensation, fees and distributions paid or payable by the Partnership to the General Partners and their affiliates for the year ended December 31, 2002, exclusive of any distributions to which the General Partners or their affiliates may be entitled by reason of their purchase and ownership of Units.
Type of Amount Incurred Compensation Method of For the Year and Recipient Computation Ended December 31, 2002 Reimbursement to affiliates for Operating expenses are reimbursed Accounting and administrative operating expenses at the lower of cost or 90% of the services: $133,609 prevailing rate at which comparable services could have been obtained in the same geographic area. If the General Partners or their affiliates loan funds to the Partnership, the General Partners or their affiliates will be reimbursed for the interest and fees charged to them by unaffiliated lenders for such loans. Affiliates of the General Partners from time to time incur certain operating expenses on behalf of the Partnership for which the Partnership reimburses the affiliates without interest. Annual, subordinated property One-half of one percent per year $-0- management fee to affiliates of Partnership assets under management (valued at cost), subordinated to certain minimum returns to the Limited Partners. The property management fee will not exceed the lesser of one percent of gross operating revenues or competitive fees for comparable services. Due to the fact that these fees are noncumulative, if the Limited Partners do not receive their 10% Preferred Return in any particular year, no management fees will be due or payable for such year. Type of Amount Incurred Compensation Method of For the Year and Recipient Computation Ended December 31, 2002 Deferred, subordinated real estate A deferred, subordinated real $ 45,300 disposition fee payable to estate disposition fee, payable affiliates upon sale of one or more Properties, in an amount equal to the lesser of (i) one-half of a competitive real estate commission, or (ii) three percent of the sales price of such Property or Properties. Payment of such fee shall be made only if affiliates of the General Partners provide a substantial amount of services in connection with the sale of a Property or Properties and shall be subordinated to certain minimum returns to the Limited Partners. However, if the net sales proceeds are reinvested in a replacement property, no such real estate disposition fee will be incurred until such replacement property is sold and the net sales proceeds are distributed. General Partners' deferred, A deferred, subordinated share $-0- subordinated share of Partnership equal to one percent of net cash flow Partnership distributions of net cash flow, subordinated to certain minimum returns to the Limited Partners. General Partners' deferred, A deferred, subordinated share $-0- sub-ordinated share of Partnership equal to five percent of net sales proceeds from a sale or Partnership distributions of such sales not in liquidation of the net sales proceeds, subordinated Partnership to certain minimum returns to the Limited Partners. Type of Amount Incurred Compensation Method of For the Year and Recipient Computation Ended December 31, 2002 General Partners' share of Distributions of net sales $-0- Partnership net sales proceeds from proceeds from a sale or sales of a sale or sales in liquidation of substantially all of the the Partnership Partnership's assets will be distributed in the following order or priority: (i) first, to pay all debts and liabilities of the Partnership and to establish reserves; (ii) second, to Partners with positive capital account balances, determined after the allocation of net income, net loss, gain and loss, in proportion to such balances, up to amounts sufficient to reduce such balances to zero; and (iii) thereafter, 95% to the Limited Partners and 5% to the General Partners.
Item 14. Controls and Procedures The General Partners maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the Partnership's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The principal executive and financial officers of the corporate General Partner have evaluated the Partnership's disclosure controls and procedures within 90 days prior to the filing of this Annual Report on Form 10-K and have determined that such disclosure controls and procedures are effective. Subsequent to the above evaluation, there were no significant changes in internal controls or other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this report. 1. Financial Statements Report of Independent Certified Public Accountants Balance Sheets at December 31, 2002 and 2001 Statements of Income for the years ended December 31, 2002, 2001, and 2000 Statements of Partners' Capital for the years ended December 31, 2002, 2001, and 2000 Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 Notes to Financial Statements 2. Financial Statement Schedule Schedule III - Real Estate and Accumulated Depreciation at December 31, 2002 Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 2002 All other Schedules are omitted as the required information is inapplicable or is presented in the financial statements or notes thereto. 3. Exhibits 3.1 Certificate of Limited Partnership of CNL Income Fund III, Ltd. (Included as Exhibit 3.1 to Amendment No. 1 to 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 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.) 10.6 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002, and incorporated herein by reference.) 99.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 99.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) (b) The Registrant filed no reports on Form 8-K during the period from October 1, 2002 through December 31, 2002. (c) Not applicable. (d) Other Financial Information The Partnership is required to file audited financial information of its tenant, IHOP Corp., as a result of this tenant leasing more than 20% of the Partnership's total assets for the year ended December 31, 2002. IHOP Corp. is a public company and as of the date hereof, had not filed their Form 10-K; therefore, the financial statements are not available to the Partnership to include in this filing. The Partnership will file this financial information under cover of a Form 10-K/A as soon as it is available. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March, 2003. CNL INCOME FUND III, LTD. By: CNL REALTY CORPORATION General Partner /s/ Robert A. Bourne -------------------------- ROBERT A. BOURNE, President By: ROBERT A. BOURNE General Partner /s/ Robert A. Bourne -------------------------- ROBERT A. BOURNE By: JAMES M. SENEFF, JR. General Partner /s/ James M. Seneff, Jr. -------------------------- JAMES M. SENEFF, JR. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Robert A. Bourne President, Treasurer and Director March 24, 2003 Robert A. Bourne (Principal Financial and Accounting Officer) /s/ James M. Seneff, Jr. Chief Executive Officer and Director March 24, 2003 James M. Seneff, Jr. (Principal Executive Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CORPORATE GENERAL PARTNER PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James M. Seneff, Jr., the Chief Executive Officer of CNL Realty Corporation, the corporate general partner of CNL Income Fund III, Ltd. (the "registrant"), certify that: 1. I have reviewed this annual report on Form 10-K of the registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 /s/ James M. Seneff, Jr. James M. Seneff, Jr. Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CORPORATE GENERAL PARTNER PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert A. Bourne, President and Treasurer of CNL Realty Corporation, the corporate general partner of CNL Income Fund III, Ltd. (the "registrant") certify that: 1. I have reviewed this annual report on Form 10-K of the registrant; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 /s/ Robert A. Bourne Robert A. Bourne President and Treasurer EXHIBIT INDEX Exhibit Number (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 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.) 10.6 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002, and incorporated herein by reference.) 99.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 99.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) EXHIBIT 99.1 EXHIBIT 99.2
CNL INCOME FUND III, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002 Costs Capitalized Subsequent To Initial Cost Acquisition -------------------- ----------------- Encum- Buildings Improve- Carrying brances Land Improvemenments Costs -------- --------- ------------------- ------ Properties the Partnership has Invested in Under Operating Leases: Burger King Restaurants: Kansas City, Missouri - $236,055 $573,739 - - Golden Corral Family Steakhouse Restaurants: Stockbridge, Georgia - 384,644 685,511 150,000 - IHOP Restaurant: Auburn, Alabama - 373,763 1,060,478 - - KFC Restaurants: Calallen, Texas - 219,432 - 332,043 - Katy, Texas - 266,768 - 279,486 - Burnsville, Minnesota - 196,159 - 437,895 - Page, Arizona - 328,729 - 270,755 - Pizza Hut Restaurants: Jacksboro, Texas - 54,274 147,337 - - Seminole, Texas - 183,284 134,531 - - Winter Springs, Florida - 268,128 270,372 - - Austin, Texas - 301,778 372,137 - - Taco Bell Restaurants: Bishop, California - 363,964 - 272,150 - Longwood, Florida - 346,832 - 394,088 - Other: Hastings, Nebraska - 110,800 332,400 23,636 - Wichita, Kansas - 147,349 442,045 - - --------- --------- --------- ------ $3,781,959 $4,018,550$2,160,053 ========= ========= ========= ====== Property in Which the Partnership has a 33.0% Interest as Tenants-in- Common and has Invested in Under an Operating Lease: IHOP Restaurant: Englewood, Colorado - $552,590 - - - ========= ========= ========= ====== Property in Which the Partnership has a 9.84% Interest as Tenants-in- Common and has Invested in Under an Operating Lease: Chevy's Fresh Mex Restaurant: Miami, Florida - $976,357 $974,016 - - ========= ========= ========= ====== Property of Joint Venture in Which the Partnership has a 46.88% Interest and has Invested in Under an Operating Lease: Ruby Tuesday Restaurant: Orlando, Florida - $623,496 - - - ========= ========= ========= ====== Property in Which the Partnership has a 20% Interest as Tenants-in- Common and has Invested in Under an Operating Lease: IHOP Restaurant: Baytown, Texas - $495,847 $799,469 - - ========= ========= ========= ====== Property in Which the Partnership has a 33.0% Interest as Tenants-in- Common and has Invested in Under Direct Financing Lease: IHOP Restaurant: Englewood, Colorado - - $1,008,839 - - ========= ========= ========= ====== Property in Which the Partnership has a 25.87% Interest as Tenants-in- Common and has Invested in Under Direct Financing Lease: IHOP Restaurant: Overland Park, Kansas - $335,374 $1,273,134 - - ========= ========= ========= ====== Property of Joint Veture in Which the Partnership has a 46.88% Interest and has Invested in Under Direct Financing Lease: Ruby Tuesday Restaurant: Orlando, Florida - - - $820,202 - ========= ========= ========= ====== Life on Which Net Cost Basis at Which Depreciation in Carried at Close of Period (c) Date Latest Income ---------------------------------- Buildings and Accumulatedof Con- Date Statement is Land Improvements Total DepreciatiostructioAcquired Computed ----------- --------------------- ------------------------------------ $236,055 $573,739 $809,794 $288,463 1984 12/87 (b) 384,644 835,511 1,220,155 378,191 1987 11/87 (b) 373,763 1,060,478 1,434,241 112,604 1998 10/99 (b) 219,432 332,043 551,475 160,487 1988 12/87 (b) 266,768 279,486 546,254 137,026 1988 02/88 (b) 196,159 437,895 634,054 209,216 1988 02/88 (b) 328,729 270,755 599,484 131,993 1988 02/88 (b) 54,274 147,337 201,611 74,078 1983 12/87 (b) 183,284 134,531 317,815 67,640 1977 12/87 (b) 268,128 270,372 538,500 135,562 1987 01/88 (b) 301,778 372,137 673,915 184,518 1987 02/88 (b) 363,964 272,150 636,114 128,895 1988 05/88 (b) 346,832 394,088 740,920 185,557 1988 06/88 (b) 110,800 356,036 466,836 180,394 1987 10/87 (b) 147,349 442,045 589,394 223,478 1987 11/87 (b) ----------- --------- ---------- --------- $3,781,959 $6,178,603 $9,960,562 $2,598,102 =========== ========= ========== ========= $552,590 (e) $552,590 (d) 1996 07/97 (d) =========== ========= ========== $976,357 $974,016 $1,950,373 $162,426 1995 12/97 (b) =========== ========= ========== ========= $623,496 (e) $623,496 (d) 1998 05/98 (d) =========== ========= ========== $495,847 $799,469 $1,295,316 $85,265 1998 10/99 (b) =========== ========= ========== ========= - (e) (e) (d) 1996 07/97 (d) =========== - (e) (e) (d) 1997 01/98 (d) =========== - (e) (e) (d) 1998 05/98 (d) ===========
CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002 (a) Transactions in real estate and accumulated depreciation are summarized below. The balances in 1999, 2000, and 2001 have been adjusted to reflect the reclassification of properties accounted for as discontinued operations.
Accumulated Cost Depreciation ---------------- ------------------ Properties the Partnership has Invested in Under Operating Leases: Balance, December 31, 1999 $ 12,375,355 $ 2,538,310 Dispositions (604,791 ) (149,107 ) Depreciation expense -- 252,169 ---------------- ------------------ Balance, December 31, 2000 11,770,564 2,641,372 Dispositions (1,483,004 ) (486,874 ) Provision for write-down of assets (h) (205,980 ) -- Depreciation expense -- 234,903 ---------------- ------------------ Balance, December 31, 2001 10,081,580 2,389,401 Dispositions (121,018 ) -- Depreciation expense -- 208,701 ---------------- ------------------ Balance, December 31, 2002 $ 9,960,562 $ 2,598,102 ================ ================== Property of Joint Venture in Which the Partnership has a 73.4% Interest and has Invested in Under an Operating Lease: Balance, December 31, 1999 $ 750,045 $ 262,872 Provision for write-down of assets (f) (227,094 ) -- Depreciation expense -- 16,994 ---------------- ------------------ Balance, December 31, 2000 522,951 279,866 Provision for write-down of assets (f) (73,571 ) -- Depreciation expense -- 8,805 ---------------- ------------------ Balance, December 31, 2001 449,380 288,671 Dispositions (f) (449,380 ) (288,671 ) Depreciation expense -- -- ---------------- ------------------ Balance, December 31, 2002 $ -- $ -- ================ ==================
CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED December 31, 2002
Accumulated Cost Depreciation ------------- ---------------- Property in Which the Partnership has a 33% Interest as Tenants-in-Common and has Invested in Under an Operating Lease: Balance, December 31, 1999 $ 552,590 $ -- Depreciation expense (d) -- -- ------------- ---------------- Balance, December 31, 2000 552,590 -- Depreciation expense (d) -- -- ------------- ---------------- Balance, December 31, 2001 552,590 -- Depreciation expense (d) -- -- ------------- ---------------- Balance, December 31, 2002 $ 552,590 $ -- ============= ================ Property in Which the Partnership has a 9.84% Interest as Tenants-in-Common and has Invested in Under an Operating Lease: Balance, December 31, 1999 $ 1,950,373 $ 65,023 Depreciation expense -- 32,468 ------------- ---------------- Balance, December 31, 2000 1,950,373 97,491 Depreciation expense -- 32,468 ------------- ---------------- Balance, December 31, 2001 1,950,373 129,959 Depreciation expense -- 32,467 ------------- ---------------- Balance, December 31, 2002 $ 1,950,373 $ 162,426 ============= ================
CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED December 31, 2002
Accumulated Cost Depreciation ------------- ---------------- Property of Joint Venture in Which the Partnership has a 46.88% Interest and has Invested in Under an Operating Lease: Balance, December 31, 1999 $ 623,496 $ -- Depreciation expense (d) -- -- ------------- ---------------- Balance, December 31, 2000 623,496 -- Depreciation expense (d) -- -- ------------- ---------------- Balance, December 31, 2001 623,496 -- Depreciation expense (d) -- -- ------------- ---------------- Balance, December 31, 2002 $ 623,496 $ -- ============= ================ Property in Which the Partnership has a 20% Interest as Tenants-in-Common and has Invested in Under an Operating Lease: Balance, December 31, 1999 $1,295,316 $ 5,318 Depreciation expense -- 26,649 -------------- --------------- Balance, December 31, 2000 1,295,316 31,967 Depreciation expense -- 26,649 -------------- --------------- Balance, December 31, 2001 1,295,316 58,616 Depreciation expense -- 26,649 -------------- --------------- Balance, December 31, 2002 $1,295,316 85,265 ============== ===============
(b) Depreciation expense is computed for buildings and improvements based upon estimated lives of 30 years. (c) As of December 31, 2002, the aggregate cost of the Properties owned by the Partnership and its consolidated joint venture and the Properties owned by unconsolidated joint ventures (including the Properties owned with affiliates as tenants-in-common) for federal income tax purposes was $10,644,779 and $7,858,323, respectively. All of the leases are treated as operating leases for federal income tax purposes. (d) The portion of the lease relating to the building has been recorded as a direct financing lease. The cost of the building has been included in the net investment in direct financing lease; therefore, depreciation is not applicable. CNL INCOME FUND III, LTD. (A Florida Limited Partnership) NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED December 31, 2002 (e) Certain components of the lease relating to land and building have been recorded as a direct financing lease. Accordingly, costs relating to these components of this lease are not shown. (f) The undepreciated cost of the Property in Titusville, Florida, was written down to its estimated fair value due to an impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets of approximately $227,100 as of December 31, 2000. During 2001, the Partnership recorded an additional impairment of approximately $73,600. The total provision represented the difference between the Property's net carrying value and its estimated fair value. The Property was sold in January 2002. (h) The undepreciated cost of the Property in Montgomery, Alabama, for which the building portion has been classified as a direct financing lease, was written down to net realizable value due to an impairment in value. The Partnership recognized the impairment by recording a provision for write-down of assets of approximately $515,000 as of December 31, 2001. The provision represented the difference between the Property's net carrying value and its estimate fair value. The Partnership sold this Property in May 2002.