10-Q 1 if7.txt INCOME FUND VII, LTD. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarterly period ended September 30, 2003 -------------------------------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT of 1934 For the transition period from _____________________ to ____________________ Commission file number 0-19140 --------------------------------------- CNL Income Fund VII, Ltd. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-2963871 -------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 450 South Orange Avenue Orlando, Florida 32801 -------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number (including area code) (407) 540-2000 ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):Yes___ No X CONTENTS Page Part I. Item 1. Financial Statements: Condensed Balance Sheets 1 Condensed Statements of Income 2 Condensed Statements of Partners' Capital 3 Condensed Statements of Cash Flows 4 Notes to Condensed Financial Statements 5-6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 9 Item 4. Controls and Procedures 9 Part II. Other Information 10-11 CNL INCOME FUND VII, LTD. (A Florida Limited Partnership) CONDENSED BALANCE SHEETS

See accompanying notes to condensed financial statements. CNL INCOME FUND VII, LTD. (A Florida Limited Partnership) CONDENSED STATEMENTS OF INCOME

See accompanying notes to condensed financial statements. CNL INCOME FUND VII, LTD. (A Florida Limited Partnership) CONDENSED STATEMENTS OF PARTNERS' CAPITAL

See accompanying notes to condensed financial statements. CNL INCOME FUND VII, LTD. (A Florida Limited Partnership) CONDENSED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed financial statements. CNL INCOME FUND VII, LTD. (A Florida Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 1. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of the general partners, necessary for a fair statement of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 2003, may not be indicative of the results that may be expected for the year ending December 31, 2003. Amounts as of December 31, 2002, included in the financial statements, have been derived from audited financial statements as of that date. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in Form 10-K of CNL Income Fund VII, Ltd. (the "Partnership") for the year ended December 31, 2002. The Partnership accounts for its 83% interest in San Antonio #849 Joint Venture using the consolidation method. Minority interest represents the minority joint venture partners' proportionate share of the equity in the Partnership's consolidated joint venture. All significant intercompany accounts and transactions have been eliminated. In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" to expand upon and strengthen existing accounting guidance that addresses when a company should include the assets, liabilities and activities of another entity in its financial statements. To improve financial reporting by companies involved with variable interest entities (more commonly referred to as special-purpose entities or off-balance sheet structures), FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to older entities, in the first fiscal year or interim period ending after December 15, 2003. The general partners believe adoption of this standard may result in either consolidation or additional disclosure requirements of the Partnership's unconsolidated joint ventures, which are currently accounted for under the equity method. However, such consolidation is not expected to significantly impact the Partnership's results of operations. In May 2003, the FASB issued FASB Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. FAS 150 will require issuers to classify certain financial instruments as liabilities (or assets in some circumstances) that previously were classified as equity. One requirement of FAS 150 is that minority interests for majority owned finite lived entities be classified as a liability and recorded at fair market value. FAS 150 initially applied immediately to all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred implementation of FAS 150 as it applies to minority interests of finite lived Partnerships. The deferral of these provisions is expected to remain in effect while these interests are addressed in either Phase II of the FASB's Liabilities and Equity project or Phase II of the FASB's Business Combinations project; therefore, no specific timing for the implementation of these provisions has been stated. The implementation of the currently effective aspects of FAS 150 did not have an impact on the Partnership's results of operations. CNL INCOME FUND VII, LTD. (A Florida Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 2. Reclassification Certain items in the prior year's financial statements have been reclassified to conform to 2003 presentation. These reclassifications had no effect on total partners' capital or net income. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CNL Income Fund VII, Ltd. (the "Partnership") is a Florida limited partnership that was organized on August 18, 1989, to acquire for cash, either directly or through joint venture and tenancy in common arrangements, both newly constructed and existing restaurants, as well as land upon which restaurants were to be constructed (the "Properties"), which are leased primarily to operators of national and regional fast-food, family-style and casual dining restaurant chains. The leases generally are triple-net leases, with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. As of September 30, 2003 and 2002, the Partnership owned 18 Properties directly and 17 Properties indirectly through joint venture or tenancy in common arrangements. Capital Resources For the nine months ended September 30, 2003 and 2002, the Partnership generated cash from operating activities of $2,047,935 and $1,921,428, respectively. At September 30, 2003, the Partnership had $979,602 in cash and cash equivalents, as compared to $972,797 at December 31, 2002. At September 30, 2003, these funds were held in demand deposit accounts at commercial banks. The funds remaining at September 30, 2003, after payment of distributions and other liabilities, will be used to invest in an additional Property and to meet the Partnership's working capital needs. Short-Term Liquidity The Partnership's investment strategy of acquiring Properties for cash and leasing them under triple-net leases to operators who generally meet specified financial standards minimizes the Partnership's operating expenses. The general partners believe that the leases will continue to generate cash flow in excess of operating expenses. The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership. The general partners have the right, but not the obligation, to make additional capital contributions if they deem it appropriate in connection with the operations of the Partnership. The Partnership generally distributes cash from operations remaining after the payment of operating expenses of the Partnership, to the extent that the general partners determine that funds are available for distribution. Based on current and anticipated future cash from operations, the Partnership declared distributions to the limited partners of $2,025,000 for each of the nine months ended September 30, 2003 and 2002 ($675,000 for each applicable quarter). This represents distributions of $0.068 per unit for each of the nine months ended September 30, 2003 and 2002 ($0.023 per unit for each applicable quarter). No distributions were made to the general partners for the quarters and nine months ended September 30, 2003 and 2002. No amounts distributed to the limited partners for the nine months ended September 30, 2003 and 2002 are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the limited partners' return on their adjusted capital contributions. The Partnership intends to continue to make distributions of cash available for distribution to the limited partners on a quarterly basis. Total liabilities, including distributions payable, were $767,421 at September 30, 2003, as compared to $733,847 at December 31, 2002. The general partners believe that the Partnership has sufficient cash on hand to meet its current working capital needs. Long-Term Liquidity The Partnership has no long-term debt or other long-term liquidity requirements. Results of Operations Total rental revenues were $1,328,319 during the nine months ended September 30, 2003, as compared to $1,341,270 during the same period of 2002, $442,036 and $447,216 of which were earned during the third quarter of 2003 and 2002, respectively. Rental revenues during the quarter and nine months ended September 30, 2003 remained constant, as compared to the quarter and nine months ended September 30, 2002, since there was no change in the leased property portfolio. During the nine months ended September 30, 2003 and 2002, the Partnership also earned $28,057 and $27,420, respectively, in interest and other income, of which $26,555 and $4,275 were earned during the quarters ended September 30, 2003 and 2002, respectively. Interest and other income increased during the quarter ended September 30, 2003, as compared to the same period of 2002, because the Partnership recorded as income amounts received from the City of San Antonio, Texas for a right of way taking relating to a parcel of land on its Property in San Antonio Texas which is owned by the Partnership's consolidated joint venture. Interest income was lower during the nine months ended September 30, 2003 as compared to the same period of 2002. The decrease in interest income during 2003 was due to a decrease in the average cash balance as a result of the reinvestment during 2002 of sales proceeds in additional Properties through joint venture arrangements and the collection of a promissory note, as well as a decline in interest rates. Also, during the nine months ended September 30, 2002, the Partnership recorded as income amounts received from the State of Ohio for a right of way taking relating to a parcel of land on its Property in Toledo, Ohio. The Partnership also earned $645,525 attributable to net income earned by unconsolidated joint ventures during the nine months ended September 30, 2003, as compared to $827,264 during the same period of 2002, $214,710 and $426,399 of which were earned during the quarters ended September 30, 2003 and 2002, respectively. Net income earned by joint ventures was higher during the quarter and nine months ended September 30, 2002 as compared to the same periods of 2003 because in August 2002, Mansfield Joint Venture, in which the Partnership owns a 79% interest, sold the Property in Mansfield, Texas. The Partnership recorded its pro-rata share of the gain resulting from the sale of this Property as equity in earnings. The net sales proceeds were reinvested in a Property in Arlington, Texas. In addition, net income earned by joint ventures was higher during the nine months ended September 30, 2002 due to the fact that in June 2002, CNL Restaurant Investments II Joint Venture, in which the Partnership owns an 18% interest, sold its Properties in Columbus, Ohio and Pontiac, Michigan to the tenant. The Partnership recorded its pro-rata share of the gains resulting from the sales of these Properties as equity in earnings. The decrease in net income earned by unconsolidated joint ventures during the nine months ended September 30, 2003 was partially offset by earnings related to Arlington Joint Venture which the Partnership acquired in June 2002. The decrease in net income earned by joint ventures during the nine months ended September 30, 2003 was also partially offset by the fact that the tenant of the Property owned by Duluth Joint Venture, in which the Partnership owns a 56% interest, resumed making rental payments to the joint venture during the second quarter of 2002. The tenant of the Property had previously experienced financial difficulties and had ceased making rental payments to the joint venture. Duluth Joint Venture had stopped recording rental revenues during the quarter ended March 31, 2002. Operating expenses, including depreciation expense, were $395,261 during the nine months ended September 30, 2003, as compared to $439,438 during the same period of 2002, $117,768 and $115,557 of which were incurred during the quarters ended September 30, 2003 and 2002, respectively. Operating expenses were higher during the nine months ended September 30, 2002, because the Partnership elected to reimburse the tenant of the Properties in Odessa, El Paso and Harlingen, Texas for certain renovation costs. In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" to expand upon and strengthen existing accounting guidance that addresses when a company should include the assets, liabilities and activities of another entity in its financial statements. To improve financial reporting by companies involved with variable interest entities (more commonly referred to as special-purpose entities or off-balance sheet structures), FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to older entities, in the first fiscal year or interim period ending after December 15, 2003. The general partners believe adoption of this standard may result in either consolidation or additional disclosure requirements of the Partnership's unconsolidated joint ventures, which are currently accounted for under the equity method. However, such consolidation is not expected to significantly impact the Partnership's results of operations. In May 2003, the FASB issued FASB Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("FAS 150"). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. FAS 150 will require issuers to classify certain financial instruments as liabilities (or assets in some circumstances) that previously were classified as equity. One requirement of FAS 150 is that minority interests for majority owned finite lived entities be classified as a liability and recorded at fair market value. FAS 150 initially applied immediately to all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred implementation of FAS 150 as it applies to minority interests of finite lived Partnerships. The deferral of these provisions is expected to remain in effect while these interests are addressed in either Phase II of the FASB's Liabilities and Equity project or Phase II of the FASB's Business Combinations project; therefore, no specific timing for the implementation of these provisions has been stated. The implementation of the currently effective aspects of FAS 150 did not have an impact on the Partnership's results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 4. CONTROLS AND PROCEDURES The general partners maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the Partnership's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The principal executive and financial officers of the corporate general partner have evaluated the Partnership's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective. There was no change in internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Inapplicable. ------------------ Item 2. Changes in Securities. Inapplicable. ---------------------- Item 3. Default upon Senior Securities. Inapplicable. ------------------------------- Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable. ---------------------------------------------------- Item 5. Other Information. Inapplicable. ------------------ Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to Registration Statement No. 33-31482 on Form S-11 and incorporated herein by reference.) 4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to Registration Statement No. 33-31482 on Form S-11 and incorporated herein by reference.) 4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund VII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 10.1 Management Agreement between CNL Income Fund VII, Ltd. and CNL Investment Company (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 10.2 Assignment of Management Agreement from CNL Investment Company to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form 10-K filed with the Securities and Exchange Commission on March 30, 1995, and incorporated herein by reference.) 10.3 Assignment of Management Agreement from CNL Income Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 10.4 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Included as Exhibit 10.4 to Form 10-Q filed with the Securities and Exchange Commission on August 10, 2001, and incorporated herein by reference.) 10.5 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form 10-Q filed with the Securities and Exchange Commission on August 13, 2002, and incorporated herein by reference.) 31.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 31.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 32.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 32.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED this 12th day of November, 2003 CNL INCOME FUND VII, LTD. By: CNL REALTY CORPORATION General Partner By:/s/ James M. Seneff, Jr. --------------------------- JAMES M. SENEFF, JR. Chief Executive Officer (Principal Executive Officer) By:/s/ Robert A. Bourne --------------------------- ROBERT A. BOURNE President and Treasurer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit Number (c) Exhibits 3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to Registration Statement No. 33-31482 on Form S-11 and incorporated herein by reference.) 4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund VII, Ltd. (Included as Exhibit 4.1 to Registration Statement No. 33-31482 on Form S-11 and incorporated herein by reference.) 4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund VII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 10.1 Management Agreement between CNL Income Fund VII, Ltd. and CNL Investment Company (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 10.2 Assignment of Management Agreement from CNL Investment Company to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form 10-K filed with the Securities and Exchange Commission on March 30, 1995, and incorporated herein by reference.) 10.3 Assignment of Management Agreement from CNL Income Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.) 10.4 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Included as Exhibit 10.4 to Form 10-Q filed with the Securities and Exchange Commission on August 10, 2001, and incorporated herein by reference.) 10.5 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form 10-Q filed with the Securities and Exchange Commission on August 13, 2002, and incorporated herein by reference.) 31.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 31.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 32.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) 32.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) EXHIBIT 31.1 EXHIBIT 31.2 EXHIBIT 32.1 EXHIBIT 32.2

CNL INCOME FUND VII LTD 10-Q