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, 2001
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 0-19144
CNL INCOME FUND VI, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2922954
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(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]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 70,000 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 VI, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 17, 1988. 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 June 8, 1989, the Partnership
offered for sale up to $35,000,000 in limited partnership interests (the
"Units") (70,000 Units at $500 per Unit) pursuant to a registration statement on
Form S-11 under the Securities Act of 1933, as amended, effective December 16,
1988. The offering terminated on January 22, 1990, at which date the maximum
offering proceeds of $35,000,000 had been received from investors who were
admitted to the Partnership as limited partners (the "Limited Partners").
The Partnership was organized 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 and family-style
restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership
from its offering of Units, after deduction of organizational and offering
expenses, totaled $30,975,000, and were used to acquire 42 Properties, including
interests in four Properties owned by joint ventures in which the Partnership is
a co-venturer.
During the year ended December 31, 1994, the Partnership sold its
Properties in Batesville and Heber Springs, Arkansas, to the tenant and
reinvested the net sales proceeds in a Jack in the Box Property in Dallas,
Texas, and a Jack in the Box Property in Yuma, Arizona, which is owned as
tenants-in-common with an affiliate of the General Partners. In addition, during
1995, the Partnership sold its Property in Little Canada, Minnesota, and
reinvested the net sales proceeds in a Denny's Property in Broken Arrow,
Oklahoma, in 1995 and in a Property located in Clinton, North Carolina, with
affiliates of the General Partners as tenants-in-common, in 1996. Also, during
1996, the Partnership sold its Property in Dallas, Texas, and in 1997, the
Partnership reinvested the net sales proceeds in a Bertucci's Property located
in Marietta, Georgia. In addition, during 1997, the Partnership sold its
Properties in Plattsmouth, Nebraska; Venice, Florida; Naples, Florida; and
Whitehall, Michigan, and the Property in Yuma, Arizona, which was held as
tenants-in-common with an affiliate of the General Partners, and reinvested a
portion of these net sales proceeds in two IHOP Properties, one in each of
Elgin, Illinois, and Manassas, Virginia, and in a Property in Vancouver,
Washington, as tenants-in-common with affiliates of the General Partners. In
addition, Show Low Joint Venture, a joint venture in which the Partnership is a
co-venturer with an affiliate of the General Partners, sold its Property in Show
Low, Arizona. The joint venture reinvested the net sales proceeds in a Property
in Greensboro, North Carolina. During 1998, the Partnership reinvested the net
sales proceeds from the sales of the Properties in Whitehall, Michigan and
Plattsmouth, Nebraska in one Property in Overland Park, Kansas and one Property
in Memphis, Tennessee, as tenants-in-common, with affiliates of the General
Partners. In addition, in 1998, the Partnership sold its Properties in Deland,
Florida; Liverpool, New York; Melbourne, Florida; and Bellevue, Nebraska. The
Partnership reinvested the net sales proceeds from the sale of the Property in
Deland, Florida in one Property in Fort Myers, Florida, as tenants-in-common,
with an affiliate of the General Partners and the Partnership reinvested the net
sales proceeds from the sales of the Properties in Melbourne, Florida and
Bellevue, Nebraska in two joint ventures, Warren Joint Venture and Melbourne
Joint Venture, respectively, to each purchase and hold one restaurant Property.
In 1999, the Partnership sold four of its Burger King Properties all
located in Tennessee and reinvested a portion of the net sales proceeds in
Properties in Baytown and Round Rock, Texas and Dublin, California, each as
tenants-in-common with affiliates of the General Partners. In 2000, the
Partnership reinvested the majority of the remaining net sales proceeds in a
Property in Niles, Illinois, as tenants-in-common with an affiliate of the
General Partners. In addition, during 2000, the Partnership sold four of its
Popeye's Properties all located in Florida. In 2001, the Partnership reinvested
the net sales proceeds from the 2000 sale of the four Properties in Florida in
two Properties located in Burley, Idaho and Cleburne, Texas. In addition, during
2001, the Partnership sold its Properties in Chester, Pennsylvania and Cheyenne,
Wyoming and the Properties in Dublin, California and Round Rock, Texas, each of
which was held with an affiliate of the General Partners as tenants-in-common.
The Partnership reinvested the majority of the sales proceeds from the sales of
the Properties in Chester, Pennsylvania, Dublin, California and Round Rock,
Texas in a Property in Houston, Texas and a Property in Waldorf, Maryland with
CNL Income Fund IX, Ltd. and CNL Income Fund XVII, Ltd., each of which is a
Florida limited partnership and an affiliate of the General Partners.
As a result of the above transactions, as of December 31, 2001, the
Partnership owned 38 Properties. The 38 Properties include six Properties owned
by joint ventures in which the Partnership is a co-venturer and eight Properties
owned with affiliates as tenants-in-common. 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 will hold 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 will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also 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.
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to which the
Partnership would be merged with and into a subsidiary of APF (the "Merger").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains. Under the Agreement and Plan of Merger,
APF was to issue shares of its common stock as consideration for the Merger. On
March 1, 2000, the General Partners and APF announced that they had mutually
agreed to terminate the Agreement and Plan of Merger. The agreement to terminate
the Agreement and Plan of Merger was based, in large part, on the General
Partners' concern that, in light of market conditions relating to publicly
traded real estate investment trusts, the value of the transaction had
diminished. As a result of such diminishment, the General Partners' ability to
unequivocally recommend voting for the transaction, in the exercise of their
fiduciary duties, had become questionable.
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, the
joint ventures in which the Partnership is a co-venturer and the properties
owned with affiliates as tenants-in-common provide for initial terms, ranging
from five to 20 years (the average being 18 years), and expire between 2003 and
2020. The leases generally 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 provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $39,500 to
$246,400. Generally, the leases provide for percentage rent based on sales in
excess of a specified amount. In addition, some of the leases provide that,
commencing in the fourth to sixth lease year, the percentage rent will be an
amount equal to the greater of the percentage rent calculated under the lease
formula or a specified percentage (ranging from one to five percent) of the
purchase price or gross sales.
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 31 of the Partnership's 38 Properties also have been
granted options to purchase Properties at the Property's then fair market value,
or pursuant to a formula based on the original purchase price of the Property,
after a specified portion of the lease term has elapsed. Fair market value will
be determined through an appraisal by an independent appraisal firm.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership first must
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 2001, the Partnership reinvested the net sales proceeds from the
four Properties sold in Florida in two Properties located in Burley, Idaho and
Cleburne, Texas. In addition, in 2001, the Partnership reinvested the sales
proceeds from the sales of the Properties in Chester, Pennsylvania, Dublin,
California and Round Rock, Texas in a Property in Houston, Texas and a Property
in Waldorf, Maryland with affiliates of the General Partners, as described below
in "Joint Venture and Tenancy in Common Arrangements". The lease terms for these
Properties are substantially the same as the Partnership's other leases, as
described above.
Major Tenants
During 2001, two lessees of the Partnership and its consolidated joint
venture, Golden Corral Corporation and IHOP Properties, Inc., each contributed
more than ten percent of the Partnership's total rental and earned income
(including rental income from the Partnership's consolidated joint venture in
which the Partnership is a co-venturer and the Partnership's share of the rental
and earned income from the Properties owned by unconsolidated joint venturers
and the Properties owned with affiliates of the General Partners as
tenants-in-common). As of December 31, 2001, Golden Corral Corporation was the
lessee under leases relating to five restaurants and IHOP Properties, Inc. was
the lessee under leases relating to six restaurants. It is anticipated that,
based on the minimum rental payments required by the leases, these two lessees
each will continue to contribute more than ten percent of the Partnership's
total rental and earned income in 2002. In addition, two Restaurant Chains,
Golden Corral Family Steakhouse Restaurants ("Golden Corral") and IHOP, each
accounted for more than ten percent of the Partnership's total rental and earned
income in 2001 (including rental income from the Partnership's consolidated
joint venture and the Partnership's share of the rental and earned income from
the Properties owned by unconsolidated joint ventures in which the Partnership
is a co-venturer and the Properties owned with affiliates of the General
Partners as tenants-in-common). In 2002, it is anticipated that these two
Restaurant Chains each will continue to account for more than ten percent of the
total rental and earned income to which the Partnership is entitled under the
terms of the leases. Any failure of these lessees or Restaurant Chains could
materially affect the Partnership's income if the Partnership is not able to
re-lease the Properties in a timely manner. As of December 31, 2001, no single
tenant or group of affiliated tenants 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 a joint venture arrangement, Caro
Joint Venture, with an unaffiliated entity to purchase and hold one Property. In
addition, the Partnership has entered into the following separate joint venture
arrangements: Auburn Joint Venture with CNL Income Fund IV, Ltd.; Show Low Joint
Venture with CNL Income Fund II, Ltd.; Asheville Joint Venture with CNL Income
Fund VIII, Ltd.; Melbourne Joint Venture with CNL Income Fund XIV, Ltd.; and
Warren Joint Venture with CNL Income Fund IV, Ltd. Each joint venture was formed
to purchase and 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 joint venture arrangements provide for the Partnership and its
joint venture partners to share in all costs and benefits associated with the
joint venture in accordance with their respective percentage interest in the
joint venture. The Partnership has 66.14% interest in Caro Joint Venture, a 3.9%
interest in Auburn Joint Venture, a 36% interest in Show Low Joint Venture, a
14.46% interest in Asheville Joint Venture, a 50% interest in Melbourne Joint
Venture, and a 64.29% interest in Warren Joint Venture. The Partnership and its
joint venture partners are jointly and severally liable for all debts,
obligations and other liabilities of the joint venture.
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.
The Partnership has management control of Caro Joint Venture and shares
management control equally with affiliates of the General Partners for Auburn
Joint Venture, Show Low Joint Venture, Asheville Joint Venture, Melbourne Joint
Venture, and Warren Joint Venture. The joint venture agreements restrict each
venturer's ability to sell, transfer to assign its joint venture interest
without first offering it for sale to its joint venture partner, either upon
such terms and conditions as to which the venturers may agree or, in the event
the venturers cannot agree, on the same terms and conditions as any offer from a
third party to purchase such joint venture interest.
Net cash flow from operations of Auburn Joint Venture, Show Low Joint
Venture, Caro Joint Venture, Asheville Joint Venture, Melbourne Joint Venture,
and Warren Joint Venture is distributed 3.9%, 36%, 66.14%, 14.46%, 50%, and
64.29%, respectively, to the Partnership and the balance is distributed to each
of the other joint venture partners in accordance with its respective percentage
interest in 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.
In addition to the above joint venture arrangements, the Partnership
has entered into agreements to hold a Property in Vancouver, Washington, as
tenants-in-common, with CNL Income Fund, Ltd., CNL Income Fund II, Ltd., and CNL
Income Fund V, Ltd., a Property in Clinton, North Carolina, as
tenants-in-common, with CNL Income Fund IV, Ltd., CNL Income Fund X, Ltd., and
CNL Income Fund XV, Ltd., a Property in Overland Park, Kansas, as
tenants-in-common, with CNL Income Fund II, Ltd. and CNL Income Fund III, Ltd.,
a Property in Memphis, Tennessee, as tenants-in-common, with CNL Income Fund II,
Ltd. and CNL Income Fund XVI, Ltd., a Property in Ft. Myers, Florida, as
tenants-in-common, with CNL Income Fund XV, Ltd., a Property in Baytown, Texas,
as tenants-in-common, with CNL Income Fund III, Ltd., a Property in Round Rock,
Texas, as tenants-in-common, with CNL Income Fund XI, Ltd., a Property in
Dublin, California, as tenants-in-common with CNL Income Fund IX, Ltd. and a
Property in Niles, Illinois, as tenants-in-common, with CNL Income Fund XIV,
Ltd. Each CNL Income Fund is an affiliate of the General Partners. The
agreements provide for the Partnership and the affiliates to share in the
profits and losses of the Property and net cash flow from the Properties, in
proportion to each party's percentage interest. In June 2001, the Partnership
and CNL Income IX, Ltd., as tenants-in-common, sold the Property in Dublin,
California. The Partnership owned a 75% interest in the profits and losses of
this Property. In addition, in October 2001, the Partnership and CNL Income XI,
Ltd., as tenants-in-common, sold the Property in Round Rock, Texas. The
Partnership owned a 77% interest in the profits and losses of this Property. The
Partnership owns a 23.04%, an 18%, a 34.74%, a 46.2%, an 85%, an 80%, and a 74%
interest in the Properties in Vancouver, Washington; Clinton, North Carolina;
Overland Park, Kansas; Memphis, Tennessee; Ft. Myers, Florida; Bay Town, Texas;
and Niles, Illinois, respectively.
In July 2001, the Partnership entered into an agreement to hold a
Bennigan's Property in Waldorf, Maryland, as tenants-in-common, with CNL Income
Fund IX, Ltd., and CNL Income Fund XVII, Ltd., each of which is an affiliate of
the General Partners. The agreement provides for the Partnership and the
affiliates to share in the profits and losses of the Property and net cash flow
from the Property, in proportion to each co-venturer's percentage interest. The
Partnership owns a 60% interest in this Property.
Each of the affiliates is a limited partnership organized pursuant to
the laws of the state of Florida. The tenancy in common agreement restricts each
party's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining parties.
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 a
Property if the proceeds are reinvested in an additional Property.
Certain Management Services
CNL APF Partners, LP, an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership. Under this agreement,
CNL APF Partners, LP (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 has agreed to pay the Advisor an
annual fee of one percent of the sum of gross rental revenues from Properties
wholly owned by the Partnership plus the Partnership's allocable share of gross
revenues of joint ventures in which the Partnership is a co-venturer and the
Property held as tenants-in-common with an affiliate, but not in excess of
competitive fees for comparable services. Under the management agreement, the
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.
During 2000, CNL Fund Advisors, Inc. assigned its rights in, and its
obligations under, the management agreement with the Partnership to CNL APF
Partners, LP. All of the terms and conditions of the management agreement,
including the payment of fees, as described above, remain unchanged.
The 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 APF, 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, 2001, the Partnership owned 38 Properties. Of the 38
Properties, 24 are owned by the Partnership in fee simple, six are owned through
joint venture arrangements and eight 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 11,500
to 115,100 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 as of
December 31, 2001, by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation for the year ended December 31, 2001.
State Number of Properties
----- --------------------
Florida 7
Georgia 1
Idaho 1
Illinois 2
Indiana 1
Kansas 1
Massachusetts 1
Maryland 1
Michigan 3
North Carolina 3
New Mexico 1
Ohio 1
Oklahoma 2
Tennessee 4
Texas 6
Virginia 2
Washington 1
-------------
TOTAL PROPERTIES 38
=============
Buildings. Each of the Properties owned by the Partnership 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
1,200 to 10,700 square feet. All buildings on Properties 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, 2001, 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, 2001, the aggregate cost of the Properties owned by
the Partnership (including its consolidated joint venture) and joint ventures
(including Properties owned through tenancy in common arrangements) for federal
income tax purposes was $20,649,706 and $17,578,300, respectively.
The following table lists the Properties owned by the Partnership as of
December 31, 2001 by Restaurant Chain.
Restaurant Chain Number of Properties
---------------- --------------------
Arby's 1
Baker's Square 1
Bennigan's 2
Burger King 1
Chevy's Fresh Mex 1
Church's 2
Darryl's 1
Denny's 2
Durango's Steakhouse of Atlanta 1
Golden Corral 5
Hardee's 2
IHOP 6
Jack in the Box 3
KFC 3
Loco Lupe's Mexican Restaurant 1
Shoney's 1
Taco Bell 1
Taco Cabana 1
Waffle House 3
-----------------
TOTAL PROPERTIES 38
=================
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. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.
At December 31, 2001, 2000, 1999, 1998, and 1997, the Properties were
100%, 97%, 100%, 95%, and 98% occupied, respectively. The following is a
schedule of the average rent per Property for the years ended December 31:
2001 2000 1999 1998 1997
-------------- ------------- -------------- -------------- --------------
Rental Revenues (1)(2) $ 3,311,674 $ 3,456,021 $ 3,417,147 $ 3,342,220 $ 3,139,283
Properties (2) 38 37 41 42 39
Average Rent per
property $ 87,149 $ 93,406 $ 83,345 $ 79,577 $ 80,494
(1) Rental income includes the Partnership's share of rental income from
the Properties owned through joint venture arrangements and the
Properties owned through tenancy in common arrangements. Rental
revenues have been adjusted, as applicable, for any amounts for which
the Partnership has established an allowance for doubtful accounts.
(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, 2001 for the next ten years and thereafter.
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases (1) Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2002 -- -- --
2003 1 54,000 1.59%
2004 3 515,141 15.15%
2005 3 314,800 9.26%
2006 -- -- --
2007 -- -- --
2008 3 124,077 3.65%
2009 2 91,818 2.70%
2010 7 566,638 16.66%
2011 2 27,059 0.80%
Thereafter 17 1,706,946 50.19%
---------- ------------- -------------
Total 38 $ 3,400,479 100.00%
========== ============= =============
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2001 (see Item 1. Business -
Major Tenants) are substantially the same as those described in Item 1. Business
- - Leases.
Golden Corral Corporation leases five Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2004 and 2011) and the
average minimum base annual rent is approximately $152,900 (ranging from
approximately $88,000 to $185,700).
IHOP Corp. leases six 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 $138,000 (ranging from approximately $114,500 to
$163,200).
Item 3. Legal Proceedings
Neither the Partnership, not 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 15, 2002, there were 2,977 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 2001, 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. The
price paid for any Unit transferred pursuant to the Plan was $475 per Unit. The
price paid for any Unit 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 2001 and 2000 other than
pursuant to the Plan, net of commissions.
2001 (1) 2000 (1)
----------------------------------- -----------------------------------
High Low Average High Low Average
--------- -------- ---------- --------- -------- -----------
First Quarter $475 $370 $ 423 $ 380 $ 380 $ 380
Second Quarter 475 179 337 382 371 378
Third Quarter 351 328 339 387 334 363
Fourth Quarter 350 331 341 395 300 346
(1) A total of 319 and 216 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2001 and 2000, 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 each of the years ended December 31, 2001 and 2000, the Partnership
declared cash distributions of $3,150,000 to the Limited Partners. Distributions
of $787,500 were declared at the close of each of the Partnership's calendar
quarter during 2001 and 2000 to the Limited Partners. No amounts distributed to
partners for the years ended December 31, 2001 and 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. No distributions have been made to the General Partners to date.
These amounts include monthly distributions made in arrears for the Limited
Partners electing to receive distributions on this basis.
The Partnership intends to continue to make distributions of cash
available for distribution to the Limited Partners on a quarterly basis,
although some Limited Partners, in accordance with their election, receive
monthly distributions, for an annual fee.
(b) Not applicable.
Item 6. Selected Financial Data
2001 2000 1999 1998 1997
-------------- --------------- -------------- --------------- ---------------
Year ended December 31:
Revenues (1) $3,405,046 $3,211,507 $3,461,440 $3,526,060 $3,456,406
Net income (2) 2,033,137 3,016,796 3,510,474 3,020,881 2,899,882
Cash distributions
declared (3) 3,150,000 3,150,000 3,150,000 3,220,000 3,150,000
Net income per Unit (2) 29.04 43.10 49.67 42.75 41.06
Cash distributions
declared per Unit (3) 45.00 45.00 45.00 46.00 45.00
At December 31:
Total assets $28,709,054 $29,820,589 $30,120,859 $29,655,896 $29,993,069
Partners' capital 27,705,537 28,822,400 28,955,604 28,595,130 28,794,249
(1) Revenues include equity in earnings of unconsolidated joint ventures,
minority interest in income of the consolidated joint venture, and
lease termination income.
(2) Net income for the years ended December 31, 2001, 2000, 1998, and 1997,
includes provision for write-down of assets of $565,061, $368,430,
$155,528, and $263,186, respectively. In addition, net income for the
years ended December 31, 2001 and 1997, includes $11,897 and $79,777,
respectively, from a loss on sale of assets. Net income for the years
ended December 31, 2000, 1999, 1998, and 1997, also includes $639,806,
$848,303, $345,122, and $626,804, respectively, from gains on sale of
assets.
(3) Distributions for the years ended December 31, 1998, include a special
distribution to the Limited Partners of $70,000, which represented
cumulative excess operating reserves.
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 August 17, 1988, 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, which are leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are generally triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 2001, the Partnership owned 38 Properties, either directly or indirectly
through joint venture or tenancy in common arrangements.
Capital Resources
During the years ended December 31, 2001, 2000, and 1999, the
Partnership generated cash from operations (which includes cash received from
tenants, distributions from joint ventures and interest received, less cash paid
for expenses) of $2,900,366, $3,136,299, and $3,204,934, respectively. The
decrease in cash from operations during 2001 and 2000, each as compared to the
previous year, was primarily a result of changes in income and expenses as
described in "Results of Operations" below.
Other sources and uses of capital included the following during the
years ended December 31, 2001, 2000, and 1999.
In 1999 and 2000, the Partnership received payments amounting to
$18,600 and $55,800, respectively, related to certain rental payments deferral
agreed with one tenant in 1996. During 2000, the Partnership terminated the
lease with the tenant of the Property located in Chester, Pennsylvania due to
financial difficulties the tenant was experiencing. In connection with the
terminated lease, the Partnership received $175,000 in consideration for the
Partnership releasing the tenant from its obligations under the lease terms. In
May 2001, the Partnership sold this Property to an unrelated third party for
$85,000 and received net sales proceeds of $83,000. The Partnership had
previously recorded provisions for loss of $368,430 in a prior year relating to
this Property. The Partnership recorded an additional loss of $14,008 upon the
sale of this Property. In July 2001, the Partnership reinvested these net sales
proceeds in a Property in Waldorf, Maryland, as described below.
In June 1999, the Partnership sold four Burger King Properties, one in
each of Sevierville, Walker Springs, Broadway and Greeneville, Tennessee, to the
tenant in accordance with the purchase options under the lease agreements for a
total of approximately $4,354,000 and received net sales proceeds of $4,316,145,
resulting in a total gain of $848,303.
In October 1999, the Partnership used the majority of the net sales
proceeds from the sales of the Properties in Walker Springs and Broadway,
Tennessee, to invest approximately $2,108,100 in two Properties, one in each of
Baytown, Texas and Round Rock, Texas, with CNL Income Fund III, Ltd. and CNL
Income Fund XI, Ltd., respectively, affiliates of the General Partners, as
tenants-in-common for an 80% and a 77% interest, respectively, in the
Properties. In October 2001, the Partnership and CNL Income Fund XI, Ltd., sold
the Property in Round Rock, Texas, for approximately $1,539,000 and received net
sales proceeds of approximately $1,510,700, resulting in a gain, to the
tenancy-in-common, of approximately $123,900. The Partnership received
approximately $1,156,300 as a liquidating distribution for its pro-rata share of
the net sales proceeds. In December 2001, the Partnership reinvested the
majority of these proceeds in a Property in Houston, Texas at an approximate
cost of $964,900. The Partnership acquired this Property from CNL Funding
2001-A, LP, a Delaware limited partnership and an affiliate of the General
Partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the
Property in order to facilitate the acquisition of the Property by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by CNL Funding 2001-A, LP to acquire and carry the Property, including
closing costs. A portion of the transaction relating to the sale of this
Property and the reinvestment of the net sales proceeds qualified as a like-kind
exchange transaction for federal income tax purposes. The Partnership
distributed amounts sufficient to enable the Limited Partners to pay federal and
state income taxes, if any (at a level reasonably assumed by the General
Partners) resulting from the sale.
In addition, in November 1999, the Partnership used the majority of the
net sales proceeds from the sale of the Property in Greeneville, Tennessee,
together with the sales proceeds from the 1998 sale of the Property in
Liverpool, New York, to invest in an IHOP Property in Dublin, California, with
CNL Income Fund IX, Ltd., a Florida limited partnership and an affiliate of the
General Partners, as tenants-in-common for a 75% interest in this Property. In
June 2001, the Partnership and CNL Income Fund IX, Ltd., as tenants-in-common,
sold the Property in Dublin, California, for a sales price of approximately
$1,743,300 and received net sales proceeds of approximately $1,699,600,
resulting in a gain, to the tenancy-in-common, of approximately $158,100. The
Partnership received approximately $1,273,800 as a liquidating distribution for
its pro-rata share of the net sales proceeds. The Partnership distributed
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, at a level reasonably assumed by the General Partners, resulting
from the sale. In July 2001, the Partnership reinvested the net sales proceeds
from the sale of the Property in Chester, Pennsylvania and the return of
capital, described above, in a Property in Waldorf, Maryland, as
tenants-in-common, with CNL Income Fund IX, Ltd. and CNL Income Fund XVII, Ltd.,
each of which is an affiliate of the General Partners and a Florida limited
partnership. The Partnership contributed approximately $1,368,300 to acquire the
Property. The Partnership owns an approximate 60% interest in the profits and
losses of the Property.
In January 2000, the Partnership invested the majority of the net sales
proceeds from the sale of the Property in Sevierville, Tennessee, in a Property
in Niles, Illinois, with CNL Income Fund XIV, Ltd., a Florida limited
partnership and an affiliate of the General Partners, as tenants-in-common for a
74% interest in the Property. The Partnership acquired the Property from an
affiliate of the General Partners. The affiliate had purchased and temporarily
held title to the Property in order to facilitate the acquisition of the
Property by the Partnership. The purchase price paid by the Partnership
represented the costs incurred by the affiliate to acquire the Property,
including closing costs. A portion of the transaction relating to the sales of
the four Properties and the reinvestment of the net sales proceeds qualified as
a like-kind exchange transaction for federal income tax purposes. The
Partnership distributed amounts sufficient to enabled the Limited Partners to
pay federal and state income taxes, if any (at a level reasonably assumed by the
General Partners) resulting from the sales.
In September 2000, the Partnership sold four of its Popeyes Properties,
three in Jacksonville, Florida and one in Tallahassee, Florida, to a third party
for a total of approximately $2,081,800 and received net sales proceeds totaling
approximately $2,071,800 resulting in gains totaling approximately $639,800. In
January 2001, the Partnership invested a portion of these net sales proceeds in
two Properties located in Burley, Idaho and Cleburne, Texas at an approximate
cost of $2,098,400. The Partnership acquired these Properties from CNL Funding
2001-A, LP, a Delaware limited partnership and an affiliate of the General
Partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the
Properties in order to facilitate the acquisition of the Properties by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by CNL Funding 2001-A, LP to acquire and carry the Properties,
including closing costs. A portion of the transaction relating to the sale of
these four Properties and the reinvestment of the net sales proceeds qualified
as a like-kind exchange transaction for federal income tax purposes. The
Partnership distributed amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any (at a level reasonably assumed by the
General Partners) resulting from the sales.
In 2001, the Partnership entered in a promissory note with the
corporate General Partner for a loan in the amount of $75,000 in connection with
the operations of the partnership. The loan was uncollateralized, non-interest
bearing and due on demand. As of December 31, 2001, the Partnership had repaid
the loan in full to the corporate General Partner.
In December 2001, the Partnership sold its Property in Cheyenne,
Wyoming to an unrelated third party for approximately $300,000 and received net
sales proceeds of approximately $290,800, resulting in a gain of $2,111. The
Partnership intends to reinvest these sales proceeds in an additional Property.
The Partnership distributed amounts sufficient to enable the Limited Partners to
pay federal and state income taxes, if any (at a level reasonably assumed by the
General Partners) resulting from the sale.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements in which the Partnership owns an interest, is
or may be encumbered. Under its partnership agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf 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 and net
sales proceeds from the sale of Properties, pending reinvestment in additional
Properties, are 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 the Partnership's use of such funds to pay Partnership expenses or
to make distributions to the partners. At December 31, 2001, the Partnership had
$1,126,921 invested in such short-term investments, as compared to $868,873 at
December 31, 2000. The increase in cash and cash equivalents during 2001 was
primarily a result of the Partnership receiving and holding the net sales
proceeds from the sale of the Property in Cheyenne, Wyoming, as described above,
pending the reinvestment in an additional Property. For the year ending December
31, 2001, the average interest rate earned on the rental income deposited in
demand deposit accounts at commercial banks was approximately 2.3% annually. The
funds remaining at December 31, 2001, 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 short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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.
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 of the Partnership's Properties are 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 remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based on current and anticipated future cash from operations, the
Partnership declared distributions to the Limited Partners of $3,150,000 for
each of the years ended December 31, 2001, 2000, and 1999. This represents
distributions of $45 per Unit for each of the years ended December 31, 2001,
2000, and 1999. No distributions were made to the General Partners during the
years ended December 31, 2001, 2000, and 1999. No amounts distributed to the
Limited Partners for the years ended December 31, 2001, 2000, and 1999, 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 and did not receive any distributions
during the years ended December 31, 2001 and 2000.
As of December 31, 2001 and 2000, the Partnership owed $11,507 and
$5,396, respectively, to affiliates for operating expenses and accounting and
administrative services and other amounts. As of March 15, 2002, the Partnership
had reimbursed all such amounts to the affiliates. Other liabilities of the
Partnership, including distributions payable were $854,867 at December 31, 2001,
as compared to $852,460 at December 31, 2000. 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
method. 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 its Properties and investments in unconsolidated
entities periodically (no less than once per year) for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through operations. Management determines whether
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 fair value.
Results of Operations
During 1999, the Partnership and its consolidated joint venture, Caro
Joint Venture, owned and leased 32 wholly owned Properties (including four
Properties which were sold during 1999), and during 2000, the Partnership owned
and leased 28 wholly owned Properties (including four Properties which were sold
during 2000) and during 2001, the Partnership owned and leased 26 wholly owned
Properties (including two Properties which were sold during 2001). In addition,
during 1999, the Partnership was a co-venturer in five separate joint ventures
that owned and leased a total of five Properties and during 2000 and 2001 the
Partnership was a co-venturer in one additional joint venture that owned and
leased one Property. During 1999, the Partnership owned and leased eight
Properties with affiliates as tenants-in-common, and during 2000, the
Partnership owned and leased nine Properties with affiliates as
tenants-in-common, and during 2001, the Partnership owned and leased ten
Properties with affiliates as tenants-in-common (including two Properties which
were sold in 2001). As of December 31, 2001, the Partnership owned, either
directly, or through joint venture arrangements, 38 Properties which are
generally subject to long-term, triple-net leases. The leases of the Properties
provide for minimum base annual rental amounts (payable in monthly installments)
ranging from approximately $39,500 to $246,400. Generally, the leases provide
for percentage rent based on sales in excess of a specified amount. In addition,
some of the leases provide that, commencing in the fourth to sixth lease year,
the percentage rent will be an amount equal to the greater of the percentage
rent calculated under the lease formula or a specified percentage (ranging from
one to five percent) of the purchase price or gross sales. For further
description of the Partnership's leases and Properties, see Item 1. Business -
Leases and Item 2. Properties, respectively.
During the years ended December 31, 2001, 2000, and 1999, the
Partnership and its consolidated joint venture earned $2,207,186, $2,355,377,
and $2,675,958, respectively, in rental income from operating leases and earned
income from direct financing leases. Rental and earned income decreased during
2001 and 2000, each as compared to the previous year, primarily as a result of
the sales of Properties during 2000 and 1999, as described above in "Capital
Resources." The decrease in rental and earned income during 2001 was partially
offset by an increase of approximately $215,700, due to the fact that in 2001,
the Partnership reinvested a portion of the net sales proceeds from the 2000 and
2001 sales of several Properties in three additional Properties, as described
above in "Capital Resources." Rental and earned income are expected to remain at
reduced amounts while equity in earnings of joint ventures is expected to
increase due to the fact that the Partnership reinvested a portion of the net
sales proceeds from the 2000 sales of several Properties and the majority of the
net sales proceeds from the 1999 sales of several Properties in joint ventures
or in Properties with affiliates of the General Partners, as tenants-in-common.
Rental and earned income remained at reduced amounts during 2001 and
2000, due to the fact that PRG, the tenant of two of the Partnership's
Properties, experienced financial difficulties during 2000 and in October 2001,
filed for bankruptcy and rejected the lease it had with the Partnership relating
to the Property in Cheyenne, Wyoming. As a result of the bankruptcy, the
Partnership stopped recording rental revenue relating to these Properties. PRG
has not rejected or affirmed the lease relating to the Property in Broken Arrow,
Oklahoma. While the tenant has not rejected or affirmed this lease, there can be
no assurance that the lease will not be rejected in the future. In December
2001, the Partnership sold the vacant Property in Cheyenne, Wyoming, as
described above in "Capital Resources." The lost revenues resulting from the
possible rejection of the remaining lease could have an adverse effect on the
results of operations of the Partnership if the Partnership is unable to
re-lease the Properties in a timely manner.
The decrease in rental and earned income during 2000, as compared to
1999, was partially offset by the fact that the Partnership collected and
recorded as income approximately $53,700 and $18,600 during 2000 and 1999, in
rental payment deferrals for the two Properties leased by the same tenant in
Chester, Pennsylvania, and Orlando, Florida. These amounts were collected in
accordance with the agreement entered into in March 1996, with the tenant to pay
the remaining balance of the rental payment deferral amounts as discussed above
in "Capital Resources." During 2000, the tenant terminated its lease relating to
the Property in Chester, Pennsylvania. In connection with the termination, the
Partnership received $175,000 in lease termination income in consideration for
the Partnership releasing the tenant from its obligations under the lease. In
May 2001, the Partnership sold this Property, as described above in "Capital
Resources." In July 2001, the Partnership reinvested these net sales proceeds in
a Property in Waldorf, Maryland, with CNL Income Fund IX, Ltd. and CNL Income
Fund XVII, Ltd., as tenants-in-common, as described in "Capital Resources".
Rental and earned income are expected to remain at reduced amounts while equity
in earnings of joint ventures is expected to increase due to the fact that the
Partnership reinvested these net sales proceeds in a Property with an affiliate
of the General Partners, as tenants-in-common.
In addition, for the years ended December 31, 2001, 2000, and 1999, the
Partnership earned $987,886, $672,749, and $524,643, respectively, attributable
to net income earned by joint ventures in which the Partnership is a
co-venturer. The increase in net income earned by joint ventures during 2001, as
compared to 2000, was partially due to the fact that in June 2001, the
Partnership and CNL Income Fund IX, Ltd., as tenants-in-common, sold the
Property in Dublin, California, in which the Partnership owned a 75% interest.
The tenancy in common recognized a gain of approximately $158,100 during, 2001,
as described above in "Capital Resources." The tenancy in common distributed to
the Partnership its pro-rata share of the net sales proceeds from this sale as a
liquidation distribution, as described above in "Capital Resources". The
increase in net income earned by joint ventures was also attributable to the
fact that during 2001, the Partnership reinvested these proceeds in an
additional Property, as tenants-in-common with CNL Income Fund IX, Ltd. and CNL
Income Fund XVII, Ltd. as described above in "Capital Resources." In addition,
the increase in net income earned by joint ventures during 2001, as compared to
2000, was partially due to the fact that in October 2001, the Partnership and
CNL Income Fund XI, Ltd., as tenants-in-common, sold the Property in Round Rock,
Texas, in which the Partnership owned a 77% interest, as described above in
"Capital Resources." The tenancy in common recognized a gain of approximately
$123,900 during, 2001. The tenancy in common distributed to the Partnership its
pro-rata share of the net sales proceeds from this sale as a liquidating
distribution, and the Partnership reinvested these proceeds in a Property in
Houston, Texas, as described above in "Capital Resources". The increase in net
income earned by joint ventures during 2001 was partially offset by the fact
that in January 2002, Houlihan's Restaurant, Inc., which leases the Property
owned by Show Low Joint Venture, filed for bankruptcy and rejected the lease
relating to this Property. As a result, during 2001, the joint venture recorded
a provision for write-down of assets of approximately $56,400 related to
previously accrued rental income relating to this Property. The accrued rental
income was the accumulated amount of non-cash accounting adjustment previously
recorded in order to recognize future scheduled rent increases as income evenly
over the term of the lease. No such provision was recorded during 2000 or 1999,
relating to this Property. The provision represented the difference between the
carrying value of the Property, including the accumulated accrued rental income
balance and the General Partners' estimated net realizable value of the
Property. The joint venture will not recognize any rental and earned income from
this Property until the Property is re-leased or the Property is sold and the
proceeds are reinvested in an additional Property. The joint venture is
currently seeking a replacement tenant or purchaser for this Property. The lost
revenues resulting from the vacant Property could have an adverse effect on the
equity in earnings of joint ventures, if the joint venture is not able to
re-lease or sell the Property in a timely manner.
The increase in net income earned by joint ventures during 2000, as
compared to 1999, was primarily due to the fact that in 1999 and 2000, the
Partnership reinvested the net sales proceeds it received from the 1999 sales of
four Burger King Properties in four Properties with affiliates of the general
partners as tenants-in-common. The increase in net income earned by joint
ventures during 2000 was partially offset by the fact that during 2000, the
lease relating to the Property owned by Melbourne Joint Venture, in which the
Partnership owns a 50% interest, was amended to provide for rent reductions
starting in February 2000. In June 2000, the operator of this Property vacated
the Property and discontinued operations. As a result, during 2000, the joint
venture stopped recording rental revenue relating to this Property. The joint
venture will continue to pursue collection of past due rental amounts. The joint
venture did not recognize any rental income relating to this Property until June
2001, at which time the joint venture re-leased this Property to a new tenant.
The lease terms for this Property are substantially the same as the
Partnership's other leases. In addition, during 2000, the joint venture
established a provision for write-down of assets for this Property of
approximately $219,100. The provision represented the difference between the
Property's net carrying value at December 31, 2000 and the current estimated net
realizable value for the Property. No such provision was recognized during 2001
or 1999.
During 2001, two lessees of the Partnership and its consolidated joint
venture, Golden Corral Corporation and IHOP Properties, Inc., each contributed
more than ten percent of the Partnership's total rental and earned income
(including rental income from the Partnership's consolidated joint venture in
which the Partnership is a co-venturer and the Partnership's share of the rental
and earned income from the Properties owned by unconsolidated joint venturers
and the Properties owned with affiliates of the General Partners as
tenants-in-common). As of December 31, 2001, Golden Corral Corporation was the
lessee under leases relating to five restaurants and IHOP Properties, Inc. was
the lessee under leases relating to six restaurants. It is anticipated that,
based on the minimum rental payments required by the leases, these two lessees
each will continue to contribute more than ten percent of the Partnership's
total rental and earned income in 2002. In addition, two Restaurant Chains,
Golden Corral Family Steakhouse Restaurants ("Golden Corral") and IHOP, each
accounted for more than ten percent of the Partnership's total rental and earned
income in 2001 (including rental income from the Partnership's consolidated
joint venture and the Partnership's share of the rental and earned income from
the Properties owned by unconsolidated joint ventures in which the Partnership
is a co-venturer and the Properties owned with affiliates of the General
Partners as tenants-in-common). In 2002, it is anticipated that these two
Restaurant Chains each will continue to account for more than ten percent of the
total rental and earned income to which the Partnership is entitled under the
terms of the leases. Any failure of these lessees or Restaurant Chains could
materially affect the Partnership's income if the Partnership is not able to
re-lease the Properties in a timely manner.
For the years ended 2001, 2000, and 1999, the Partnership also earned
$83,689, $58,100, and $147,908, respectively, in interest and other income.
Interest and other income were higher during 2001 and 1999, as compared to 2000
primarily due to the amount interest earned on the net sales proceeds received
and held in escrow relating to the sales of several Properties, until such
proceeds were reinvested in additional Properties, as described above in
"Capital Resources."
Operating expenses, including depreciation and amortization expense and
provisions for losses on assets, were $1,360,012, $1,009,517, and $799,269, for
the years ended December 31, 2001, 2000, and 1999, respectively. The increase in
operating expenses during 2001, as compared to 2000, was partially attributable
to the fact that the Partnership established a provision for write-down of
assets of approximately $565,100 relating to the Properties in Broken Arrow,
Oklahoma and Cheyenne, Wyoming. The tenant of these Properties filed for
bankruptcy and rejected the lease relating to the Property in Cheyenne, Wyoming,
as described above. In addition, the Partnership recorded a provision for
doubtful accounts of approximately $33,100 for past due rental amounts relating
to these Properties. The General Partners will continue to pursue collection of
these past due rental amounts. In addition, the Partnership incurred legal fees,
repairs and maintenance and real estate taxes relating to these Properties
during 2001. The Partnership anticipates that it will continue to incur such
costs relating to the remaining vacant Property and will pursue collection of
these amounts from the tenant.
The increase in operating expenses during 2001, as compared to 2000,
was also partially attributable to an increase in the costs incurred for
administrative expenses for servicing the Partnership and its Properties, as
permitted by the Partnership agreement. In addition, the increase in operating
expenses during 2001 was partially due to the Partnership incurring additional
state taxes due to changes in tax laws of a state in which the Partnership
conducts business.
The increase in operating expenses during 2000, as compared to 1999,
was primarily due to the fact that during 2000, the Partnership recorded a
provision for write-down of assets in the amount of $368,430, for the Property
in Chester, Pennsylvania. This lease for this Property was terminated in 2000,
as described above in "Capital Resources." The provision represented the
difference between the Property's carrying value at December 31, 2000, and the
General Partners' estimated net realizable value for this Property. No such
provision was recorded during 1999. In May 2001, the Partnership sold this
Property, as described above in "Capital Resources." The increase during 2000,
as compared to 1999, was partially offset by, a decrease in depreciation expense
due to sales of several Properties in 2000 and 1999.
The increase in operating expenses during 2000 and 1999, each as
compared to the previous year, was partially offset by the fact that during 2000
and 1999 the Partnership incurred $34,287 and $174,233, respectively, in
transaction costs relating to the General Partners retaining financial and legal
advisors to assist them in evaluating and negotiating the proposed merger with
CNL American Properties Fund, Inc. ("APF"). On March 1, 2000 the general
partners and APF mutually agreed to terminate the merger. No such expenses were
incurred during 2001.
As a result of the sale of the Properties in Chester, Pennsylvania and
Cheyenne, Wyoming, as described above in "Capital Resources," the Partnership
recognized a loss of $11,897 during the year ended December 31, 2001. As a
result of the sales of four Popeye's Properties in 2000 and four Burger King
Properties in 1999, as described above in "Capital Resources," the Partnership
recognized gains of $639,806 and $848,303, respectively.
The restaurant industry, as a whole, has been one of the many
industries affected by the general slowdown in the economy. While the
Partnership has experienced some losses due to the financial difficulties of a
limited number of restaurant operators, the General Partners remain confident in
the overall performance of the fast-food and family style restaurants, the
concepts that comprise the Partnership's portfolio. Industry data shows that
these restaurant concepts continue to outperform and remain more stable than
higher-end restaurants, which have been more adversely affected by the slowing
economy.
The Partnership's leases as of December 31, 2001, are generally
triple-net leases and 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 December 1999, the Securities and Exchange Commission released SAB
101, which provides the staff's view in applying generally accepted accounting
principles to selected revenue recognition issues. SAB 101 requires the
Partnership to defer recognition of certain percentage rental income until
certain defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material impact on the
Partnership results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" (FAS 141) and
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). The Partnership has reviewed both statements and
has determined that both FAS 141 and FAS 142 do not apply to the Partnership as
of December 31, 2001.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144). 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 fair
value. If an impairment is recognized, the adjusted carrying amount of a
long-lived asset is its new cost basis. The adoption of FAS 144 did not have any
effect on the partnership's recording of impairment losses as this Statement
retained the fundamental provisions of FAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Termination of Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF. Under the Agreement and Plan of Merger, APF was to
issue shares of its common stock as consideration for the Merger. On March 1,
2000, the General Partners and APF announced that they had mutually agreed to
terminate the Agreement and Plan of Merger. The agreement to terminate the
Agreement and Plan of Merger was based, in large part, on the General Partners'
concern that, in light of market conditions relating to publicly traded real
estate investment trusts, the value of the transaction had diminished. As a
result of such diminishment, the General Partners' ability to unequivocally
recommend voting for the transaction, in the exercise of their fiduciary duties,
had become questionable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONTENTS
--------
Page
----
Report of Independent Certified Public Accountants 20
Financial Statements:
Balance Sheets 21
Statements of Income 22
Statements of Partners' Capital 23
Statements of Cash Flows 24-25
Notes to Financial Statements 26-43
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Partners
CNL Income Fund VI, 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 VI, Ltd. (a Florida limited
partnership) at December 31, 2001 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under item 14(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedules are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules 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.
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
February 8, 2002
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2001 2000
------------------ --------------------
ASSETS
------
Land and buildings on operating leases, net $ 16,023,866 $13,428,503
Net investment in direct financing leases 2,399,329 3,324,866
Investment in joint ventures 8,387,142 9,280,761
Cash and cash equivalents 1,126,921 868,873
Certificate of deposit -- 103,500
Restricted cash -- 2,062,036
Receivables, less allowance for doubtful accounts of $150,802
and $193,869, respectively 124,865 141,085
Due from related parties 15,981 13,593
Accrued rental income, less allowance for doubtful accounts
of $47,718 in 2001 and 2000
590,190 533,412
Other assets 40,760 63,960
------------------ --------------------
$ 28,709,054 $ 29,820,589
================== ====================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 16,859 $ 41,715
Accrued and escrowed real estate taxes payable 13,119 11,126
Due to related parties 11,507 5,396
Distributions payable 787,500 787,500
Rents paid in advance and deposits 37,389 12,119
------------------ --------------------
Total liabilities 866,374 857,856
Minority interest 137,143 140,333
Partners' capital 27,705,537 28,822,400
------------------ --------------------
$ 28,709,054 $ 29,820,589
================== ====================
See accompanying notes to financial statements.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2001 2000 1999
------------------ --------------- ---------------
Revenues:
Rental income from operating leases $ 2,003,280 $ 1,935,866 $ 2,217,409
Earned income from direct financing leases 203,906 419,511 458,549
Contingent rental income 149,286 152,450 149,981
Lease termination income -- 175,000 --
Interest and other income 83,689 58,100 147,908
------------------ --------------- ---------------
2,440,161 2,740,927 2,973,847
------------------ --------------- ---------------
Expenses:
General operating and administrative 274,012 169,603 158,011
Professional services 47,035 45,719 45,076
Provision for doubtful accounts 33,147 -- --
Real estate taxes 25,704 3,780 --
State and other taxes 42,557 18,720 10,042
Depreciation and amortization 372,496 368,978 411,907
Provision for write-down of assets 565,061 368,430 --
Transaction costs -- 34,287 174,233
------------------ --------------- ---------------
1,360,012 1,009,517 799,269
------------------ --------------- ---------------
Income Before Gain (Loss) on Sale of Assets, Minority
Interest in Income of Consolidated Joint Venture and
Equity in Earnings of Unconsolidated Joint Ventures 1,080,149 1,731,410 2,174,578
Gain (Loss) on Sale of Assets (11,897 ) 639,806 848,303
Minority Interest in Income of Consolidated Joint Venture (23,001 ) (27,169 ) (37,050 )
Equity in Earnings of Unconsolidated Joint Ventures 987,886 672,749 524,643
------------------ --------------- ---------------
Net Income $ 2,033,137 $ 3,016,796 $ 3,510,474
================== =============== ===============
Allocation of Net Income:
General partners $ -- $ -- $ 33,908
Limited partners 2,033,137 3,016,796 3,476,566
------------------ --------------- ---------------
$ 2,033,137 $ 3,016,796 $ 3,510,474
================== =============== ===============
Net Income Per Limited Partner Unit $ 29.04 $ 43.10 $ 49.67
================== =============== ===============
Weighted Average Number of Limited Partner Units
Outstanding 70,000 70,000 70,000
================== =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2001, 2000 and 1999
General Partners Limited Partners
---------------------------- ------------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
--------------- ------------ ------------- ---------------- ---------------- ------------- -------------
Balance, December 31, 1998 $ 1,000 $ 256,690 $ 35,000,000 $ (28,804,226 ) $ 26,156,666 $ (4,015,000 ) $28,595,130
Distributions to limited
partners ($45.00 per
limited partner unit) -- -- -- (3,150,000 ) -- -- (3,150,000 )
Net income -- 33,908 -- -- 3,476,566 -- 3,510,474
--------------- ------------ ------------- ---------------- ---------------- ------------- -------------
Balance, December 31, 1999 1,000 290,598 35,000,000 (31,954,226 ) 29,633,232 (4,015,000 ) 28,955,604
Distributions to limited
partners ($45.00 per
limited partner unit) -- -- -- (3,150,000 ) -- -- (3,150,000 )
Net income -- -- -- -- 3,016,796 -- 3,016,796
--------------- ------------ ------------- ---------------- ---------------- ------------- -------------
Balance, December 31, 2000 1,000 290,598 35,000,000 (35,104,226 ) 32,650,028 (4,015,000 ) 28,822,400
Distributions to limited
partners ($45.00 per
limited partner unit) -- -- -- (3,150,000 ) -- -- (3,150,000 )
Net income -- -- -- -- 2,033,137 -- 2,033,137
--------------- ------------ ------------- ---------------- ---------------- ------------- -------------
Balance, December 31, 2001 $ 1,000 $ 290,598 $ 35,000,000 $ (38,254,226 ) $ 34,683,165 $ (4,015,000 ) $27,705,537
=============== ============ ============= ================ ================ ============= =============
See accompanying notes to financial statements.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
--------------- --------------- ---------------
Increase ( Decrease) in Cash and Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants $ 2,384,714 $ 2,647,604 $ 2,817,707
Distributions from unconsolidated joint ventures 819,773 881,943 483,152
Cash paid for expenses (380,274) (437,139) (227,913)
Interest received 76,153 43,891 131,988
------------------ ------------------ ------------------
Net cash provided by operating activities 2,900,366 3,136,299 3,204,934
------------------ ------------------ ------------------
Cash Flows from Investing Activities:
Proceeds from sale of assets 373,800 2,071,847 4,316,145
Additions to land and buildings on operating
leases (3,063,219) -- --
Investment in joint ventures (1,368,300) (1,112,500) (3,314,843)
Liquidating distribution from joint ventures 2,430,032 -- --
Redemption of (investment in) certificate of
deposit 100,000 (100,000) --
Decrease (increase) in restricted cash 2,061,560 (2,061,560) --
Payment of lease costs -- -- (3,300)
------------------ ------------------ ------------------
Net cash provided by (used in) investing
activities 533,873 (1,202,213) 998,002
------------------ ------------------ ------------------
Cash Flows from Financing Activities:
Proceeds from loan from corporate General
Partner 75,000 -- --
Repayment of loan from corporate General
Partner (75,000) -- --
Distributions to limited partners (3,150,000) (3,150,000) (3,220,000)
Distributions to holder of minority interest (26,191) (40,706) (28,129)
------------------ ------------------ ------------------
Net cash used in financing activities (3,176,191) (3,190,706) (3,248,129)
------------------ ------------------ ------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 258,048 (1,256,620) 954,807
Cash and Cash Equivalents at Beginning of Year 868,873 2,125,493 1,170,686
------------------ ------------------ ------------------
Cash and Cash Equivalents at End of Year $ 1,126,921 $ 868,873 $ 2,125,493
================== ================== ==================
See accompanying notes to financial statements.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2001 2000 1999
--------------- --------------- ---------------
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income $ 2,033,137 $ 3,016,796 $ 3,510,474
--------------- --------------- ---------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 370,848 367,328 410,257
Amortization 1,648 1,650 1,650
Provision for doubtful accounts 33,147 -- --
Equity in earnings of unconsolidated joint ventures, net
of distributions (168,113 ) 209,194 (41,491 )
Loss (gain) on sale of assets 11,897 (639,806 ) (848,303 )
Provision for write-down of assets 565,061 368,430 --
Minority interest in income of consolidated joint
venture 23,001 27,169 37,050
Decrease (increase) in due from related parties (2,388 ) 5,518 --
Increase in receivables (12,951 ) (10,584 ) (2,676 )
Decrease in net investment in direct financing leases 71,787 68,794 64,697
Increase in accrued rental income (56,778 ) (97,498 ) (95,735 )
Decrease (increase) in other assets 21,552 (27,163 ) (1,898 )
Increase (decrease) in accounts payable and accrued and
escrowed real estate taxes payable (22,863 ) (89,824 ) 135,333
Increase (decrease ) in due to related parties 6,111 (59,824 ) 45,817
Increase (decrease) in rents paid in advance and
deposits 25,270 (3,881 ) (10,241 )
--------------- --------------- ---------------
Total adjustments 867,229 119,503 (305,540 )
--------------- --------------- ---------------
Net Cash Provided by Operating Activities $ 2,900,366 $ 3,136,299 $ 3,204,934
=============== =============== ===============
Supplemental Schedule of Non-Cash Financing Activities:
Distributions declared and unpaid at December 31 $ 787,500 $ 787,500 $ 787,500
=============== =============== ===============
See accompanying notes to financial statements.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund VI, 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 and family-style 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
acquisition of land and buildings at cost, including acquisition and
closing costs. Land and buildings are leased to unrelated third parties
generally on a triple-net basis, whereby the tenant is responsible for
all operating expenses relating to the property, including property
taxes, insurance, maintenance and repairs. The leases are accounted for
using either the direct financing or the operating methods. Such
methods are described below:
Direct financing method - The 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) (Note 4). 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.
Operating method - Land and building 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.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
-------------------------------------------
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date. Whenever a tenant defaults
under the terms of its lease, or events or changes in
circumstance indicate that the tenant will not lease the
property through the end of the lease term, the Partnership
either reserves or reverses the cumulative accrued rental
income balance.
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 the fair value. Although the general partners have made
their best estimate of these factors based on current conditions, it is
reasonably possible that changes could occur in the near term which
could adversely affect the general partners' best estimate of net cash
flows expected to be generated from its properties and the need for
asset impairment write-downs.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, an adjustment is made to increase the
allowance for doubtful accounts, which is netted against receivables
and accrued rental income, although the Partnership continues to pursue
collection of such amounts. 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 66%
interest in Caro Joint Venture, a Florida general partnership, using
the consolidation method. Minority interests represent the minority
joint venture partners' proportionate share of equity in the
Partnership's consolidated joint venture. All significant intercompany
accounts and transactions have been eliminated.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
-------------------------------------------
The Partnership's investments in Auburn Joint Venture, Show Low Joint
Venture, Asheville Joint Venture, Warren Joint Venture, and Melbourne
Joint Venture and properties in Clinton, North Carolina; Vancouver,
Washington; Overland Park, Kansas; Memphis, Tennessee; Fort Myers,
Florida; Baytown, Texas; Waldorf, Maryland; and Niles, Illinois, each
of which is held as tenants-in-common with affiliates of the general
partners, are accounted for using the equity method since the joint
venture 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.
Lease Costs - Other assets include brokerage fees and lease incentive
costs incurred in finding new tenants and negotiating new leases for
the Partnership's properties which are amortized over the terms of the
new leases using the straight-line method.
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 are netted against
partners' capital and represent a reduction of Partnership equity and a
reduction in the basis of each partner's investment. See "Income Taxes"
footnote for a reconciliation of net income for financial reporting
purposes to net income for federal income tax purposes.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
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 2001 presentation.
These reclassifications had no effect on total partners' capital or net
income.
Staff Accounting Bulletin No. 101 ("SAB 101") - In December 1999, the
Securities and Exchange Commission released SAB 101, which provides the
staff's view in applying generally accepted accounting principles to
selected revenue recognition issues. SAB 101 requires the Partnership
to defer recognition of certain percentage rental income until certain
defined thresholds are met. The Partnership adopted SAB 101 beginning
January 1, 2000. Implementation of SAB 101 did not have a material
impact on the Partnership results of operations.
Statement of Financial Accounting Standards No. 141 ("FAS 141") and
Statement of Financial Accounting Standards No. 142 ("FAS 142") - In
July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" (FAS
141) and Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" (FAS 142). The Partnership has reviewed
both statements and has determined that both FAS 141 and FAS 142 do not
apply to the Partnership as of December 31, 2001.
Statement of Financial Accounting Standards No. 144 ("FAS 144") - In
October 2001, the Financial Accounting Standards Board issued 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
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2001, 2000, and 1999
1. Significant Accounting Policies - Continued:
-------------------------------------------
the date it is tested for recoverability. An impairment loss is
recognized when the carrying amount of a long-lived asset exceeds its
fair value. If an impairment is recognized, the adjusted carrying
amount of a long-lived asset is its new cost basis. The adoption of FAS
144 did not have any effect on the partnership's recording of
impairment losses as this Statement retained the fundamental provisions
of FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of."
2. Leases:
------
The Partnership leases its land and buildings to operators of national
and regional fast-food and family-style restaurants. The leases are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 13, "Accounting for Leases." The leases generally are
classified as operating leases; however, some leases have been
classified as direct financing leases. For the leases classified as
direct financing leases, the building p