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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19144
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]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2): Yes___ No X
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of 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.
As of December 31, 2000, the Partnership owned 23 Properties directly
and 15 Properties indirectly through joint venture and tenancy in common
arrangements. In 2001, the Partnership reinvested the net sales proceeds from
the 2000 sale of four Properties in Florida in a Property in Burley, Idaho and a
Property in Cleburne, Texas. 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. During 2002, the Partnership reinvested the
remaining sales proceeds from the 2001 sales of several Properties in two
Properties, one in Universal City, Texas and one in Schertz, Texas, each as a
separate tenancy in common arrangement with CNL Income Fund XI, Ltd., a Florida
limited partnership and an affiliate of the General Partners. During 2002, Caro
Joint Venture, in which the Partnership owned a 66.14%, sold its Property in
Caro, Michigan. In addition, during 2002, the building on the Property in
Marietta, Georgia was destroyed by fire. In 2003, the Partnership received
insurance proceeds and reinvested them in a Property in Dalton, Georgia, as
tenants-in-common, with CNL Income Fund XI, Ltd., CNL Income Fund XV, Ltd., and
CNL Income Fund XVI, Ltd., each of which is a Florida limited partnership and an
affiliate of the General Partners. During 2003, the Partnership sold its
Property in Broken Arrow, Oklahoma. In addition, during 2003, Show Low Joint
Venture, in which the Partnership owned a 36% interest, sold its Property and
the Partnership and the joint venture partner liquidated the joint venture. As
of December 31, 2003, the Partnership owned 23 Properties directly and 15
Properties indirectly through joint venture and tenancy in common arrangements.
Generally, the Properties are leased on a triple-net basis with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities.
The Partnership holds its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners consider factors such as potential capital
appreciation, net cash flow and federal income taxes. 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.
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 10 to 25 years (the average being 18 years), and expire between 2004 and
2029. 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
successive 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 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 January 2002, Houlihan's Restaurant, Inc., the tenant of the
Property owned by Show Low Joint Venture, filed for bankruptcy and rejected the
lease relating to the Property in Greensboro, North Carolina. In September 2003,
the joint venture sold this Property. In December 2003, the Partnership and the
joint venture partner liquidated the joint venture and the Partnership received
its pro rata share of the liquidating distribution.
In July 2002, Loco Lupe's of Hermitage, Inc., a tenant of one of the
Partnership's Properties, filed for Chapter 11 bankruptcy protection. Although
the tenant affirmed the one lease it has with the Partnership, in September
2003, the tenant stopped making rental payments. The lost revenues will have an
adverse effect on the results of operations of the Partnership if the
Partnership is unable to re-lease the Property in a timely manner.
The tenant of the Property in Detroit, Michigan exercised its option to
extend the lease for an additional five years beginning in February 2003. All
other lease terms remained unchanged and are substantially the same as the
Partnership's other leases.
In October 2003, Chevy's, Inc., the tenant of the Property in
Vancouver, Washington which the Partnership owns as tenants-in-common with
affiliates of the General Partners, filed for Chapter 11 bankruptcy protection.
The Partnership owns a 23.04% interest in this Property. While the tenant has
neither rejected nor affirmed the one lease it has with the Partnership, there
can be no assurance that the lease will not be rejected in the future. The lost
revenues that would result if the tenant rejects this lease will have an adverse
effect on the equity in earnings of joint ventures of the Partnership if the
tenancy in common is not able to re-lease the Property in a timely manner.
In December 2003, Waving Leaves, Inc., the tenant of the Property in
Waynesburg, Ohio filed for Chapter 11 bankruptcy protection. While the tenant
has neither rejected nor affirmed the one lease it has with the Partnership,
there can be no assurance that the lease will not be rejected in the future. The
lost revenues that would result if the tenant rejects this lease will have an
adverse effect on the results of operations of the Partnership if the
Partnership is not able to re-lease the Property in a timely manner.
During 2003, the Partnership sold its Property in Broken Arrow,
Oklahoma. In addition, during 2003, the Partnership reinvested a portion of the
insurance proceeds from the Property in Marietta, Georgia in a Property in
Dalton, Georgia, as a tenancy in common arrangement with CNL Income Fund XI,
Ltd., CNL Income Fund XV, Ltd., and CNL Income Fund XVI, Ltd., each of which is
a Florida limited partnership and an affiliate of the General Partners. The
lease terms for this Property are substantially the same as the Partnership's
other leases.
Major Tenants
During 2003, two lessees of the Partnership and its consolidated joint
venture, Golden Corral Corporation and IHOP Properties, Inc., each contributed
more than ten percent of total rental revenues (including the Partnership's
share of total rental revenues from the Properties owned by unconsolidated joint
ventures and the Properties owned with affiliates of the General Partners as
tenants-in-common). As of December 31, 2003, 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 total rental
revenues in 2004. In addition, two Restaurant Chains, Golden Corral Buffet and
Grill ("Golden Corral") and IHOP, each accounted for more than ten percent of
total rental revenues in 2003 (including the Partnership's share of total rental
revenues 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 2004, it is anticipated that these
two Restaurant Chains each will continue to account for more than ten percent of
the total rental revenues to which the Partnership is entitled under the terms
of the leases. Any failure of these lessees or Restaurant Chains will materially
affect the Partnership's operating results if the Partnership is not able to
re-lease the Properties in a timely manner. As of December 31, 2003, 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 the following joint venture and
tenancy in common arrangements as of December 31, 2003:
Entity Name Year Ownership Partners Property
Auburn Joint Venture 1989 3.90% CNL Income Fund IV, Ltd. Auburn, MA
Asheville Joint Venture 1991 14.46% CNL Income Fund VIII, Ltd. Asheville, NC
CNL Income Fund IV, Ltd., CNL 1996 18.00% CNL Income Fund IV, Ltd. CNL Clinton, NC
Income Fund VI, Ltd., Income Fund X, Ltd.
CNL Income Fund X, Ltd., CNL Income Fund XIV, Ltd.
and CNL Income Fund XIV,
Ltd. Tenants in Common
CNL Income Fund, Ltd., CNL 1997 23.04% CNL Income Fund, Ltd. Vancouver, WA
Income Fund II, Ltd., CNL Income Fund II, Ltd.
CNL Income Fund V, Ltd., CNL Income Fund V, Ltd.
and CNL Income Fund VI,
Ltd., Tenants in Common
CNL Income Fund II, Ltd., CNL 1998 34.74% CNL Income Fund II, Ltd. Overland Park, KS
Income Fund III, Ltd., CNL Income Fund III, Ltd.
and CNL Income Fund VI,
Ltd., Tenants in Common
CNL Income Fund II, Ltd., CNL 1998 46.20% CNL Income Fund II, Ltd. Memphis, TN
Income Fund VI, Ltd., CNL Income Fund XVI, Ltd.
and CNL Income Fund XVI,
Ltd., Tenants in Common
Melbourne Joint Venture 1998 50.00% CNL Income Fund XIV, Ltd. Melbourne, FL
CNL Income Fund VI, Ltd., and 1998 85.00% CNL Income Fund XV, Ltd. Ft. Myers, FL
CNL Income Fund XV,
Ltd., Tenants in Common
Entity Name Year Ownership Partners Property
Warren Joint Venture 1998 64.29% CNL Income Fund IV, Ltd. Warren, MI
CNL Income Fund III, Ltd., 1999 80.00% CNL Income Fund III, Ltd. Baytown, TX
and CNL Income
Fund VI, Ltd., Tenants
in Common
CNL Income Fund VI, Ltd., and 2000 74.00% CNL Income Fund XIV, Ltd. Niles, IL
CNL Income Fund XIV,
Ltd., Tenants in Common
CNL Income Fund VI, Ltd., CNL 2001 60.00% CNL Income Fund IX, Ltd. CNL Waldorf, MD
Income Fund IX, Ltd. and Income Fund XVII, Ltd.
CNL Income Fund XVII,
Ltd., Tenants in Common
CNL Income Fund VI, Ltd. and 2002 14.20% CNL Income Fund XI, Ltd. Universal City, TX
CNL Income Fund XI,
Ltd., Tenants in Common
CNL Income Fund VI, Ltd. and 2002 9.50% CNL Income Fund XI, Ltd. Schertz, TX
CNL Income Fund XI,
Ltd., Tenants in Common
CNL Income Fund VI, Ltd., 2003 25% CNL Income Fund XI, Ltd. Dalton, GA
CNL Income Fund XI, CNL Income Fund XV, Ltd.
Ltd., CNL Income Fund CNL Income Fund XVI, Ltd.
XV, Ltd., and CNL Income
Fund XVI, Ltd., Tenants
in Common
Each joint venture and tenancy in common was formed to hold one
Property. Each CNL Income Fund is an affiliate of the General Partners and is a
limited partnership organized pursuant to the laws of the state of Florida. The
Partnership shares management control equally with the affiliates of the General
Partners
The joint venture and tenancy in common arrangements provide for the
Partnership and its joint venture or tenancy in common partners to share in all
costs and benefits in proportion to each partner's percentage interest in the
entity or Property. The Partnership and its partners are also jointly and
severally liable for all debts, obligations and other liabilities of the joint
venture or tenancy in common. Net cash flow from operations is distributed to
each joint venture or tenancy in common partner in accordance with its
respective percentage interest in the entity or Property.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer by an event of dissolution.
Events of dissolution include the bankruptcy, insolvency or termination of any
joint venturer, sale of the Property owned by the joint venture and mutual
agreement of the Partnership and its joint venture partner to dissolve the joint
venture. Any liquidation proceeds, after paying joint venture debts and
liabilities and funding reserves for contingent liabilities, will be distributed
first to the joint venture partners with positive capital account balances in
proportion to such balances until such balances equal zero, and thereafter in
proportion to each joint venture partner's percentage interest in the joint
venture.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer or assign its interest without first offering
it for sale to its partner, either upon such terms and conditions as to which
the parties may agree or, in the event the parties cannot agree, on the same
terms and conditions as any offer from a third party to purchase such joint
venture or tenancy in common interest.
The Partnership had entered into a joint venture arrangement, Show Low
Joint Venture, with CNL Income Fund II, Ltd., a Florida limited partnership and
an affiliate of the General Partners, to purchase and hold a Property. During
2003, Show Low Joint Venture was liquidated upon the sale of the Property held
by the joint venture and the net sales proceeds were distributed to each joint
venture partner in accordance with the terms of the joint venture agreement.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the Property if the proceeds are reinvested in an additional Property.
Certain Management Services
RAI Restaurants, Inc. ("the Advisor"), 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, 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, 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.
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.
During 2003, CNL Capital Management, Inc., ("CCM"), a wholly owned
subsidiary of CNL Financial Group, Inc., began providing certain strategic
advisory services to the General Partners relative to the Partnership's
business. CCM is not reimbursed for these services by the Partnership. CCM also
began providing some accounting and portfolio management services to the
Partnership during 2003, through a subcontract with the Advisor.
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, the officers and employees of CNL Restaurant Properties, Inc.
(formerly CNL American Properties Fund, Inc.), the parent company of the
Advisor, and the officers and employees of CCM 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, 2003, the Partnership owned 38 Properties. Of the 38
Properties, 23 are owned by the Partnership in fee simple, four are owned
through joint venture arrangements and eleven are owned through tenancy in
common arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement.
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,
either directly or indirectly through joint venture or tenancy in common
arrangements, as of December 31, 2003, by state.
State Number of Properties
Florida 7
Georgia 2
Idaho 1
Illinois 2
Indiana 1
Kansas 1
Maryland 1
Massachusetts 1
Michigan 2
New Mexico 1
North Carolina 2
Ohio 1
Oklahoma 1
Tennessee 4
Texas 8
Virginia 2
Washington 1
-------------
TOTAL PROPERTIES 38
=============
Buildings. Each of the Properties 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, 2003, 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, 2003, the aggregate cost of the Properties owned by
the Partnership and joint ventures (including Properties owned through tenancy
in common arrangements) for federal income tax purposes was $19,024,266 and
$21,010,256, respectively.
The following table lists the Properties owned by the Partnership,
either directly or indirectly through joint venture or tenancy in common
arrangements, as of December 31, 2003 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
Denny's 1
Golden Corral 5
Hardee's 2
IHOP 6
Jack in the Box 3
KFC 2
O'Charley's 1
Shoney's 1
Taco Bell 1
Taco Cabana 3
Waffle House 3
Other 2
-----------------
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
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.
The following is a schedule of the average rent per Property and
occupancy rates for each of the years ended December 31:
2003 2002 2001 2000 1999
-------------- ------------- -------------- -------------- --------------
Rental Revenues (1)(2) $ 3,177,844 $ 3,157,653 $ 3,311,674 $ 3,456,021 $ 3,417,147
Properties (2) 37 37 38 37 41
Average rent per
property $ 85,888 $ 85,342 $ 87,149 $ 93,406 $ 83,345
Occupancy Rate 97% 95% 100% 97% 100%
(1) Rental revenues include the Partnership's share of rental revenues from
the Properties owned through joint venture arrangements and the
Properties owned through tenancy in common arrangements.
(2) Excludes Properties that were vacant or under construction 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, 2003 for the next ten years and thereafter.
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
----------------- ---------------- --------------------- --------------------------
2004 3 $ 515,141 16.71%
2005 3 314,800 10.21%
2006 -- -- --
2007 -- -- --
2008 4 183,027 5.94%
2009 2 91,413 2.97%
2010 5 350,109 11.36%
2011 2 27,539 0.89%
2012 1 54,961 1.78%
2013 -- -- --
Thereafter 17 1,545,453 50.14%
---------- ------------- -------------
Total (1) 37 $ 3,082,443 100.00%
========== ============= =============
(1) Excludes one Property which was under construction at December 31,
2003.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2003 (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, nor its General Partners, nor any affiliate of
the Partnership, 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 12, 2004, there were 2,938 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 2003, 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 2003 and 2002 other than
pursuant to the Plan, net of commissions.
2003 (1) 2002 (1)
----------------------------------- -----------------------------------
High Low Average High Low Average
--------- -------- ---------- --------- -------- -----------
First Quarter $ 475 $249 $ 400 $ 500 $305 $ 330
Second Quarter 475 263 430 366 300 323
Third Quarter 475 429 457 405 138 292
Fourth Quarter 475 400 442 404 305 370
(1) A total of 872 and 670 Units were transferred other than pursuant to
the Plan for the years ended December 31, 2003 and 2002, 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, 2003 and 2002, 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
quarters during 2003 and 2002 to the Limited Partners. No amounts distributed to
partners for the years ended December 31, 2003 and 2002, are required to be or
have been treated by the Partnership as a return of capital for purposes of
calculating the Limited Partners' return on their adjusted capital
contributions. 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
The following selected financial data should be read in conjunction
with the financial statements and related notes in Item 8. hereof.
2003 2002 2001 2000 1999
---------------- --------------- --------------- -------------- ----------------
Year ended December 31:
Continuing Operations (4):
Revenues $ 2,236,425 $ 2,331,776 $ 2,341,073 $ 2,597,464 $ 2,766,803
Equity in earnings of
unconsolidated joint
ventures 733,125 673,970 987,886 672,749 524,643
Income from continuing
operations (1) (2) 2,315,981 2,226,357 2,219,077 2,890,517 3,319,653
Discontinued Operations (4):
Revenues 41,884 155,987 99,088 143,463 207,044
Income (loss) from and
gain on disposal of
discontinued operations
(3) 41,659 245,959 (185,940 ) 126,279 190,821
Net income 2,357,640 2,472,316 2,033,137 3,016,796 3,510,474
Income (loss) per unit
Continuing operations $ 33.09 $ 31.81 $ 31.70 $ 41.29 $ 47.42
Discontinued operations 0.59 3.51 (2.66 ) 1.81 2.73
---------------- --------------- --------------- -------------- ----------------
$ 33.68 $ 35.32 $ 29.04 $ 43.10 $ 50.15
================ =============== =============== ============== ================
Cash distributions $ 3,150,000 $ 3,150,000 $ 3,150,000 $ 3,150,000 $ 3,150,000
declared
Cash distributions
declared per unit 45.00 45.00 45.00 45.00 45.00
At December 31:
Total assets $ 27,104,531 $ 27,918,964 $28,709,054 $29,820,589 $ 30,120,859
Total partners' capital 26,235,493 27,027,853 27,705,537 28,822,400 28,955,604
(1) Income from continuing operations for the years ended December 31,
2002, 2001, and 2000, includes provisions for write-down of assets of
$73,578, $354,295, and $368,430, respectively.
(2) Income from continuing operations for the years ended December 31,
2003, 2000, and 1999, includes gain on casualty loss on building of
$12,356, and gain on sale of assets of $639,806, and $848,303,
respectively and losses of $2,254 and $11,897 for the years ended
December 31, 2003 and 2001, respectively.
(3) Income (loss) from and gain on disposal of discontinued operations for
the year ended December 31, 2002 includes gain on sale of assets of
$234,297.
(4) Certain items in the prior years' financial data have been reclassified
to conform to the 2003 presentation. These reclassifications had no
effect on net income. The results of operations relating to properties
that were identified for sale as of December 31, 2001 but sold
subsequently are reported as continuing operations. The results of
operations relating to properties that were either identified for sale
and disposed of subsequent to January 1, 2002 or were classified as
held for sale as of December 31, 2003 are reported as discontinued
operations for all periods presented.
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
Restaurant Chains. The leases are generally triple-net leases, 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
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.
As of December 31, 2001, the Partnership owned 24 Properties directly
and 14 Properties indirectly through joint venture or tenancy in common
arrangements. As of December 31, 2002, the Partnership owned 24 Properties
directly and 15 Properties indirectly through joint venture or tenancy in common
arrangements. As of December 31, 2003, the Partnership owned 23 Properties
directly and 15 Properties indirectly through joint venture or tenancy in common
arrangements.
Capital Resources
Cash from operating activities was $2,762,018, $3,071,594, and
$2,900,366, during the years ended December 31, 2003, 2002, and 2001,
respectively. The decrease in cash from operating activities during the year
ended December 31, 2003 was a result of changes in the Partnership's working
capital, such as the timing of transactions relating to the collection of
receivables and the payment of expenses and changes in income and expenses, such
as changes in rental income and changes in operating and Property related
expenses. The increase in cash from operating activities during the year ended
December 31, 2002 was a result of changes in the Partnership's working capital,
such as the timing of transactions relating to the collection of receivables and
the payment of expenses.
Other sources and uses of cash included the following during the years
ended December 31, 2003, 2002, and 2001.
In May 2001, the Partnership sold its Property in Chester, Pennsylvania
to a third party and received net sales proceeds of approximately $83,000. The
Partnership had previously recorded provisions for write-down of assets of
approximately $368,400 in a prior year relating to this Property. The
Partnership recorded an additional loss of approximately $14,000 when the
Property was sold in 2001.
In January 2001, the Partnership invested a portion of the net sales
proceeds from the 2000 sales of several Properties, in a Property in Burley,
Idaho and one in Cleburne, Texas. 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.
During 2001, the Partnership and CNL Income Fund XI, Ltd., as
tenants-in-common, sold the Property in Round Rock, Texas, 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. The Partnership owned a 77% interest in this Property.
During 2001, the Partnership reinvested the majority of these proceeds in a
Property in Houston, Texas. 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.
During 2001, the Partnership and CNL Income Fund IX, Ltd., as
tenants-in-common, sold the Property in Dublin, California, 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 owned a 75% interest in this Property.
During 2001, the Partnership reinvested these proceeds and the net sales
proceeds from the sale of the Property in Chester, Pennsylvania 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 and the affiliates entered
into an agreement whereby each co-tenant will share in the profits and losses of
the Property in proportion to its applicable percentage interest. The
Partnership contributed approximately $1,368,300 to acquire the Property. The
Partnership owns a 60% interest in the profits and losses of the Property.
During 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.
During 2001, the Partnership also sold its Property in Cheyenne,
Wyoming to a third party and received net sales proceeds of approximately
$290,800, resulting in a gain of approximately $2,100. During 2002, the
Partnership reinvested a portion of these net sales proceeds and the remaining
proceeds from the 2001 sale of the Property in Round Rock, Texas in a Property
in Universal City, Texas and a Property in Schertz, Texas, each as a separate
tenants-in-common arrangement with CNL Income Fund XI, Ltd., an affiliate of the
General Partners. Each co-tenant will share in the profits and losses of each
property in proportion to its applicable percentage interest. The Partnership
contributed approximately $148,500 and $98,900 for a 14.2% and 9.5% interest, in
the Properties in Universal City, Texas and Schertz, Texas, respectively. The
Partnership and CNL Income Fund XI, Ltd. acquired Properties from CNL Funding
2001-A, LP, 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 and CNL Income Fund XI,
Ltd. The purchase prices paid by the Partnership and CNL Income Fund XI, Ltd.
represented the costs incurred by CNL Funding 2001-A, LP to acquire and carry
the Properties.
During 2002, Caro Joint Venture, in which the Partnership owned a
66.14% interest and accounted for under the consolidation method, entered into
an agreement with a third party to sell its Property in Caro, Michigan. During
2002, the joint venture sold this property and received net sales proceeds of
approximately $600,000, resulting in a gain on sale of assets of approximately
$216,100 to the joint venture. As a result of the sale of the Property, the
joint venture was dissolved in accordance with the joint venture agreement and
the Partnership received approximately $441,100 representing its pro-rata share
of liquidating distributions from the joint venture and recorded a gain on sale
of discontinued operations of approximately $18,200 during the year ended
December 31, 2002.
During 2002, the building on the Property in Marietta, Georgia was
destroyed by fire and the tenant terminated its lease relating to the Property.
In March 2003, the Partnership collected approximately $590,100 in insurance
proceeds relating to this Property, resulting in a gain of approximately $12,400
during 2003. In November 2003, the Partnership reinvested a portion of these
proceeds in a Property in Dalton, Georgia with CNL Income Fund XI, Ltd, CNL
Income Fund XV, Ltd., and CNL Income Fund XVI, Ltd., as tenants-in-common. The
Partnership and affiliates entered into an agreement whereby each co-venturer
will share in the profits and losses of the property in proportion to its
applicable percentage interest. The Partnership contributed $475,000 for a 25%
interest in the Property.
During 2003, the Partnership sold its Property in Broken Arrow,
Oklahoma, to a third party and received net sales proceeds of approximately
$472,400, resulting in no gain or loss on disposal of discontinued operations
during 2003. The Partnership had recorded provisions for write-down of assets in
previous years relating to this asset. The Partnership intends to reinvest these
proceeds in an additional Property or to pay liabilities of the Partnership as
needed.
In addition, during 2003, Show Low Joint Venture, in which the
Partnership owned a 36% interest, sold its Property in Greensboro, North
Carolina to a third party and received net sales proceeds of approximately
$468,900, resulting in a loss to the joint venture of approximately $29,500. The
joint venture had recorded provisions for write-down of assets relating to this
Property in previous periods. In the fourth quarter of 2003, the Partnership
received approximately $189,200 as its pro-rata share of the liquidating
distribution from the joint venture. The Partnership intends to use these
proceeds to either invest in an additional Property or pay liabilities of the
Partnership.
None of the Properties owned by the Partnership, or the joint venture
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.
At December 31, 2003, the Partnership had $1,557,186 invested in cash
and cash equivalents, as compared to $1,168,450 at December 31, 2002. At
December 31, 2003, these funds were held in demand deposit accounts at
commercial banks. The increase in cash and cash equivalents was due to the
Partnership holding the sales proceeds from the 2003 sale of the Property in
Broken Arrow, Oklahoma and the liquidating proceeds received from Show Low Joint
Venture. As of December 31, 2003, the average interest rate earned on the rental
income deposited in demand deposit accounts at commercial banks was less than
one percent annually. The funds remaining at December 31, 2003, after payment of
distributions and other liabilities, will be used to invest in an additional
Property or 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 net cash
flow in excess of operating expenses.
The General Partners have the right, but not the obligation, to make
additional capital contributions or loans if they deem it appropriate in
connection with the operations of the Partnership.
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 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, 2003, 2002, and 2001. This represents
distributions of $45.00 per Unit for each of the years ended December 31, 2003,
2002, and 2001. No distributions were made to the General Partners during the
years ended December 31, 2003, 2002, and 2001. No amounts distributed to the
Limited Partners for the years ended December 31, 2003, 2002, and 2001, are
required to be or have been treated by the Partnership as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Partnership intends to continue to make distributions
of cash available for distribution to the Limited Partners on a quarterly basis.
During 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the General
Partners were not allocated any net income during the years ended December 31,
2003, 2002, and 2001.
As of December 31, 2003 and 2002, the Partnership owed $12,517 and
$14,423, respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 12, 2004, the Partnership had reimbursed
the affiliates for these amounts. Other liabilities, including distributions
payable, were $856,521 at December 31, 2003, as compared to $876,688 at December
31, 2002. The General Partners believe that the Partnership has sufficient cash
on hand to meet its current working capital needs.
Off-Balance Sheet Transactions
The Partnership holds interests in various unconsolidated joint venture
and tenancy in common arrangements that are accounted for using the equity
method. The General Partners do not believe that any such interest would
constitute an off-balance sheet arrangement requiring any additional disclosures
under the provisions of the Sarbanes-Oxley Act of 2002.
Contractual Obligations, Contingent Liabilities, and Commitments
The Partnership has no contractual obligations, contingent liabilities,
or commitments as of December 31, 2003.
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 Financial Accounting Standards 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.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities for impairment at least once a year or whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The assessment is based on the carrying amount of the
Property or investment at the date it is tested for recoverability compared to
the sum of the estimated future cash flows expected to result from its operation
and sale through the expected holding period. If an impairment is indicated, the
asset is adjusted to its estimated fair value.
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." Accordingly, when the Partnership makes the
decision to sell or commits to a plan to sell a Property within one year, its
operating results are reported as discontinued operations.
Results of Operations
Comparison of year ended December 31, 2003 to year ended December 31, 2002
Rental revenues from continuing operations were $2,079,638 during the
year ended December 31, 2003, as compared to $2,190,267 during the same period
of 2002. Rental revenues from continuing operations were lower during 2003
because the Partnership stopped recording rental revenues in October 2002 when
the building on the Property in Marietta, Georgia was destroyed by fire and the
tenant terminated the lease relating to this Property. In March 2003, the
Partnership received approximately $590,100 in insurance proceeds and used these
proceeds to invest in a Property in Dalton, Georgia, as tenants-in-common with
affiliates of the General Partners, as described above. In September 2003, the
Partnership entered into a new lease, with a new tenant, for the Property in
Marietta, Georgia. The lease terms for this Property are substantially the same
as the Partnership's other leases. In connection with the new lease, the new
tenant has agreed to construct a new building on the Property. Construction of
the building is expected to be completed early in 2004, at which point rental
payments are expected to commence.
During 2002, a tenant, Loco Lupe's of Hermitage, Inc., filed for
Chapter 11 bankruptcy protection. Although the tenant had affirmed the one lease
it has with the Partnership, the tenant stopped making rental payments in
September 2003. The lost revenues will have an adverse effect on the results of
operations of the Partnership if the Partnership is unable to re-lease the
Property in a timely manner.
In December 2003, Waving Leaves, Inc., the tenant of the Property in
Waynesburg, Ohio filed for Chapter 11 bankruptcy protection. While the tenant
has neither rejected nor affirmed the lease one lease it has with the
Partnership, there can be no assurance that the lease will not be rejected in
the future. As of March 12, 2004, the Partnership has received all rental
payments relating to this lease. The lost revenues that would result if the
tenant rejects this lease will have an adverse effect on the results of
operations of the Partnership if the Partnership is not able to re-lease the
Property in a timely manner.
The Partnership also earned $154,154 in contingent rental income during
the year ended December 31, 2003, as compared to $131,860 during the same period
of 2002. The increase in contingent rental income during 2003 was due to an
increase in reported gross sales of the restaurants with leases that require the
payment of contingent rental income during 2003, as compared to 2002.
The Partnership also earned $733,125 attributable to net income earned
by unconsolidated joint ventures during the year ended December 31, 2003, as
compared to $673,970 during the same period of 2002. Net income earned by joint
ventures was lower during 2002, because Houlihan's Restaurant, Inc., which
leased the Property owned by Show Low Joint Venture, filed for bankruptcy and
rejected the lease relating to this Property in January 2002. As a result, the
joint venture, in which the Partnership owned a 36% interest, stopped recording
rental revenues relating to this Property. In addition, during the 2003 and
2002, Show Low Joint Venture recorded provisions for write-down of assets of
approximately $55,500 and $172,200, respectively relating to this Property. The
provisions represented the difference between the Property's net carrying value
and its estimated fair value. In September 2003, the joint venture sold this
vacant Property to a third party and recorded an additional loss on disposal of
discontinued assets of approximately $29,500. In the fourth quarter of 2003, the
joint venture was liquidated and the Partnership recorded a loss on dissolution
of joint ventures of approximately $2,300. The Partnership intends to use the
liquidating proceeds it received to either invest in another Property or to pay
liabilities of the Partnership. The decrease in net income earned by
unconsolidated joint ventures was partially offset by the fact that the
Partnership acquired one Property in November 2003 and two Properties in June
2002, each as a separate tenancy in common arrangement with affiliates of the
General Partners, as described above.
In October 2003, Chevy's, Inc., the tenant of the Property in
Vancouver, Washington which the Partnership owns as tenants-in-common with
affiliated of the General Partners, filed for Chapter 11 bankruptcy protection.
The Partnership owns a 23.04% interest in this Property. While the tenant has
neither rejected nor affirmed the lease one lease it has with the Partnership,
there can be no assurance that the lease will not be rejected in the future. The
lost revenues that would result if the tenant were to reject this lease will
have an adverse effect on the equity in earnings of joint ventures of the
Partnership if the tenancy in common is not able to re-lease the Property in a
timely manner.
During 2003, 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 rental revenues (including the
Partnership's share of the rental revenues from the Properties owned by
unconsolidated joint ventures and the Properties owned with affiliates of the
General Partners as tenants-in-common). As of December 31, 2003, 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 rental revenues in 2004. In addition, two Restaurant Chains,
Golden Corral, and IHOP, each accounted for more than ten percent of the
Partnership's rental revenues in 2003 (including the Partnership's share of the
rental revenues 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 2004, it is anticipated that
these two Restaurant Chains each will continue to account for more than ten
percent of the rental revenues to which the Partnership is entitled under the
terms of the leases. Any failure of these lessees or Restaurant Chains will
materially affect the Partnership's operating results if the Partnership is not
able to re-lease the Properties in a timely manner.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $663,671 during the year ended December
31, 2003, as compared to $779,389 during the same period of 2002. Operating
expenses were higher during 2002, because the Partnership elected to reimburse
the tenant of the Properties in El Paso, and Amarillo, Texas for certain
renovation costs. In addition, depreciation expense decreased during 2003 as a
result of the building on the Property in Marietta, Georgia being destroyed by
fire in October 2002. The decrease in operating expenses was partially offset by
an increase in state tax expense relating to several states in which the
Partnership conducts business. During 2002 and 2003 the Partnership incurred
certain property related expenses, such as legal fees, repairs and maintenance,
insurance and real estate taxes relating to vacant Properties. In May 2002, the
Partnership assigned the lease relating to one of the two vacant Properties to a
new tenant. The Partnership did not incur any additional expenses relating to
this Property after the assignment of the lease had occurred. In September 2003,
the Partnership entered into a new lease for the remaining vacant Property, as
described above. The new tenant is responsible for real estate taxes, insurance,
and maintenance relating to the Property in accordance with the terms of its
lease; therefore, the General Partners do not anticipate the Partnership will
incur these expenses for this Property in the future.
In March 2003, the Partnership received insurance proceeds relating to
the Property in Marietta, Georgia that was destroyed by fire in October 2002, as
described above. As a result, the Partnership recorded a gain of approximately
$12,400 during the year ended December 31, 2003.
During the year ended December 31, 2002, the Partnership identified and
sold one Property, owned by Caro Joint Venture, in which the Partnership owned a
66.14% interest and accounted for under the consolidation method, that was
classified as Discontinued Operations in the accompanying financial statements.
In addition, in January 2003, the Partnership identified for sale its Property
in Broken Arrow, Oklahoma. The Partnership recognized net rental income (rental
revenues less Property related expenses) of $106,978 during the year ended
December 31, 2002, relating to these two Properties. In June 2003, the
Partnership sold the Property in Broken Arrow, Oklahoma and recorded no gain or
loss on disposal of discontinued operations. The Partnership had recorded
provisions for write-down of assets in previous years relating to this Property,
including approximately $32,900 during the year ended December 31, 2002. The
Partnership recognized net rental income of $41,659 during the year ended
December 31, 2003, relating to this Property.
In September 2003, Show Low Joint Venture, in which the Partnership
owned a 36% interest, sold its Property in Greensboro, North Carolina, as
described above. The financial results relating to this Property were classified
as Discontinued Operations in the combined, condensed financial information for
the joint ventures and the properties held as tenants-in-common with affiliates
reported in the footnotes to the accompanying financial statements. The
Partnership's pro-rata share of these amounts was included in equity in earnings
of unconsolidated joint ventures in the accompanying financial statements.
Comparison of year ended December 31, 2002 to year ended December 31, 2001
Rental revenues from continuing operations were $2,190,267 during the
year ended December 31, 2002, as compared to $2,110,811 for the same period of
2001. Rental revenues from continuing operations increased during the year ended
December 31, 2002, because during 2001 the Partnership reinvested a portion of
the net sales proceeds from the sales of several Properties in three additional
Properties.
Phoenix Restaurant Group, Inc. ("PRG"), the tenant of two of the
Partnership's Properties, experienced financial difficulties during 2000. As a
result, during 2001, the Partnership stopped recording rental revenue relating
to two Properties. In October 2001, PRG filed for bankruptcy and rejected one of
the two leases it had with the Partnership. In December 2001, the Partnership
sold the vacant Property, and reinvested the net sales proceeds in an additional
Property. Rental revenues were higher during 2002 partially because the
Partnership received rental payments relating to the one Property not rejected
by the tenant after the bankruptcy date. In May 2002, the Partnership assigned
the lease relating to the one Property not rejected by PRG to a new tenant; all
lease terms remained the same.
The increase in rental revenues from continuing operations during 2002
was partially offset by the fact that in October 2002, the Property in Marietta,
Georgia was destroyed by fire and the tenant terminated its lease relating to
this Property. During 2003, the Partnership entered into a new lease, with a new
tenant, as described above.
The Partnership also earned $131,860 in contingent rental income during
the year ended December 31, 2002, as compared to $149,069 during the same period
of 2001. Contingent rental income was higher during 2001 due to an increase in
reported gross sales of the restaurants with leases that require the payment of
contingent rental income during 2001, as compared to 2002.
The Partnership earned $673,970, attributable to net income earned by
unconsolidated joint ventures during the year ended December 31, 2002, as
compared to $987,886 during the same period of 2001. Net income earned by joint
ventures was higher during 2001 because during 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 $158,000 during 2001 relating to this sale.
In addition, during 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. The tenancy in common recognized a gain of
approximately $123,900 during 2001 relating to this sale. Each tenancy in common
distributed to the Partnership its pro-rata share of the net sales proceeds from
the respective sales as a liquidating distribution. During 2001, the Partnership
reinvested a portion of these liquidating distributions in a Property in
Waldorf, Maryland, as tenants-in-common with CNL Income Fund IX, Ltd. and CNL
Income Fund XVII, Ltd. During 2002, the Partnership reinvested a portion of the
net sales proceeds from the 2001 sales of two Properties in two additional
Properties, each as tenants-in-common with CNL Income Fund XI, Ltd. Net income
earned by joint ventures was lower during 2002 because Houlihan's Restaurant,
Inc., which leased the Property owned by Show Low Joint Venture, filed for
bankruptcy and rejected the lease relating to this Property, as described above.
The Partnership earned $9,649 in interest and other income during the
year ended December 31, 2002, as compared to $81,193 during the same period of
2001. Interest and other income was higher during 2001 due to higher average
cash balances as a result of net sales proceeds being held in interest bearing
accounts until they were reinvested in additional Properties and higher average
interest rates during 2001.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets were $779,389 during the year ended December
31, 2002, as compared to $1,097,985 during the same period of 2001. Operating
expenses were higher during 2001 because the Partnership recorded provisions for
doubtful accounts of approximately $11,500, relating to a Property leased by
PRG. During 2001, the Partnership also recorded a provision for write-down of
assets of approximately $354,300 relating to this Property. The provision
represented the difference between the Property's net carrying value and its
estimated fair value. During 2002, the Partnership also recorded a provision for
write-down of assets of approximately $73,600 relating to the Property in
Marietta, Georgia which was destroyed by fire. The provision represented the
difference between the Property's net carrying value and its fair value. The
Partnership also incurred Property related expenses, such as legal fees, repairs
and maintenance, insurance and real estate taxes relating to the vacant
Properties. In December 2001 the Partnership sold one of its two PRG Properties
and in May 2002 the Partnership assigned the lease relating to the remaining PRG
Property to a new tenant. The Partnership did not incur any additional expenses
relating to these Properties after the sale of the Property and the assignment
of the lease had occurred. During 2003, the Partnership entered into a new lease
with a new tenant for the Property in Marietta, Georgia.
Operating expenses were lower during 2002 because of a decrease in
state tax expense and a decrease in the costs incurred for administrative
expenses for servicing the Partnership and its Properties. The decrease in
operating expenses during 2002 was offset by the Partnership electing to
reimburse the tenant of the Properties in El Paso and Amarillo, Texas for
certain renovation costs.
As a result of the sale of the Property in Chester, Pennsylvania, the
Partnership recognized a loss on sale of assets of approximately $12,000 during
the year ended December 31, 2001. Because this Property was identified for sale
prior to the January 2002 implementation of Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," the results of operations relating to this Property were included as
Income from Continuing Operations in the accompanying financial statements.
During the year ended December 31, 2002, the Partnership identified and
sold one Property, owned by Caro Joint Venture, in which the Partnership owned a
66.14% interest and accounted for under the consolidation method, that was
classified as Discontinued Operations in the accompanying financial statements.
In addition, in January 2003, the Partnership identified for sale its Property
in Broken Arrow, Oklahoma. The Partnership recognized net rental income (rental
revenues less Property related expenses) of $106,978 and a net rental loss of
$162,939 during the years ended December 31, 2002 and 2001, respectively,
relating to these two Properties. The net rental loss during 2001 was primarily
a result of the Partnership recording a provision for write-down of assets of
approximately $210,800 relating to the Property in Broken Arrow, Oklahoma. The
provision represented the difference between the Property's net carrying value
and its estimated fair value. In June 2003, the Partnership sold this Property
and recorded no gain or loss on disposal of discontinued operations.
In September 2003, Show Low Joint Venture, in which the Partnership
owned a 36% interest, sold its Property in Greensboro, North Carolina, as
described above. The financial results relating to this Property were classified
as Discontinued Operations in the combined, condensed financial information for
the joint ventures and the properties held as tenants-in-common with affiliates
reported in the footnotes to the accompanying financial statements. The
Partnership's pro-rata share of these amounts was included in equity in earnings
of unconsolidated joint ventures in the accompanying financial statements.
The General Partners continuously evaluate strategic alternatives for
the Partnership, including alternatives to provide liquidity to the Limited
Partners.
The Partnership's leases as of December 31, 2003, 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 January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting guidance
that addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve financial
reporting by companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that company is
subject to a majority risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. Prior to FIN 46, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. In December 2003, the FASB issued FASB Interpretation No. 46R
("FIN 46R"), to clarify some of the provisions of FIN 46. Under FIN 46R, special
effective date provisions apply to entities that have fully or partially applied
FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is
required in financial statements of public entities that have interests in
structures that are commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities, other than small
business issuers, for all other types of variable interest entities is required
in financial statements for periods ending after March 15, 2004. The Partnership
did not fully or partially apply FIN 46 prior to the issuance of FIN 46R. Also,
the Partnership does not have interests in structures commonly referred to as
special-purpose entities. Therefore, application of FIN 46R is required in the
Partnership's financial statements for periods ending after March 15, 2004. The
General Partners believe adoption of this standard may result in either
consolidation or additional disclosure requirements of the Partnership's
unconsolidated joint ventures, which are currently accounted for under the
equity method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
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 26-39
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, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003 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 15(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.
As described in Note 1 to the financial statements, on January 1, 2002, the
Partnership adopted Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/PricewaterhouseCoopers LLP
Orlando, Florida
March 24, 2004
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2003 2002
------------------ --------------------
ASSETS
Real estate properties with operating leases, net $ 14,355,664 $ 14,701,960
Net investment in direct financing leases 1,777,315 1,835,770
Real estate held for sale -- 472,425
Investment in joint ventures 8,674,222 8,483,605
Cash and cash equivalents 1,557,186 1,168,450
Receivables, less allowance for doubtful accounts of $27,488
and $9,774, respectively 144,162 676,352
Due from related parties -- 109
Accrued rental income, less allowance for doubtful accounts
of $9,697 in 2003 and 2002 564,672 550,037
Other assets 31,310 30,256
------------------ --------------------
$ 27,104,531 $ 27,918,964
================== ====================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued expenses $ 6,698 $ 34,851
Real estate taxes payable 14,220 13,010
Distributions payable 787,500 787,500
Due to related parties 12,517 14,423
Rents paid in advance 48,103 41,327
------------------ --------------------
Total liabilities 869,038 891,111
Partners' capital 26,235,493 27,027,853
------------------ --------------------
$ 27,104,531 $ 27,918,964
================== ====================
See accompanying notes to financial statements.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year Ended December 31,
2003 2002 2001
------------------ --------------- ---------------
Revenues:
Rental income from operating leases $ 1,876,996 $ 1,977,189 $ 1,915,760
Earned income from direct financing leases 202,642 213,078 195,051
Contingent rental income 154,154 131,860 149,069
Interest and other income 2,633 9,649 81,193
--------------- --------------- ---------------
2,236,425 2,331,776 2,341,073
------------------ --------------- ---------------
Expenses:
General operating and administrative 242,878 251,161 291,725
Property related 26,765 60,483 37,881
Provision for doubtful accounts -- -- 11,483
State and other taxes 46,080 28,513 42,557
Depreciation and amortization 347,948 365,654 360,044
Provision for write-down of assets -- 73,578 354,295
------------------ --------------- ---------------
663,671 779,389 1,097,985
------------------ --------------- ---------------
Income before gain (loss) on sale of assets and equity in
earnings of unconsolidated joint ventures 1,572,754 1,552,387 1,243,088
Gain (loss) on sale of assets 10,102 -- (11,897 )
Equity in earnings of unconsolidated joint ventures 733,125 673,970 987,886
--------------- --------------- ---------------
Income from continuing operations 2,315,981 2,226,357 2,219,077
------------------ --------------- ---------------
Discontinued operations:
Income (loss) from discontinued operations 41,659 11,662 (185,940 )
Gain on disposal of discontinued operations -- 234,297 --
------------------ --------------- ---------------
41,659 245,959 (185,940 )
------------------ --------------- ---------------
Net income $ 2,357,640 $ 2,472,316 $ 2,033,137
================== =============== ===============
Income (loss) per limited partner unit
Continuing operations $ 33.09 $ 31.81 $ 31.70
Discontinued operations 0.59 3.51 (2.66 )
------------------ --------------- ---------------
$ 33.68 $ 35.32 $ 29.04
================== =============== ===============
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, 2003, 2002 and 2001
General Partners Limited Partners
-------------------------------------- --------------------------------------------------------
Accumulated Accumulated
Contributions Earnings Contributions Distributions Earnings
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2000 $ 1,000 $ 290,598 $ 35,000,000 $ (35,104,226 ) $ 32,650,028
Distributions to limited
partners ($45.00 per
limited partner unit) -- -- -- (3,150,000 ) --
Net income -- -- -- -- 2,033,137
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2001 1,000 290,598 35,000,000 (38,254,226 ) 34,683,165
Distributions to limited
partners ($45.00 per
limited partner unit) -- -- -- (3,150,000 ) --
Net income -- -- -- -- 2,472,316
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2002 1,000 290,598 35,000,000 (41,404,226 ) 37,155,481
Distributions to limited
partners ($45.00 per
limited partner unit) -- -- -- (3,150,000 ) --
Net income -- -- -- -- 2,357,640
------------------ ---------------- ----------------- ---------------- -----------------
Balance, December 31, 2003 $ 1,000 $ 290,598 $ 35,000,000 $ (44,554,226 ) $ 39,513,121
================== ================ ================= ================ =================
See accompanying notes to financial statements.
- ----------------
Syndication
Costs Total
-------------- --------------
$ (4,015,000 ) $28,822,400
-- (3,150,000 )
-- 2,033,137
-------------- --------------
(4,015,000 ) 27,705,537
-- (3,150,000 )
-- 2,472,316
-------------- --------------
(4,015,000 ) 27,027,853
-- (3,150,000 )
-- 2,357,640
-------------- --------------
$ (4,015,000 ) $26,235,493
============== ==============
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2003 2002 2001
--------------- --------------- ---------------
Cash Flows from Operating Activities:
Net income $ 2,357,640 $ 2,472,316 $ 2,033,137
----------------- ----------------- ------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 346,296 375,418 370,848
Amortization of investment in direct financing
leases 58,455 58,275 71,787
Amortization 1,652 1,650 1,648
Minority interest -- 95,316 23,001
Equity in earnings of unconsolidated joint
ventures, net of distributions 92,968 152,860 (168,113)
Loss (gain) on sale of assets (10,102) (216,094) 11,897
Provision for write-down of assets -- 106,437 565,061
Provision for doubtful accounts -- -- 33,147
Decrease (increase) in receivables (45,586) 26,288 (12,951)
Decrease (increase) in due from related party 109 14,317 (2,388)
Increase in accrued rental income (14,635) (48,618) (56,778)
Decrease (increase) in other assets (2,706) 8,854 21,552
Increase (decrease) in accounts payable and
accrued expenses and real estate taxes
payable (26,943) 17,883 (22,863)
Increase (decrease) in due to related parties (1,906) 2,916 6,111
Increase in rents paid in advance and deposits 6,776 3,776 25,270
----------------- ----------------- ------------------
Total adjustments 404,378 599,278 867,229
----------------- ----------------- ------------------
Net cash provided by operating activities 2,762,018 3,071,594 2,900,366
----------------- ----------------- ------------------
Cash Flows from Investing Activities:
Insurance proceeds for casualty loss on building 590,132 -- --
Proceeds from sale of assets 472,425 441,126 373,800
Additions to real estate properties with operating -- -- (3,063,219)
leases
Investment in joint ventures (475,000) (247,437) (1,368,300)
Liquidating distribution from joint ventures 189,161 -- 2,430,032
Redemption of certificate of deposit -- -- 100,000
Decrease in restricted cash -- -- 2,061,560
----------------- ----------------- ------------------
Net cash provided by investing activities 776,718 193,689 533,873
----------------- ----------------- ------------------
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) (3,150,000)
Distributions to holder of minority interest -- (73,754) (26,191)
----------------- ----------------- ------------------
Net cash used in financing activities (3,150,000) (3,223,754) (3,176,191)
----------------- ----------------- ------------------
Net increase in cash and cash equivalents 388,736 41,529 258,048
Cash and cash equivalents at beginning of year 1,168,450 1,126,921 868,873
----------------- ----------------- ------------------
Cash and Cash Equivalents at End of Year $ 1,557,186 $ 1,168,450 $ 1,126,921
================= ================= ==================
See accompanying notes to financial statements.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
2003 2002 2001
--------------- --------------- ---------------
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Insurance proceeds receivable $ -- $ 577,775 $ --
=============== =============== ===============
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, 2003, 2002, and 2001
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 real estate
property acquisitions at cost, including acquisition and closing costs.
Real estate properties are leased to 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. During the years ended December 31, 2003,
2002, and 2001, tenants paid, or are expected to pay, directly to real
estate taxing authorities approximately $302,600, $315,800, and
$295,600, respectively, in estimated real estate taxes in accordance
with the terms of their leases.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The Partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using either the
operating or the direct financing methods.
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.
Direct financing method - Leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset). Unearned income is deferred and amortized
to income over the lease terms so as to produce a constant
periodic rate of return on the Partnership's net investment in
the leases. For the leases classified as direct financing
leases, the building portions of the property leases are
accounted for as direct financing leases while the land
portions of some of these leases are operating leases.
Accrued rental income represents the aggregate amount of income
recognized on a straight-line basis in excess of scheduled rental
payments to date.
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
Substantially all leases are for 15 to 20 years and provide for minimum
and contingent rentals. The lease options generally allow tenants to
renew the leases for two to four successive five-year periods subject
to the same terms and conditions as the initial lease. Most leases also
allow the tenant to purchase the property at fair market value after a
specified portion of the lease has elapsed.
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.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, a provision is made to increase the
allowance for doubtful accounts. If amounts are subsequently determined
to be uncollectible, the corresponding receivable and allowance for
doubtful accounts are decreased accordingly.
Investment in Joint Ventures - Prior to the liquidation of Caro Joint
Venture, a Florida limited partnership, in November 2002, the
Partnership accounted for its 66% interest in the joint venture using
the consolidation method. Minority interest represented 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. The Partnership's
investments in Auburn Joint Venture, Melbourne Joint Venture, Asheville
Joint Venture, Warren Joint Venture, and Show Low Joint Venture, prior
to its liquidation in December 2003, and the properties in Clinton,
North Carolina; Vancouver, Washington; Overland Park, Kansas; Memphis,
Tennessee; Fort Myers, Florida; Baytown, Texas; Waldorf, Maryland;
Niles, Illinois; Universal City, Texas; Schertz, Texas; and Dalton,
Georgia, 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. 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 leases and 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
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002, and 2001
1. Significant Accounting Policies - Continued
in the accompanying financial statements. The Partnership is subject to
certain state taxes on its income and property. Additionally, for tax
purposes, syndication costs are included in Partnership equity and in
the basis of each partner's investment. For financial reporting
purposes, syndication costs represent a reduction of Partnership equity
and a reduction in the basis of each partner's investment.
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 2003 presentation.
These reclassifications had no effect on total partners' capital, net
income or cash flows.
Statement of Financial Accounting Standards No. 144 - Effective January
1, 2002, the Partnership adopted Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement requires that a long-lived asset be
tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. The assessment is based on the
carrying amount of the asset at the date it is tested for
recoverability. An impairment loss is recognized when the carrying
amount of a long-lived asset exceeds its fair value. If an impairment
is recognized, the adjusted carrying amount of a long-lived asset is
its new cost basis. The statement also requires that the results of
operations of a component of an entity that either has been disposed of
or is classified as held for sale be reported as a discontinued
operation if the disposal activity was initiated subsequent to the
adoption of the Standard.
FASB Interpretation No. 46 - In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and
strengthen existing accounting guidance that addresses when a company
should include the assets, liabilities and activities of another entity
in its financial statements. To improve financial reporting by
companies involved with variable interest entities, FIN 46 requires
that a variable interest entity be consolidated by a company if that
company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS