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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20017
CNL INCOME FUND IX, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-3004138
(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 ($10 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 3,500,000 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 $10 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
Item 1. Business
CNL Income Fund IX, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on April 16, 1990. 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 March 20, 1991, the Partnership offered
for sale up to $35,000,000 in limited partnership interests (the "Units")
(3,500,000 Units each at $10 per Unit) pursuant to a registration statement on
Form S-11 under the Securities Act of 1933, as amended. The offering terminated
on September 6, 1991, 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 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
$30,800,000, and were used to acquire 41 Properties, including 13 Properties
owned by joint ventures in which the Partnership is a co-venturer, and to
establish a working capital reserve for Partnership purposes.
As of December 31, 1999, the Partnership owned 25 Properties directly
and 16 Properties indirectly through joint venture or tenancy in common
arrangements. During the year ended December 31, 2000, the Partnership sold its
Properties in Williamsville, New York and in Bluffton and Alliance, Ohio, and
used a portion of these net sales proceeds to invest in a Property in
Libertyville, Illinois, with an affiliate of the General Partners, as
tenants-in-common. During the year ended December 31, 2001, the Partnership sold
its Properties in Bedford, Indiana, Copley Township, Ohio and the Property in
Dublin, California, which was held with an affiliate of the General Partners as
tenants-in-common, and reinvested the majority of these sales proceeds in a
Property in Blaine, Minnesota and in a Property in Waldorf, Maryland with
affiliates of the General Partners as tenants-in-common. During 2002, the
Partnership sold its Properties in Greenville, South Carolina; Farragut,
Tennessee, and Libertyville, Illinois, which was held with an affiliate of the
General Partners as tenant-in-common. The Partnership also sold the Shoney's
portion of the dual-brand Property in Huntsville, Alabama; the Partnership still
owns the Captain D's portion. The Partnership reinvested the net sales proceeds
from the sales of the Properties in Greenville, South Carolina and Huntsville,
Alabama, along with a portion of the net sales proceeds from the 2001 sale of
the Property in Copley Township, Ohio in a Property in Dallas, Texas and a
Property in Jackson, Michigan. The Partnership reinvested the liquidating
distribution from the sale of the Property in Libertyville, Illinois in a
Property in Buffalo Grove, Illinois, with an affiliate of the General Partners,
as tenants-in-common. The Partnership intends to reinvest the sales proceeds
from the sale of the Property in Farragut, Tennessee in an additional Property.
In addition, CNL Restaurant Investments III, in which the Partnership owns a 50%
interest, sold its Property in Greensboro, North Carolina; Ashland Joint
Venture, in which the Partnership owns a 27.33% interest, sold its Property in
Ashland, New Hampshire; and CNL Restaurant Investments II, in which the
Partnership owns a 45.2% interest, sold its Properties in Columbus, Ohio and
Pontiac, Michigan. Ashland Joint Venture reinvested the majority of its net
sales proceeds in a Property in San Antonio, Texas. CNL Restaurant Investments
II reinvested the net sales proceeds from the sale of the Property in Columbus,
Ohio in a Property in Dallas, Texas and distributed the net sales proceeds from
the sale of the Property in Pontiac, Michigan to the Partnership as a return of
capital. The Partnership used this return of capital to acquire an interest in
Katy Joint Venture, with CNL Income Fund XVII, Ltd., a Florida limited
partnership, and an affiliate of the General Partners. CNL Restaurant
Investments III distributed the net sales proceeds from the sale of the Property
in Greensboro, North Carolina to the Partnership as a return of capital. The
Partnership intends to use the return of capital to meet working capital needs.
As of December 31, 2002, the Partnership owned 21 Properties directly and 16
Properties indirectly through joint venture or tenancy in common arrangements.
In February 2003, the Partnership sold the Property in Grand Prairie, Texas, to
a third party and intends to reinvest these proceeds in an additional Property.
The Partnership holds its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees 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
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 of the General Partners as tenants-in-common, generally
provide for initial terms ranging from 14 to 20 years (the average being 16
years), and expire between 2005 and 2021. The leases are generally 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 $57,600 to $246,400. In addition, generally the
leases provide for percentage rent, based on sales in excess of a specified
amount. In addition, a majority of the leases provide that, commencing in
specified lease years (ranging from the third to the sixth lease year), the
annual base rent required under the terms of the lease will increase.
Generally, the leases of the Properties provide for two to four
five-year renewal options subject to the same terms and conditions as the
initial lease. Lessees of 24 of the Partnership's 37 Properties also have been
granted options to purchase Properties at the Property's then fair market value
after a specified portion of the lease term has elapsed. Fair market value will
be determined through an appraisal by an independent appraisal firm. Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is exercised.
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.
During 2002, the Partnership reinvested the net sales proceeds from the
sales of the Properties in Huntsville, Alabama and Greenville, South Carolina in
Properties in Dallas, Texas and Jackson, Michigan. The Partnership also
reinvested the liquidating distribution it received from the sale of the
Property in Libertyville, Illinois in a Property in Buffalo Grove, Illinois, as
tenants-in-common, with CNL Income Fund VIII, Ltd., a Florida limited
partnership and affiliate of the General Partners. In addition, CNL Restaurant
Investments III, in which the Partnership owns a 50% interest, sold its Property
in Greensboro, North Carolina; Ashland Joint Venture, in which the Partnership
owns a 27.33% interest, sold its Property in Ashland, New Hampshire and
reinvested the net sales proceeds in a Property in San Antonio, Texas; and CNL
Restaurant Investments II, in which the Partnership owns a 45.2% interest, sold
its Properties in Columbus, Ohio and Pontiac, Michigan and reinvested the net
sales proceeds from the Columbus, Ohio sale in a Property in Dallas, Texas. The
lease terms for each of these Properties are substantially the same as the
Partnership's other leases.
During 2002, the tenant of the Property in North Baltimore, Ohio
terminated its lease, in accordance with its lease agreement, when a partial
right of way taking reduced road access to the restaurant. The General Partners
are currently seeking either a new tenant or a purchaser for the vacant
Property.
In December 2002, the Partnership entered into an agreement to sell the
Property in Grand Prairie, Texas. In February 2003, the Partnership sold this
Property
Major Tenants
During 2002, four of the Partnership's lessees (or group of affiliated
lessees), (i) Carrols Corporation and Texas Taco Cabana, LP (which are
affiliated entities under common control) (hereinafter referred to as Carrols
Corp.), (ii) Flagstar Enterprises, Inc., (iii) Burger King Corporation and BK
Acquisition, Inc. (which are affiliated entities under common control)
(hereinafter referred to as Burger King Corp.) and (iv) Golden Corral
Corporation, each contributed more than ten percent of the Partnership's total
rental revenues and mortgage interest income (including the Partnership's share
of rental revenues from joint ventures and Properties owned as
tenants-in-common). As of December 31, 2002, Carrols Corp. was the lessee under
leases relating to nine restaurants, Flagstar Enterprises, Inc. was the lessee
under leases relating to three restaurants, Burger King Corp. was the lessee
under leases relating to the nine restaurants and Golden Corral Corporation was
the lessee under leases relating to three restaurants. It is anticipated that,
based on the minimum rental payments required by the leases, Carrols Corp.
Burger King Corp. and Golden Corral Corporation will each continue to contribute
more than ten percent of the Partnership's rental revenues in 2003. In addition,
four Restaurant Chains, Burger King, Hardee's, Shoney's, and Golden Corral
Family Steakhouse Restaurants ("Golden Corral"), each accounted for more than
ten percent of the Partnership's rental revenues and mortgage interest during
2002 (including the Partnership's share of the rental revenues from joint
ventures and Properties owned as tenants-in-common). In 2003, it is anticipated
that these four 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 its leases. Any failure of these lessees or Restaurant Chains
could materially affect the Partnership's income if the Partnership is not able
to re-lease the Properties in a timely manner. As of December 31, 2002, Carrols
Corp. leased Properties with an aggregate carrying value in excess of 20% of the
total assets of the Partnership.
Joint Venture and Tenancy in Common Arrangements
The Partnership has entered into the following joint venture and
tenancy in common arrangements as of December 31, 2002:
Entity Name Year Ownership Partners Property
CNL Restaurant Investments II 1991 45.20% CNL Income Fund VII, Ltd. San Antonio, TX
CNL Income Fund VIII, Ltd. Raceland, LA
Dallas, TX
Hastings, MN
Newcastle, IN
CNL Restaurant Investments III 1992 50.00% CNL Income Fund X, Ltd. Dover, NH
Metrairie, LA
Lafayette, LA
Nashua, NH
Pontiac, IL
Ashland Joint Venture 1992 27.33% CNL Income Fund X, Ltd. San Antonio, TX
CNL Income Fund XI, Ltd.
CNL Income Fund III, Ltd. and 1997 67.00% CNL Income Fund III, Ltd. Englewood, CO
CNL Income Fund IX, Ltd.
Tenants in Common
CNL Income Fund VII, Ltd. and 1999 29.00% CNL Income Fund VII, Ltd. Montgomery, AL
CNL Income Fund IX, Ltd.
Tenants in Common
CNL Income Fund VI, Ltd., CNL 2001 15.00% CNL Income Fund VI, Ltd. Waldorf, MD
Income Fund IX, Ltd., CNL Income Fund XVII, Ltd.
and CNL Income Fund
XVII, Ltd. Tenants in
Common
Katy Joint Venture 2002 60.00% CNL Income Fund XVII, Ltd. Katy, TX
CNL Income Fund VIII, Ltd., 2002 34.00% CNL Income Fund VIII, Ltd. Buffalo Grove, IL
and CNL Income Fund IX,
Ltd. Tenants in Common
CNL Restaurant Investments II and CNL Restaurant Investments III were
each formed to hold six Properties, however, all other joint ventures or
tenancies in common were 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
business entity. The Partnership and its partners are also jointly and severally
liable for all debts, obligations and other liabilities of the joint venture or
tenancy in common. Net cash flow from operations is distributed to each joint
venture or tenancy in common partner in accordance with its respective
percentage interest in the business entity.
CNL Restaurant Investments II's and CNL Restaurant Investments III's
joint venture agreements do not provide a fixed term, but continue in existence
until terminated by any of the joint venturers. Ashland Joint Venture has an
initial term of 14 years and Katy Joint Venture has an initial term of 30 years
and, after the expiration of the initial term, continues in existence from year
to year unless terminated at the option of either joint venturer by an event of
dissolution. Events of dissolution include the bankruptcy, insolvency or
termination of any joint venturer, sale of the Property owned by the joint
venture and mutual agreement of the Partnership and its joint venture partner to
dissolve the joint venture. Any liquidation proceeds, after paying joint venture
debts and liabilities and funding reserves for contingent liabilities, will be
distributed first to the joint venture partners with positive capital account
balances in proportion to such balances until such balances equal zero, and
thereafter in proportion to each joint venture partner's percentage interest in
the joint venture.
The joint venture and tenancy in common agreements restrict each
party's ability to sell, transfer to assign its joint venture or tenancy in
common interest without first offering it for sale to its partner, either upon
such terms and conditions as to which the parties may agree or, in the event the
parties cannot agree, on the same terms and conditions as any offer from a third
party to purchase such joint venture or tenancy in common interest.
During 2002, CNL Restaurant Investments III sold its Property in
Greensboro, North Carolina; Ashland Joint Venture sold its Property in Ashland,
New Hampshire and reinvested the net sales proceeds in a Property in San
Antonio, Texas; and CNL Restaurant Investments II sold its Properties in
Columbus, Ohio and Pontiac, Michigan and reinvested a portion of the net sales
proceeds in a Property in Dallas, Texas. The Partnership received a return of
capital from both CNL Restaurant Investments II and CNL Restaurant Investments
III, and used these proceeds to acquire an interest in Katy Joint Venture, with
CNL Income Fund XVII, Ltd., a Florida limited partnership, and an affiliate of
the General Partners. In addition, during 2002, the Partnership and CNL Income
Fund VIII, Ltd., as tenants-in-common, sold the Property in Libertyville,
Illinois and reinvested the liquidating distribution from the sale to acquire an
IHOP Property in Buffalo Grove, Illinois, as a new tenancy in common arrangement
with the same affiliate. The Partnership owns a 34% interest in this Property.
The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available. The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties. In addition, tenancy in common arrangements may allow the
Partnership to defer the gain for federal income tax purposes upon the sale of
the Property if the proceeds are reinvested in an additional Property.
Certain Management Services
RAI Restaurants, Inc. (formerly known as CNL Restaurants XVIII, Inc.),
an affiliate of the General Partners, provides certain services relating to
management of the Partnership and its Properties pursuant to a management
agreement with the Partnership. CNL APF Partners, LP assigned its rights in, and
its obligations under, the management agreement with the Partnership to RAI
Restaurants, Inc. ("Advisor") effective January 1, 2002. All of the terms and
conditions of the management agreement, including the payment of fees, remained
unchanged. Under this agreement, the Advisor is responsible for collecting
rental payments, inspecting the Properties and the tenants' books and records,
assisting the Partnership in responding to tenant inquiries and notices, and
providing information to the Partnership about the status of the leases and the
Properties. The Advisor also assists the General Partners in negotiating the
leases. For these services, the Partnership had agreed to pay the Advisor an
annual fee of one 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").
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Competition
The fast-food and family-style restaurant business is characterized by
intense competition. The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or
regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL American Properties Fund,
Inc., the parent company of the Advisor perform certain services for the
Partnership. In addition, the General Partners have available to them the
resources and expertise of the officers and employees of CNL Financial Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.
Item 2. Properties
As of December 31, 2002, the Partnership owned 37 Properties. Of the 37
Properties, 21 are owned by the Partnership in fee simple, 12 are owned through
joint venture arrangements and four are owned through tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses.
Description of Properties
Land. The Partnership's Property sites range from approximately 21,400
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, 2002 by state. More detailed information
regarding the location of the Properties is contained in the Schedule of Real
Estate and Accumulated Depreciation for the year ended December 31, 2002.
State Number of Properties
Alabama 4
Colorado 1
Florida 1
Georgia 2
Illinois 2
Indiana 1
Louisiana 3
Maryland 1
Michigan 1
Minnesota 2
Mississippi 1
New Hampshire 2
New York 1
North Carolina 2
Ohio 3
Tennessee 1
Texas 9
-----
TOTAL PROPERTIES 37
=====
Buildings. Each of the Properties owned by the Partnership, either
directly or indirectly through joint venture or tenancy in common arrangements,
includes a building that is one of a Restaurant Chain's approved designs. The
buildings generally are rectangular and are constructed from various
combinations of stucco, steel, wood, brick and tile. Building sizes range from
approximately 2,100 to 10,600 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, 2002, the Partnership
had no plans for renovation of the Properties. Depreciation expense is computed
for buildings and improvements using the straight line method using a
depreciable life of 40 years for federal income tax purposes.
As of December 31, 2002, 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 $18,878,784 and
$19,312,602, respectively.
The following table lists the Properties owned by the Partnership,
either directly or indirectly through joint venture or tenancy in common
arrangements, as of December 31, 2002 by Restaurant Chain
Restaurant Chain Number of Properties(1)
Baker's Square 1
Bennigan's 1
Burger King 15
Captain D's 1
Denny's 2
Golden Corral 3
Hardee's 4
IHOP 3
Johnnies 1
Shoney's 2
Taco Cabana 4
-----
TOTAL PROPERTIES 37
=====
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
The General Partners believe that the Properties are adequately covered
by insurance. In addition, the General Partners have obtained contingent
liability and property coverage for the Partnership. This insurance is intended
to reduce the Partnership's exposure in the unlikely event a tenant's insurance
policy lapses or is insufficient to cover a claim relating to the Property.
Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance.
As of December 31, 2002, 2001, 2000, 1999 and 1998, the Properties were
92%, 95%, 100%, 98%, and 98%, occupied, respectively. The following is a
schedule of the average rent per Property for the years ended December 31:
2002 2001 2000 1999 1998
------------- ------------- --------------- -------------- --------------
Rental Revenues (1)(2) $ 2,883,076 $ 2,805,847 $ 3,104,235 $ 3,168,448 $ 3,473,845
Properties (2) 34 37 40 42 41
Average Rent per
Property $ 84,796 $ 75,834 $ 77,606 $ 75,439 $ 84,728
(1) Rental revenues includes the Partnership's share of rental revenues
from the Properties owned through joint venture arrangements and the
Properties owned through tenancy in common arrangements.
(2) Excludes Properties that were vacant at December 31, and that did not
generate rental revenues during the year ended December 31.
The following is a schedule of lease expirations for leases in place as
of December 31, 2002, one of which sold in February 2003 for the next ten years
and thereafter.
Percentage of
Expiration Number Annual Rental Gross Annual
Year of Leases Revenues Rental Income
------------- ------------- ----------------- --------------
2003 -- -- --
2004 -- -- --
2005 6 $ 500,106 18.50%
2006 8 626,400 23.17%
2007 -- -- --
2008 -- -- --
2009 -- -- --
2010 -- -- --
2011 9 725,840 26.84%
2012 -- -- --
Thereafter 11 851,659 31.49%
------ ------------------ -----------
Total (1) 34 $ 2,704,005 100.00%
====== ================== ===========
(1) Excludes three Properties which were vacant at December 31, 2002, one
of which was sold in February 2003.
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 2002 (see Item 1. Business -
Major Tenants) are substantially the same as those described in Item 1. Business
- - Leases.
Carrols Corp leases five Burger King restaurants and four Taco Cabana
restaurants. The initial term of each lease ranges from 12 to 20 years (expiring
between 2011 and 2020) and the average minimum base annual rent is approximately
$101,800 (ranging from approximately $85,700 to $138,100).
Flagstar Enterprises, Inc. leases three Hardee's restaurants. The
initial term of each lease is 20 years (expiring in 2011) and the average
minimum base annual rent is approximately $70,400 (ranging from approximately
$57,600 to $85,400).
Burger King Corp. leases nine Burger King restaurants with an initial
term of 14 years (expiring between 2005 and 2006) and the average minimum base
annual rent is approximately $101,200 (ranging from approximately $79,400 to
$134,100).
Golden Corral Corporation leases three Golden Corral restaurants with
an initial term of 15 years (expiring in 2005 and 2014) and the average minimum
base annual rent is approximately $168,500 (ranging from approximately $157,500
to $176,400).
Item 3. Legal Proceedings
Neither the Partnership, nor its General Partners or any affiliate of
the General Partners, nor any of their respective Properties, is party to, or
subject to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of March 10, 2003, there were 3,396 holders of record of the
Units. There is no public trading market for the Units, and it is not
anticipated that a public market for the Units will develop. During 2002,
Limited Partners who wished to sell their Units may have offered the Units for
sale pursuant to the Partnership's distribution reinvestment plan (the "Plan"),
and Limited Partners who wished to have their distributions used to acquire
additional Units (to the extent Units were available for purchase), may have
done so pursuant to such Plan. The General Partners have the right to prohibit
transfers of Units. From inception through December 31, 2002, the price for any
Unit transferred pursuant to the Plan was $9.50 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 2002 and 2001 other than
pursuant to the Plan, net of commissions.
2002 (1) 2001 (1)
----------------------------------- ------------------------------------
High Low Average High Low Average
--------- -------- ---------- ---------- --------- ----------
First Quarter $ 9.00 $ 6.00 $ 6.81 $ 8.06 $ 6.36 $ 7.22
Second Quarter 7.30 6.80 7.08 7.23 6.62 6.86
Third Quarter 7.80 7.14 7.44 7.29 6.00 6.70
Fourth Quarter 10.62 7.28 8.59 6.14 6.14 6.14
(1) A total of 17,811 and 12,230 Units were transferred other than pursuant
to the Plan for the years ended December 31, 2002 and 2001,
respectively.
The capital contribution per Unit was $10. 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, 2002 and 2001, the Partnership
declared cash distributions in the aggregate amounts of $3,150,004 to the
Limited Partners. Distributions of $787,501 were declared at the close of each
of the Partnership's calendar quarters during 2002 and 2001 to the Limited
Partners. No amounts distributed to the Limited Partners for the years ended
December 31, 2002 and 2001, are required to be or have been treated by the
Partnership as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. No distributions have
been made to the General Partners to date. These amounts include monthly
distributions made in arrears for the Limited Partners electing to receive such
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.
2002 2001 2000 1999 1998
----------------- --------------- --------------- --------------- -------------
Year ended December 31:
Continuing Operations (5):
Revenues $ 1,967,240 $ 2,069,145 $ 2,391,502 $ 2,341,846 $2,595,206
Equity in earnings of joint
ventures 1,199,146 753,457 674,930 606,337 596,166
Income from continuing
operations (1) (2) 2,550,412 2,021,348 1,767,845 2,274,697 2,133,668
Discontinued Operations (5):
Revenues (1) 91,459 92,796 107,825 134,514 176,913
Income (Loss) from
discontinued operations (3)(4) 178,553 (29,442 ) 82,935 110,370 153,030
Net income 2,728,965 1,991,906 1,850,780 2,385,067 2,286,698
Net income (loss) per Unit:
Continuing operations $ 0.73 $ 0.58 $ 0.51 $ 0.65 $ 0.61
Discontinued operations 0.05 (0.01 ) 0.02 0.03 0.04
----------------- --------------- --------------- --------------- -------------
Total $ 0.78 $ 0.57 $ 0.53 $ 0.68 $ 0.65
================= =============== =============== =============== =============
Cash distribution declared $ 3,150,004 $ 3,150,004 $ 3,150,004 $ 3,150,004 $3,220,004
Cash distributions declared per
Unit 0.90 0.90 0.90 0.90 0.92
At December 31:
Total assets $ 26,450,142 $26,859,177 $ 28,132,613 $ 29,443,276 $30,099,078
Total partners' capital 25,570,620 25,991,659 27,149,757 28,448,981 29,213,918
(1) Income from continuing operations includes $381,828, $400,799, and
$582,375, for the years ended December 31, 2002, 2001, and 1998,
respectively, from provisions for write-down of assets.
(2) Income from continuing operations includes $456,143, $298,795, and
$75,997 for the years ended December 31, 2002, 2001, and 1999,
respectively, from gains on sale of assets and $730,668 for the year
ended December 31, 2000 from loss on sale of assets.
(3) Income from discontinued operations includes $58,459 and $62,126, for
the years ended December 31, 2002 and 2001, respectively, from
provisions for write-down of assets.
(4) Income from discontinued operations includes $185,632 from gain on sale
of assets for the year ended December 31, 2002.
(5) Certain items in prior years' financial statement have been
reclassified to conform to 2002 presentation. These reclassifications
had no effect on total net income. The results of operations relating
to properties that were either disposed of or were classified as held
for sale as of December 31, 2002 are reported as discontinued
operations. The results of operations relating to properties that were
identified for sale as of December 31, 2001 but sold subsequently are
reported as continuing operations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Partnership was organized on April 16, 1990, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, to be leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are generally triple-net leases, with the lessees responsible for all
repairs and maintenance, property taxes, insurance and utilities. The leases of
the Properties provide for minimum base annual rental amounts (payable in
monthly installments) ranging from approximately $57,600 to $246,400. Generally,
the leases provide for percentage rent based on sales in excess of a specified
amount. In addition, a majority of the leases provide that, commencing in
specified lease years (ranging from the third to the sixth lease year), the
annual base rent required under the terms of the lease will increase. As of
December 31, 2000, the Partnership owned 23 Properties directly and 17
Properties indirectly through joint venture or tenancy in common arrangements.
As of December 31, 2001, the Partnership owned 21 Properties directly and 17
Properties indirectly through joint venture or tenancy in common arrangements.
As of December 31, 2002, the Partnership owned 21 Properties directly and 16
Properties indirectly through joint venture or tenancy in common arrangements.
Capital Resources
Cash from operating activities was $2,656,608, $2,835,733, and
$2,844,067, for the years ended December 31, 2002, 2001, and 2000, respectively.
The decrease in cash from operating activities during 2002 and 2001, as compared
to the previous year was a result of changes in income and expenses and changes
in the Partnership's working capital.
Other sources and uses of cash included the following during the years
ended December 31, 2002, 2001, and 2000.
During 2000, the Partnership sold its Property in Williamsville, New
York, to a third party and received net sales proceeds of $693,350, resulting in
a loss of $27,391. In August 2000, the Partnership reinvested a portion of the
net sales proceeds in a Property in Libertyville, Illinois, with CNL Income Fund
VIII, Ltd. ("CNL VIII"), a Florida limited partnership and an affiliate of the
General Partners, as tenants-in-common. The Partnership and the affiliate
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 owned a 34% interest in the Property. In September 2002, the
Partnership and CNL VIII sold this Property to a third party and received net
sales proceeds of approximately $1,630,400, resulting in a gain of approximately
$199,300 to the tenancy in common. In September 2002, the Partnership used the
liquidating distribution from the sale of this Property to acquire an IHOP
Property in Buffalo Grove, Illinois, as a new tenancy in common arrangement with
the same affiliate. As of December 31, 2002, the Partnership had contributed
approximately $540,200 for a 34% interest in the profits and losses of this
Property.
During 2000, the Partnership sold its Properties in Bluffton and
Alliance, Ohio, for a total of $500,000, resulting in a loss of $703,277. The
Partnership accepted two promissory notes in the aggregate amount of $500,000,
collateralized by a mortgage on the respective Property. The promissory notes
bear an interest rate of nine percent per annum and are being collected in 96
monthly installments of principal and interest, with balloon payments of
$184,652 and $123,102, respectively, due in December 2008. The mortgage note
receivable balance relating to these Properties at December 31, 2002 and 2001
was $464,352 and $482,406, respectively, including accrued interest of $3,572
and $3,711, respectively.
During 2001, the Partnership sold its Properties in Bedford, Indiana
and Copley Township, Ohio, each to a third party and received total net sales
proceeds of approximately $1,986,200 resulting in a net gain of approximately
$298,800. During 2001, the Partnership reinvested these net sales proceeds in a
Property in Blaine, Minnesota. The Property was acquired from an affiliate of
the General Partners. The affiliate had purchased and temporarily held title to
the Property in order to facilitate the acquisition of the Property by the
Partnership. The purchase price paid by the partnership represented the costs
incurred by the affiliate to acquire the Property.
In addition, during 2001, the Partnership and CNL Income Fund VI, Ltd.,
an affiliate of the General Partners and a Florida limited partnership, 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 owned a 25%
interest in this Property. The Partnership received approximately $424,600 as a
liquidating distribution for its pro-rata share of the net sales proceeds.
During 2001, the Partnership reinvested these proceeds in a Property in Waldorf,
Louisiana, as tenants-in-common, with CNL Income Fund VI, Ltd., and CNL Income
Fund XVII, Ltd., each of which is an affiliate of the General Partners and a
Florida limited partnership. The Partnership contributed approximately $342,000
for a 15% interest in the profits and losses of the Property.
During 2002, the Partnership sold its Properties in Greenville, South
Carolina and Huntsville, Alabama, each to a third party and received total net
sales proceeds of approximately $1,928,300, resulting in a net gain of
approximately $456,100. These Properties had been identified for sale as of
December 31, 2001. The Partnership reinvested these sales proceeds in a Taco
Cabana Property in Dallas, Texas and a Burger King Property in Jackson,
Michigan. During 2002, the Partnership also sold its Property in Farragut,
Tennessee to a third party and received net sales proceeds of approximately
$886,300, resulting in a gain on disposal of discontinued operations of
approximately $185,632. This Property was identified for sale during 2002. The
Partnership intends to use these proceeds to reinvest in an additional Property.
During 2002, CNL Restaurant Investments III, in which the Partnership
owns a 50% interest, sold its Property in Greensboro, North Carolina, to the
tenant and received net sales proceeds of approximately $1,143,500, resulting in
a gain to the joint venture of approximately $371,500. The Partnership received
approximately $571,700 as a return of capital from the joint venture. During
2002, the Partnership reinvested the majority of these net sales proceeds in a
joint venture arrangement, Katy Joint Venture, with CNL Income Fund XVII, Ltd.,
a Florida limited partnership and an affiliate of the General Partners. Katy
Joint Venture acquired a Taco Cabana Property in Katy, Texas. As of December 31,
2002, the Partnership had contributed approximately $625,000 for a 60% interest
in this joint venture.
During 2002, Ashland Joint Venture, in which the Partnership owns a
27.33% interest, sold its Property in Ashland, New Hampshire to the tenant and
received net sales proceeds of approximately $1,472,900, resulting in a gain to
the joint venture of approximately $500,900. During 2002, the joint venture
reinvested the majority of the net sales proceeds from the sale of this Property
in a Taco Cabana Property in San Antonio, Texas. The Partnership received
approximately $6,000 as a return of capital from the remaining net sales
proceeds. The Partnership intends to use this return of capital for working
capital needs.
In June 2002, CNL Restaurant Investments II, in which the Partnership
owns a 45.2% interest, sold its Property in Columbus, Ohio to the tenant and
received net sales proceeds of approximately $1,215,700 resulting in a gain to
the joint venture of approximately $448,300. The joint venture used the majority
of the net sales proceeds from this sale to acquire a Property in Dallas, Texas.
The Partnership received approximately $27,600 as a return of capital from the
remaining net sales proceeds. In addition, in June 2002, CNL Restaurant
Investments II sold its Property in Pontiac, Michigan to the tenant and received
net sales proceeds of approximately $722,600 resulting in a loss to the joint
venture of approximately $189,800. The Partnership received approximately
$326,200 as a return of capital from the net sales proceeds.
Each of the Taco Cabana Properties was acquired 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 and the joint ventures. The purchase prices paid by the Partnership
and the joint ventures represented the costs incurred by CNL Funding 2001-A, LP
to acquire the Properties.
The Burger King and IHOP Properties acquired during 2002 were acquired
from CNL Net Lease Investors, L.P. ("NLI"), a California Limited Partnership.
During 2002, and prior to the Partnership's acquisition of these Properties, CNL
Financial LP Holding, LP ("CFN"), a Delaware limited partnership, and CNL Net
Lease Investors GP Corp. ("GP Corp"), a Delaware corporation, purchased the
limited partner's interest and general partner's interest, respectively, of NLI.
Prior to this transaction, an affiliate of the Partnership's general partners
owned a 0.1% interest in NLI and served as a general partner of NLI. The
original general partners of NLI waived their rights to benefit from this
transaction. The acquisition price paid by CFN for the limited partner's
interest was based on the portfolio acquisition price. The Partnership acquired
the Properties in Jackson, Michigan and Buffalo Grove, Illinois at CFN's cost
and did not pay any additional compensation to CFN for the acquisition of the
Property. Each CNL entity is an affiliate of the Partnership's General Partners.
None of the Properties owned by the Partnership, or the joint ventures
or tenancy in common arrangements in which the Partnership owns an interest, is
or may be encumbered. Under its partnership agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf of the
Partnership. Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.
In December 2002, the Partnership entered into an agreement to sell the
Property in Grand Prairie, Texas. In February 2003, the Partnership sold this
Property to a third party and received sales proceeds of approximately $286,500,
resulting in a loss of approximately $58,500, which the Partnership recorded as
of December 31, 2002.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term highly liquid investments such as
demand deposit accounts at commercial banks, money market accounts and
certificates of deposit with less than a 90-day maturity date, pending
reinvestment in additional Properties, paying Partnership expenses, or making
distributions to the partners. At December 31, 2002, the Partnership had
$1,913,142 invested in such short-term investments as compared to $1,247,551 at
December 31, 2001. The increase in cash and cash equivalents at December 31,
2002, as compared to December 31, 2001, was primarily due to the fact that the
Partnership had not reinvested the sales proceeds it received from the sale of
the Property in Farragut, Tennessee. As of December 31, 2002, the average
interest rate earned on the rental income deposited in demand deposit accounts
at commercial banks was approximately one percent annually. The funds remaining
at December 31, 2002 after the payment of distributions and other liabilities
will be used to invest in an additional Property and to meet the Partnership's
working capital needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The General Partners believe that the leases will continue to generate net cash
flow in excess of operating expenses.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Due to low operating expenses and ongoing cash flow, the General
Partners believe that the Partnership has sufficient working capital reserves at
this time. In addition, because all 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 purpose, 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, 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 $3,150,004, for each of the years ended
December 31, 2002, 2001, and 2000, respectively. This represents a distribution
of $0.90 per Unit for each of the years ended December 31, 2002, 2001, and 2000,
respectively. No distributions were made to the General Partners during the
years ended December 31, 2002, 2001, and 2000. No amounts distributed to the
Limited Partners for the years ended December 31, 2002, 2001, or 2000, are
required to be or have been treated by the Partnership as a return of capital
for purposes of calculating the Limited Partners' return on their adjusted
capital contributions. The Partnership intends to continue to make distributions
of cash available for distribution to the Limited Partners on a quarterly basis.
During 2000, the General Partners waived their right to receive future
distributions from the Partnership, including both distributions of operating
cash flow and distributions of liquidation proceeds, to the extent that the
cumulative amount of such distributions would exceed the balance in the General
Partners' capital account as of December 31, 1999. Accordingly, the general
partners were not allocated any net income during the years ended December 31,
2002, 2001 and 2000.
As of December 31, 2002 and 2001, the Partnership owed $16,426 and
$5,878, respectively, to affiliates for operating expenses and accounting and
administrative services. As of March 10, 2003, the Partnership had reimbursed
the affiliates these amounts. Other liabilities, including distributions
payable, were $863,096 at December 31, 2002, as compared to $861,640 at December
31, 2001. The General Partners believe the Partnership has sufficient cash on
hand to meet current working capital needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Critical Accounting Policies
The Partnership's leases are accounted for under the provisions of
Statement of Accounting Standard No. 13, "Accounting for Leases" ("FAS 13"), and
have been accounted for using either the direct financing or the operating
method. FAS 13 requires management to estimate the economic life of the leased
property, the residual value of the leased property and the present value of
minimum lease payments to be received from the tenant. In addition, management
assumes that all payments to be received under its leases are collectible.
Changes in management's estimates or assumption regarding collectibility of
lease payments could result in a change in accounting for the lease at the
inception of the lease.
The Partnership accounts for its unconsolidated joint ventures using
the equity method of accounting. Under generally accepted accounting principles,
the equity method of accounting is appropriate for entities that are partially
owned by the Partnership, but for which operations of the investee are shared
with other partners. The Partnership's joint venture agreements require the
consent of all partners on all key decisions affecting the operations of the
underlying Property.
Management reviews the Partnership's Properties and investments in
unconsolidated entities periodically for impairment at least once a year or
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The assessment is based on the carrying amount
of the Property or investment at the date it is tested for recoverability
compared to the sum of the estimated future cash flows expected to result from
its operation and sale through the expected holding period. If an impairment is
indicated, the asset is adjusted to its estimated fair value.
When the Partnership makes the decision to sell or commits to a plan to
sell a Property within one year, its operating results are reported as
discontinued operations.
Results of Operations
Comparison of year ended December 31, 2002 to year ended December 31, 2001
Total rental revenues were $1,841,581 during the year ended December
31, 2002, as compared to $1,897,733 during the same period of 2001. The decrease
in rental revenues during 2002 was partially due to the 2001 and 2002 sales of
several Properties. The decrease was partially offset by the fact that between
December 2001 and September 2002 the Partnership reinvested a portion of these
sales proceeds in three additional Properties.
Rental revenues during 2002 were also lower because the tenant of the
Property in Wildwood, Florida, ceased making rental payments and vacated the
Property in April 2001. In July 2001, the Partnership and the tenant terminated
the lease and the Partnership stopped recording rental revenues. In addition,
during 2002, the tenant of the Property in North Baltimore, Ohio terminated the
lease, as permitted in the lease agreement, when a partial right of way taking
reduced road access to the restaurant. The General Partners are currently
seeking replacement tenants for these Properties. The lost revenues resulting
from the vacant Properties will have an adverse effect on the results of
operations of the Partnership, until the Partnership is able to re-lease or sell
them.
During 2001, the Partnership collected and recognized as income $63,485
in lease termination income, from the tenant of two Properties that were sold
during 2000 in consideration for the Partnership releasing the tenant from its
obligations under the terms of its lease.
The Partnership also earned $37,146 in contingent rental income during
the year ended December 31, 2002, as compared to $19,780 during the same period
of 2001. Contingent rental income was higher during 2002, as a result of an
increase in gross sales of certain restaurant Properties requiring the payment
of contingent rental income. The Partnership also earned $88,513 in interest and
other income during the year ended December 31, 2002, as compared to $88,147
during the same period of 2001.
The Partnership also earned $1,199,146 in income attributable to net
income earned by joint ventures in which the Partnership is a co-venturer during
the year ended December 31, 2002, as compared to $753,457 during the same period
of 2001. Net income earned by joint ventures was higher during 2002 partially
because CNL Restaurant Investments III Joint Venture, in which the Partnership
owns a 50% interest, Ashland Joint Venture, in which the Partnership owns a
27.33% interest, and the Partnership and CNL VIII, as tenants-in-common, in
which the Partnership owns a 34% interest, each sold one Property, and CNL
Restaurant Investments II Joint Venture, in which the Partnership owns a 45.2%
interest, sold two Properties. These sales resulted in a net gain of $1,330,172
to the joint ventures. During 2002, the majority of these net sales proceeds
were reinvested, either by the joint ventures or Partnership in other
Properties, as described above.
During 2002, four of the Partnership's lessees, Carrols Corp., Flagstar
Enterprises, Inc., Burger King Corp, and Golden Corral Corporation, each
contributed more than ten percent of the Partnership's total rental revenues and
mortgage interest income (including the Partnership's share of rental revenues
from joint ventures and Properties owned as tenants-in-common). As of December
31, 2002, Carrols Corp. was the lessee under leases relating to nine
restaurants, Flagstar Enterprises, Inc. was the lessee under leases relating to
three restaurants, Burger King Corp. was the lessee under leases relating to the
nine restaurants and Golden Corral Corporation was the lessee under leases
relating to three restaurants. It is anticipated that, based on the minimum
rental payments required by the leases, Carrols Corp. Burger King Corp. and
Golden Corral Corporation will each continue to contribute more than ten percent
of the Partnership's rental revenues in 2003. In addition, four Restaurant
Chains, Burger King, Hardee's, Shoney's, and Golden Corral, each accounted for
more than ten percent of the Partnership's rental revenues and mortgage interest
during 2002 (including the Partnership's share of the rental revenues from joint
ventures and Properties owned as tenants-in-common). In 2003, it is anticipated
that these four 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 its leases. Any failure of these lessees or Restaurant Chains
could materially affect the Partnership's income if the Partnership is not able
to re-lease the Properties in a timely manner.
Operating expenses including depreciation and amortization expense and
provision for write-down of assets, were $1,072,117 during the year ended
December 31, 2002, as compared to $1,100,049 during the same period of 2001.
Operating expenses were higher during 2001 partially because the Partnership
recorded a provision for write-down of assets of approximately $400,800 relating
to the vacant Property in Wildwood, Florida. During 2002, the Partnership
recorded an additional provision for write-down of assets of approximately
$381,800 relating to the Properties in Wildwood, Florida and North Baltimore,
Ohio. The tenants vacated the Properties and ceased payment of rents under the
terms of their respective lease agreements, as described above. The provisions
represented the difference between the net carrying value of each Property and
their estimated fair values. The decrease in operating expenses during 2002 was
also partially due to a decrease in the costs incurred for administrative
expenses for servicing the Partnership and its Properties. During the years
ended December 31, 2002 and 2001, the Partnership incurred Property expenses
such as real estate taxes, insurance and repairs and maintenance relating to the
vacant Properties in Wildwood, Florida and North Baltimore, Ohio. The
Partnership will continue to incur these expenses until the Properties are
re-leased or sold.
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.
In connection with the sales of the Properties in Huntsville, Alabama
and Greenville, South Carolina, the Partnership recognized a net gain of
approximately $456,100 during 2002. These Properties were identified for sale as
of December 31, 2001. In connection with the sales, during 2001, of the
Properties in Bedford, Indiana and Copley Township, Ohio, the Partnership
recognized a gain of approximately $298,800.
During the year ended December 31, 2002, the Partnership identified two
Properties, one in Farragut, Tennessee and one in Grand Prairie, Texas, that met
the criteria of this standard and were classified as Discontinued Operations in
the accompanying financial statements. In December 2002, the Partnership sold
the Property in Farragut, Tennessee and received net sales proceeds of
approximately $886,300, resulting in a gain on disposal of discontinued
operations of approximately $185,600. In connection with the anticipated sale of
the Property in Grand Prairie, Texas, the Partnership recorded a provision for
write-down of assets of approximately $58,500 during the year ended December 31,
2002. The Partnership had also recorded a provision for write-down of assets
relating to this Property during the year ended December 31, 2001, when the
tenant of this Property experience financial difficulties, filed for bankruptcy
and rejected the lease relating to the Property. The provisions represented the
difference between the Property's net carrying value and its estimated fair
value. In February 2003, the Partnership sold this Property. The Partnership
intends to reinvest the net sales proceeds from these two sales in additional
Properties.
In addition, during the year ended December 31, 2002, three of the
joint ventures and a tenancy in common in which the Partnership is a co-partner,
identified and sold five Properties that also met the criteria of this standard,
resulting in a net gain on disposal of assets of approximately $1,330,200 to the
joint ventures and tenancy in common. The Partnership recorded its pro-rata
share of this gain as equity in earnings of joint ventures. The majority of the
net sales proceeds from these five sales were reinvested in additional
Properties and a portion of the net sales proceeds was returned to the
Partnership as a return of capital. The financial results of these five
Properties were classified as Discontinued Operations in the condensed joint
venture financial information presented in the footnotes to the accompanying
financial statements. The Partnership's pro-rata share of these amounts is
included in equity in earnings of joint ventures in the accompanying financial
statements
Comparison of year ended December 31, 2001 to year ended December 31, 2000
Total rental revenues were $1,897,733 during the year ended December
31, 2001, as compared to $2,268,511 during the same period of 2000. The decrease
in rental revenues during 2001 was partially due to the sales of several
Properties in 2001 and 2000. During 2001, the tenant of the Property in
Wildwood, Florida, ceased making rental payments and vacated the Property in
April 2001, as described above. Rental revenues were higher during 2000 because
the Partnership collected and recognized, as income, past due rental and other
amounts relating to the Properties in Bluffton and Alliance, Ohio. These two
Properties were sold during 2000.
The Partnership also earned $19,780, in contingent rental income during
the year ended December 31, 2001, as compared to $65,269 during the same period
of 2000. Contingent rental income was lower during 2001 because of a decrease in
gross sales of certain restaurant Properties requiring the payment of contingent
rental income. The Partnership also earned $88,147 in interest and other income
during the year ended December 31, 2001, as compared to $57,722 during the same
period of 2000. Interest and other income were higher during 2001 because the
Partnership earned interest from the two mortgage note receivables relating to
the 2000 sales of the Properties in Bluffton and Alliance, Ohio.
The Partnership earned $753,457 in income attributable to net income
earned by joint ventures during the year ended December 31, 2001, as compared to
$674,930 during the same period of 2000. Net income earned by joint ventures was
higher during 2001 partially because the Partnership acquired an interest in a
Property in Libertyville, Illinois, as tenants-in-common with affiliates of the
General Partners in August 2000. In addition, in June 2001, the Partnership and
CNL Income Fund VI, Ltd., as tenants-in-common, sold the Property in Dublin,
California, in which the Partnership owned a 25% interest resulting in a gain,
to the tenancy in common of approximately $158,100. The Partnership received its
pro-rata share of the net sales proceeds from the sale as a liquidating
distribution. In July 2001, the Partnership reinvested a portion of the
liquidating distribution in an additional Property, as tenants-in-common with
CNL Income Fund VI, Ltd. and CNL Income Fund XVII, Ltd. Each of the CNL Income
Funds is a Florida limited partnership and an affiliate of the General Partners.
Operating expenses, including depreciation and amortization expense and
provision for write-down of assets, were $1,100,049, during the year ended
December 31, 2001, as compared to $567,919 during the same period of 2000.
Operating expenses were higher during 2001 because the Partnership recorded a
provision for write-down of assets of approximately $400,800 relating to the
Property in Wildwood, Florida. The tenant vacated this Property and ceased
payment of rents under the terms of its lease agreement, as described above. The
provision represented the difference between the net carrying value of the
Property at December 31, 2001 and its estimated fair value. In addition, during
2001 and 2000 the Partnership incurred Property expenses such as real estate
taxes, insurance, repairs and maintenance and legal fees relating to the vacant
Property.
Operating expenses were also higher during 2001 due to an increase in
the costs incurred for administrative expenses for servicing the Partnership and
its Properties and due to higher state taxes in a state in which the Partnership
conducts business.
During 2000, the Partnership incurred $32,540 in transaction costs
related to the General Partners retaining financial and legal advisors to assist
them in evaluating and negotiating the proposed merger with APF. On March 1,
2000, the merger discussions were terminated.
In connection with the sales of the Properties in Bluffton and
Alliance, Ohio the Partnership recognized a loss of $730,668 during the year
ended December 31, 2000.
The restaurant industry has been relatively resilient during this
volatile time with steady performance during 2002. However, the industry remains
in a state of cautious optimism. Restaurant operators expect their business to
be better in 2003, according to a nationwide survey conducted by the National
Restaurant Association, but are concerned by the budget deficits being
experienced by many states and the potential of new taxes on the industry to
alleviate the situation.
The Partnership's leases as of December 31, 2002, in general, are
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, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and strengthen
existing accounting guidance that addresses when a company should include the
assets, liabilities and activities of another entity in its financial
statements. To improve financial reporting by companies involved with variable
interest entities (more commonly referred to as special-purpose entities or
off-balance sheet structures), FIN 46 requires that a variable interest entity
be considered by a company if that company is subject to a majority risk of loss
from the variable interest entity's activities or entitled to receive a majority
of the entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Consolidation of variable
interests entities will provide more complete information about the resources,
obligations, risks and opportunities of the consolidated company. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003, and to older entities in the first
fiscal year or interim period beginning after June 15, 2003. Management believes
adoption of this standard may result in either consolidation or additional
disclosure requirements with respect to the Partnership's unconsolidated joint
ventures or Properties held with affiliates of the General Partners as
tenants-in-common, which are currently accounted for under the equity method.
However, such consolidation is not expected to significantly impact the
Partnership's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership accepted two promissory notes in conjunction with the
sale of two Properties. The General Partners believe that the estimated fair
value of the mortgage notes at December 31, 2002, approximated the outstanding
principal amount. The Partnership is exposed to equity loss in the event of
adverse changes in interest rates. The following table presents the expected
cash flows of principal that are sensitive to these changes.
Mortgage Note
Fixed Rate
------------------
2003 $ 19,620
2004 21,370
2005 23,521
2006 25,759
2007 27,348
Thereafter 343,162
----------------
$ 460,780
================
Item 8. Financial Statements and Supplementary Data
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONTENTS
Page
Report of Independent Certified Public Accountants 21
Financial Statements:
Balance Sheets 22
Statements of Income 23
Statements of Partners' Capital 24
Statements of Cash Flows 25-26
Notes to Financial Statements 27-41
Report of Independent Certified Public Accountants
To the Partners
CNL Income Fund IX, 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 IX, Ltd. (a Florida limited
partnership) at December 31, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
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 Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets."
/s/ PricewaterhouseCoopers LLP
Orlando, Florida
January 31, 2003, except for Note 13, for which the date is February 28, 2003
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
December 31,
2002 2001
--------------------- -------------------
ASSETS
Real estate properties with operating leases, net $ 13,436,040 $ 13,102,325
Net investment in direct financing leases 2,444,483 2,807,303
Real estate held for sale 286,256 1,062,405
Investment in joint ventures 7,337,667 7,324,599
Mortgage notes receivable 464,352 482,406
Cash and cash equivalents 1,913,142 1,247,551
Receivables, less allowance for doubtful accounts of
$15,296 in 2001 31,471 32,171
Due from related parties 6,265 4,872
Accrued rental income 505,561 785,025
Other assets 24,905 10,520
--------------------- -------------------
$ 26,450,142 $ 26,859,177
===================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 25,394 $ 7,190
Real estate taxes payable 7,978 7,853
Distributions payable 787,501 787,501
Due to related parties 16,426 5,878
Rents paid in advance and deposits 42,223 59,096
--------------------- -----------------------
Total liabilities 879,522 867,518
Commitments (Note 12)
Partners' capital 25,570,620 25,991,659
--------------------- -----------------------
$ 26,450,142 $ 26,859,177
===================== =======================
See accompanying notes to financial statements.
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
Year ended December 31,
2002 2001 2000
--------------- ---------------- ---------------
Revenues:
Rental income from operating leases $ 1,533,555 $ 1,507,209 $ 1,761,432
Earned income from direct financing leases 308,026 390,524 507,079
Contingent rental income 37,146 19,780 65,269
Lease termination income -- 63,485 --
Interest and other income 88,513 88,147 57,722
--------------- ---------------- ---------------
1,967,240 2,069,145 2,391,502
--------------- ---------------- ---------------
Expenses:
General operating and administrative 257,230 302,960 178,800
Property expenses 81,801 68,616 45,515
State and other taxes 43,648 35,739 22,725
Depreciation and amortization 307,610 291,935 288,339
Provision for write-down of loss of assets 381,828 400,799 --
Transaction costs -- -- 32,540
--------------- ---------------- ---------------
1,072,117 1,100,049 567,919
--------------- ---------------- ---------------
Income Before Gain (Loss) on Sale of Assets and Equity in
Earnings of Joint Ventures 895,123 969,096 1,823,583
Gain (Loss) on Sale of Assets 456,143 298,795 (730,668 )
Equity in Earnings of Joint Ventures 1,199,146 753,457 674,930
--------------- ---------------- ---------------
Income from Continuing Operations 2,550,412 2,021,348 1,767,845
--------------- ---------------- ---------------
Discontinued Operations (Note 5):
Income (loss) from discontinued operations (7,079 ) (29,442 ) 82,935
Gain on disposal of discontinued operations 185,632 -- --
--------------- ---------------- ---------------
178,553 (29,442 ) 82,935
--------------- ---------------- ---------------
Net Income $ 2,728,965 $ 1,991,906 $ 1,850,780
=============== ================ ===============
Income (Loss) Per Limited Partner Unit
Continuing Operations $ 0.73 $ 0.58 $ 0.51
Discontinued Operations 0.05 (0.01 ) 0.02
--------------- ---------------- ---------------
Total $ 0.78 $ 0.57 $ 0.53
=============== ================ ===============
Weighted Average Number of Limited Partner Units
Outstanding 3,500,000 3,500,000 3,500,000
=============== ================ ===============
See accompanying notes to financial statements.
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 2002, 2001 and 2000
General Partners Limited Partners
----------------------------- -----------------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs
------------- ------------ ------------- ------------- ------------ ------------
Balance, December 31, 1999 $ 1,000 $ 237,417 $ 35,000,000 $ (26,210,595 ) $ 23,611,159 $ (4,190,000 )
Distributions to limited
partners ($0.90 per limited
partner unit) -- -- -- (3,150,004 ) -- --
Net income -- -- -- -- 1,850,780 --
------------ ----------- ------------- -------------- -------------- -------------
Balance, December 31, 2000 1,000 237,417 35,000,000 (29,360,599 ) 25,461,939 (4,190,000 )
Distributions to limited
partners ($0.90 per limited
partner unit) -- -- -- (3,150,004 ) -- --
Net income -- -- -- -- 1,991,906 --
------------ ----------- ------------- -------------- -------------- -------------
Balance, December 31, 2001 1,000 237,417 35,000,000 (32,510,603 ) 27,453,845 (4,190,000 )
Distributions to limited
partners ($0.90 per limited
partner unit) -- -- -- (3,150,004 ) -- --
Net income -- -- -- -- 2,728,965 --
------------ ----------- ------------- -------------- -------------- -------------
Balance, December 31, 2002 $ 1,000 $ 237,417 $ 35,000,000 $ (35,660,607 ) $ 30,182,810 $ (4,190,000 )
============ =========== ============= ============== ============== =============
See accompanying notes to financial statements.
Total
--------------
$ 28,448,981
(3,150,004 )
1,850,780
--------------
27,149,757
(3,150,004 )
1,991,906
--------------
25,991,659
(3,150,004 )
2,728,965
--------------
$ 25,570,620
==============
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
--------------- --------------- --------------
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows Provided by Operating Activities:
Net income $ 2,728,965 $ 1,991,906 $ 1,850,780
--------------- --------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 321,943 313,377 310,696
Amortization of investment in direct financing
leases 80,601 71,154 69,297
Amortization -- 1,375 1,500
Equity in earnings of joint ventures, net of
distributions (331,747 ) 118,290 138,268
Loss (gain) on sale of assets (641,775 ) (298,795 ) 730,668
Provision for write-down of assets 440,287 462,925 --
Decrease (increase) in receivables 700 279,491 (205,220 )
Decrease (increase) in interest receivable 139 127 (3,838 )
Decrease (increase) in due from related parties (1,393 ) 3,963 (8,835 )
Decrease (increase) in accrued rental income 61,269 (4,216 ) (27,263 )
Decrease (increase) in other assets (14,385 ) 11,474 (547 )
Increase (decrease) in accounts payable and
real estate taxes payable 18,329 (25,854 ) (74,358 )
Increase (decrease) in due to related parties 10,548 (94,968 ) 38,780
Increase (decrease) in rents paid in advance
and deposits (16,873 ) 5,484 24,139
--------------- --------------- --------------
Total adjustments (72,357 ) 843,827 993,287
--------------- --------------- --------------
Net Cash Provided by Operating Activities 2,656,608 2,835,733 2,844,067
--------------- --------------- --------------
Cash Flows from Investing Activities:
Proceeds from sale of assets 2,814,625 1,986,253 693,350
Additions to real estate properties with
operating leases (1,992,232 ) (1,357,599 ) --
Collections on mortgage notes receivable 17,915 21,305 --
Investment in joint ventures (1,165,235 ) (342,075 ) (494,581 )
Return of capital from joint venture 929,590 -- --
Liquidating distribution from joint venture 554,324 424,600 --
--------------- --------------- --------------
Net cash provided by investing activities 1,158,987 732,484 198,769
--------------- --------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (3,150,004 ) (3,150,004 ) (3,150,004 )
-------------- --------------- --------------
Net cash used in financing activities (3,150,004 ) (3,150,004 ) (3,150,004 )
--------------- --------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents 665,591 418,213 (107,168 )
Cash and Cash Equivalents at Beginning of Year 1,247,551 829,338 936,506
--------------- --------------- --------------
Cash and Cash Equivalents at End of Year $ 1,913,142 $ 1,247,551 $ 829,338
=============== =============== ==============
See accompanying notes to financial statements.
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31:
2002 2001 2000
------------ ------------- ------------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage notes accepted in exchange for sale of assets $ -- $ -- $ 500,000
============ ============= ============
Distributions declared and unpaid at December 31 $ 787,501 $ 787,501 $ 787,501
============ ============= ============
See accompanying notes to financial statements.
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Income Fund IX, 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 generally - The Partnership records real estate
property acquisitions of land and buildings 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, 2002, 2001, and 2000, tenants paid
directly to real estate taxing authorities $261,700, $257,100, and
$277,600, respectively, in real estate taxes in accordance with the
terms of their triple net leases with the Partnership.
The leases of the Partnership provide for base minimum annual rental
payments payable in monthly installments. In addition, certain leases
provide for contingent rental revenues based on the tenants' gross
sales in excess of a specified threshold. The partnership defers
recognition of the contingent rental revenues until the defined
thresholds are met. The leases are accounted for using either the
direct financing or the operating methods. Such methods are described
below:
Direct financing method - Leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset). Unearned income is deferred and amortized
to income over the lease terms so as to produce a constant
periodic rate of return on the Partnership's 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 a majority of the land
portion of these leases are operating leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce
a constant periodic rent over the lease term commencing on the
date the property is placed in service.
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 IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies - Continued:
Substantially all leases are for 14 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 - The Partnership's investments in four
joint ventures and properties in Englewood, Colorado; Waldorf,
Maryland; Montgomery, Alabama and Buffalo Grove, Illinois for which the
properties are held as tenants-in-common with affiliates, are accounted
for using the equity method since each joint venture agreement requires
the consent of all partners on all key decisions affecting the
operations of the underlying property.
Cash and Cash Equivalents - The Partnership considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks and money market funds (some of which are
backed by government securities). Cash equivalents are stated at cost
plus accrued interest, which approximates market value. Cash accounts
maintained on behalf of the Partnership in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Partnership has not experienced any losses in such
accounts.
Lease Costs - Other assets include lease costs associated with
negotiating a new lease and are amortized over the term of the new
lease using the straight-line method.
Income Taxes - Under Section 701 of the Internal Revenue Code, all
income, expenses and tax credit items flow through to the partners for
tax purposes. Therefore, no provision for federal income taxes is
provided in the accompanying financial statements. The Partnership is
subject to certain state taxes on its income and property.
Additionally, for tax purposes, syndication costs are included in
Partnership equity and in the basis of each partner's investment. For
financial reporting purposes, syndication costs represent a reduction
of Partnership equity and a reduction in the basis of each partner's
investment.
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Significant Accounting Policies - Continued:
Use of Estimates - The general partners of the Partnership have made a
number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with generally
accepted accounting principles. The more significant areas requiring
the use of management estimates relate to the allowance for doubtful
accounts and future cash flows associated with long-lived assets.
Actual results could differ from those estimates.
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform to 2002 presentation,
including a change in presentation of the statement of cash flows from
the direct to the indirect method. These reclassifications had no
effect on total partners' capital, net income or cash flows.
Statement of Financial Accounting Standards No. 144 ("FAS 144") -
Effective January 1, 2002, the Partnership adopted Statement of
Financial Accounting Standards No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement requires that a
long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when
the carrying amount of a long-lived asset exceeds its fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The statement also requires that the
results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a
discontinued operation if the disposal activity was initiated
subsequent to the adoption of the Standard.
FASB Interpretation No. 46 ("FIN 46") - In January 2003, FASB issued
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities" to expand upon and strengthen existing accounting
guidance that addresses when a company should include the assets,
liabilities and activities of another entity in its financial
statements. To improve financial reporting by companies involved with
variable interest entities (more commonly referred to as
special-purpose entities or off-balance sheet structures), FIN 46
requires that a variable interest entity be considered by a company if
that company is subject to a majority risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. Consolidation of
variable interests entities will provide more complete information
about the resources, obligations, risks and opportunities of the
consolidated company. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31,
2003, and to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Management believes adoption of this
standard may result in either consolidation or additional disclosure
requirements with respect to the Partnership's unconsolidated joint
ventures or properties held with affiliates of the general partners as
tenants-in-common, which are currently accounted for under the equity
method. However, such consolidation is not expected to significantly
impact the Partnership's results of operations.
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
2. Real Estate Properties with Operating Leases:
Real estate properties with operating leases consisted of the following
at December 31:
2002 2001
--------------- --------------
Land $ 6,555,203 $ 6,510,989
Buildings 8,964,617 8,704,947
--------------- --------------
15,519,820 15,215,936
Less accumulated depreciation (2,083,780) (2,113,611)
--------------- --------------
$ 13,436,040 $ 13,102,325
=============== ==============
During 2001, the Partnership sold its property in Bedford, Indiana, for
which the building was classified as a direct financing lease, to the
tenant, in accordance with the purchase option under the lease
agreement. In November 2001, the Partnership sold its property in
Copley Township, Ohio to a third party. The Partnership received net
sales proceeds of approximately $1,986,200, from these two sales,
resulting in a total gain of approximately $298,800. In December 2001,
the Partnership reinvested these net sales proceeds in a property in
Blaine, Minnesota. This property was acquired from CNL Funding 2001-A,
LP, an affiliate of the general partners.
During the year ended December 31, 2001, the Partnership recorded a
provision for write-down of assets of approximately $150,000 relating
to the property in Wildwood, Florida. The tenant of this property
vacated the property and ceased restaurant operations. During the year
ended December 31, 2002, the Partnership recorded an additional
provision for write-down of assets of approximately $321,600. The total
provision represented the difference between the net carrying value of
the property at December 31, 2002 and its estimated fair.
During 2002, the Partnership sold its properties in Greenville, South
Carolina, and Huntsville, Alabama, each to a third party and received
net sales proceeds of approximately $1,928,300, resulting in a gain of
approximately $456,100. These properties had been identified for sale
as of December 31, 2001. During 2002, the Partnership reinvested these
net sales proceeds in a property in Dallas, Texas and a property in
Jackson, Michigan, at an approximate total cost of $1,992,200. The
Partnership acquired each of these properties from affiliates of the
general partners.
During 2002, the tenant of the property in North Baltimore, Ohio
terminated its lease, as permitted in the lease agreement, when a
partial right of way taking reduced road access to the restaurant. As a
result, the Partnership reclassified the related asset from net
investment in direct financing leases to real estate properties with
operating leases and recorded a provision for write-down of assets of
approximately $60,200. The provision represented the