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:
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.
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:
(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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
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.
(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.
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.
(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.
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.
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.
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
See accompanying notes to financial statements.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
STATEMENTS OF INCOME
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
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
See accompanying notes to financial statements.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS - CONTINUED
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 difference between the net carrying value of the property at December 31, 2002 and its estimated fair value.
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 - Continued:
The following is a schedule of the future minimum lease payments to be received on noncancellable operating leases at December 31, 2002:
2003 $ 1,588,353 2004 1,589,838 2005 1,600,353 2006 1,176,467 2007 960,999 Thereafter 6,935,898 -----------------
$ 13,851,908 =================
3. Net Investment in Direct Financing Leases:
The following lists the components of the net investment in direct financing leases at December 31:
During the year ended December 31, 2001, the Partnership recorded a provision of approximately $250,900 for an impairment in the carrying value of the property in Wildwood, Florida, due to the tenant vacating the property and ceasing operations. The provision represented the difference between the net carrying value of the property and its estimated fair value. In July 2001, the Partnership and the tenant terminated its lease. As a result, the Partnership reclassified the building portion of the asset from net investment in direct financing leases to land and buildings on operating leases. No loss on termination of direct financing lease was recorded.
In July 2001, the Partnership sold its property in Bedford, Indiana, for which the building portion had been classified as a direct financing lease. In connection therewith, the gross investment (minimum lease payments receivable and the estimated residual value) and unearned income relating to the building were removed from the accounts and the gain from the sale of the property was reflected in income.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
3. Net Investment in Direct Financing Leases - Continued:
The following is a schedule of future minimum lease payments to be received on the direct financing leases at December 31, 2002:
2003 $ 349,478 2004 349,478 2005 349,478 2006 357,921 2007 385,159 Thereafter 1,447,343 -----------------
$ 3,238,857 =================
4. Investment in Joint Ventures:
The Partnership has a 45.2%, 50%, and 27.33% interest in the profits and losses of CNL Restaurant Investments II, CNL Restaurant Investments III, and Ashland Joint Venture, respectively. The remaining interests in these joint ventures are held by affiliates of the Partnership which have the same general partners. The Partnership also owns a 67% interest and a 29% interest in a property in Englewood, Colorado, and Montgomery, Alabama, each as tenants-in-common with an affiliate of the general partners.
In June 2001, the Partnership and CNL Income Fund VI, Ltd., as tenants-in-common, sold the IHOP property in Dublin, California for approximately $1,743,300, 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 received by the tenancy in common. In July 2001, the Partnership reinvested these proceeds in a property in Waldorf, Maryland 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. As of December 31, 2002, the Partnership had contributed approximately $342,100 for a 15% interest in the property. 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.
In September 2002, the Partnership and CNL Income Fund VIII, Ltd., as tenants-in-common, sold the property in Libertyville, Illinois a third party and received net sales proceeds of approximately $1,630,400 resulting in a gain, to the tenancy in common, of approximately $199,300. The Partnership owned a 34% interest in this property. The Partnership received approximately $554, 300 as a liquidating distribution for its pro-rata share of the net sales proceeds. In September 2002, the Partnership reinvested these proceeds in a property in Buffalo Grove, Illinois, as a new tenancy in common with CNL Income Fund
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
4. Investment in Joint Ventures - Continued:
VIII, Ltd. As of December 31, 2002, the Partnership had contributed approximately $540,200 for a 34% interest in this property. The property was acquired from CNL Net Lease Investors, L.P., an affiliate of the general partners. 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.
In May 2002, CNL Restaurant Investments III sold its Burger King 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. In June 2002, the Partnership reinvested the majority of these proceeds in a joint venture arrangement, Katy Joint Venture, with CNL Income Fund XVII, Ltd., an affiliate of the general partners. Katy Joint Venture acquired a property in Katy, Texas from CNL Funding 2001-A, LP, an affiliate of the general partners. The Partnership and CNL Income Fund XVII, Ltd. 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. As of December 31, 2002, the Partnership had contributed approximately $625,000 for a 60% interest in this joint venture.
In June 2002, Ashland Joint Venture sold its Burger King 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. In June 2002, the joint venture reinvested the majority of the net sales proceeds from the sale of this property in a property in San Antonio, Texas. The joint venture acquired the property from CNL Funding 2001-A, LP, an affiliate of the general partners. The Partnership received approximately $6,000 as a return of capital from the remaining net sales proceeds.
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 joint venture acquired this property from CNL Funding 2001-A, LP, an affiliate of the general partners. 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.
The financial results relating to the properties in Greensboro, North Carolina; Ashland, New Hampshire; Columbus, Ohio; Pontiac, Michigan; and Libertyville, Illinois are reflected as Discontinued Operations in the condensed financial information below.
CNL Restaurant Investments II and CNL Restaurant Investments III each own and lease five properties to operators of national fast-food and family-style restaurants. Ashland Joint Venture and Katy Joint Venture each own and lease one property to operators of national fast-food and family-style restaurants. The Partnership and affiliates, as tenants-in-common, own and lease four properties to operators of national fast-food and family-style restaurants. The following presents the combined, condensed financial information for the joint ventures and the properties held as tenants-in-common with affiliates at:
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
4. Investment in Joint Ventures - Continued:
The Partnership recognized income of $1,199,146, $753,457, and $674,930 during the year ended December 31, 2002, 2001, and 2000, respectively, from these joint ventures and the properties held as tenants-in-common with affiliates.
5. Discontinued Operations:
During 2002, the Partnership entered into two separate agreements, each with a third party to sell its properties in Farragut, Tennessee and Grand Prairie, Texas. 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. The Partnership reclassified the asset relating to the Grand Prairie, Texas property from real estate properties with operating leases to real estate held for sale. The reclassified asset was recorded at the lower of its carrying amount or fair value, less cost to sell. In addition, the Partnership stopped recording depreciation once the property was identified for sale. In connection with the anticipated sale of this property, the Partnership recorded a provision for write-down of assets of approximately $58,500 during the year ended December 31, 2002.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership) NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
5. Discontinued Operations - Continued:
In February 2003, the Partnership sold this property. The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements.
The operating results of the discontinued operations for the above properties are as follows:
6. Mortgage Notes Receivable:
In connection with the sale of its properties in Bluffton and Alliance, Ohio during 2000, the Partnership accepted promissory notes in the principal sum of $300,000 and $200,000, respectively, collateralized by a mortgage on the respective property. The promissory notes bear interest at a rate of nine percent per annum and are being collected in 96 equal monthly installments (which include principal and interest) of $3,043 and $2,029 with balloon payments of a $184,652 and $123,102, due in December 2008.
The mortgage notes receivable consisted of the following at December 31:
2002 2001 ------------- ------------
Principal balance $ 460,780 $ 478,695 Accrued interest receivable 3,572 3,711 ------------- ------------
$ 464,352 $ 482,406 ============= ============
The general partners believe that the estimated fair values of mortgage notes receivable at December 31, 2002, approximate the outstanding principal amount based on estimated current rates at which similar loans would be made to borrowers with similar credit and for similar maturities.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
7. Allocations and Distributions:
From inception through December 31, 1999, generally, all net income and net losses of the Partnership, excluding gains and losses from the sale of properties, were allocated 99% to the limited partners and one percent to the general partners. From inception through December 31, 1999, distributions of net cash flow were made 99% to the limited partners and one percent to the general partners. However, the one percent of net cash flow to be distributed to the general partners was 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").
From inception through December 31, 1999, generally, net sales proceeds from the sale of properties, not in liquidation of the Partnership, to the extent distributed, were distributed first to the limited partners in an amount sufficient to provide them with their 10% Preferred Return, plus the return of their adjusted capital contributions. The general partners then received, to the extent previously subordinated and unpaid, a one percent interest in all prior distributions of net cash flow and a return of their capital contributions. Any remaining sales proceeds were distributed 95% to the limited partners and five percent to the general partners. Any gain from the sale of a property, not in liquidation of the Partnership was, in general, allocated in the same manner as net sales proceeds are distributable. Any loss from the sale of a property was, allocated first, on a pro rata basis, to partners with positive balances in their capital accounts; and thereafter, 95% to the limited partners and five percent to the general partners.
Generally, net sales proceeds from a liquidating sale of properties, will be used in the following order: (i) first to pay and discharge all of the Partnership's liabilities to creditors, (ii) second, to establish reserves that may be deemed necessary for any anticipated or unforeseen liabilities or obligations of the Partnership, (iii) third, to pay all of the Partnership's liabilities, if any, to the general and limited partners, (iv) fourth, after allocations of net income, gains and/or losses, to distribute to the partners with positive capital accounts balances, in proportion to such balances, up to amounts sufficient to reduce such positive balances to zero, and (v) thereafter, any funds remaining shall then be distributed 95 percent to the limited partners and five percent to the general partners.
Effective January 1, 2000, the general partners waived their right to receive future distributions from the Partnership, including both distributions of operating cash flow and distributions of liquidation proceeds, to the extent that the cumulative amount of such distributions would exceed the balance in the general partners' capital account as of December 31, 1999. Accordingly, for years commencing January 1, 2000 and after, the Partnership's net income will be allocated entirely among the limited partners. However, if losses are allocated to the general partners in a year, an amount of income equal to the sum of such losses may be allocated to the general partner in succeeding years. Accordingly, the general partners were not allocated any net income during the years ended December 31, 2002, 2001 and 2000.
During each of the years ended December 31, 2002, 2001, and 2000, the Partnership declared distributions to the limited partners of $3,150,004. No distributions have been made to the general partners to date.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
8. Income Taxes:
The following is a reconciliation of net income for financial reporting purposes to net income for federal income tax purposes for the years ended December 31:
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
9. Related Party Transactions:
One of the individual general partners, James M. Seneff, Jr., is one of the principal shareholders of CNL Holdings, Inc. The other individual general partner, Robert A. Bourne, serves as President and Treasurer of CNL Financial Group, Inc., a wholly owned subsidiary of CNL Holdings, Inc. CNL APF Partners, LP, a wholly owned subsidiary of CNL American Properties Fund, Inc. ("APF") served as the Partnership's advisor until January 1, 2002, when it assigned its rights and obligations under a management agreement to RAI Restaurants, Inc. (formerly known as CNL Restaurants XVIII, Inc.). RAI Restaurants, Inc. ("the Advisor") is a wholly owned subsidiary of APF. The individual general partners are stockholders and directors of APF.
The Advisor provides services pursuant to a management agreement with the Partnership. In connection therewith, the Partnership agreed to pay the Advisor an annual, noncumulative, subordinated management fee of one percent of the sum of gross revenues from properties wholly owned by the Partnership and the Partnership's allocable share of gross revenues from joint ventures, but not in excess of competitive fees for comparable services. These fees are incurred and are payable only after the limited partners receive their 10% Preferred Return. Due to the fact that these fees are noncumulative, if the limited partners have not received their 10% Preferred Return in any particular year, no management fees will be due or payable for such year. As a result of such threshold no management fees were incurred during the years ended December 31, 2002, 2001 and 2000.
The Advisor is also entitled to receive a deferred, subordinated real estate disposition fee, payable upon the sale of one or more properties based on the lesser of one-half of a competitive real estate commission or three percent of the sales price if the Advisor provides a substantial amount of services in connection with the sale. However, if the net sales proceeds are reinvested in a replacement property, no such real estate disposition fees will be incurred until such replacement property is sold and the net sales proceeds are distributed. The payment of the real estate disposition fee is subordinated to receipt by the limited partners of their aggregate 10% Preferred Return, plus their adjusted capital contributions. No deferred, subordinated real estate disposition fees have been incurred since inception.
During the years ended December 31, 2002, 2001, and 2000, the Advisor and its affiliate provided accounting and administrative services. The Partnership incurred $175,724, $198,105 and $88,741, for the years ended December 31, 2002, 2001, and 2000, respectively, for such services.
In December 2001, the Partnership acquired a property located in Blaine, Minnesota from CNL Funding 2001-A, LP, an affiliate of the general partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the property in order to facilitate the acquisition of the property by the Partnership. The purchase price paid by the Partnership represented the costs incurred by CNL Funding 2001-A, LP to acquire and carry the property, including closing costs.
In June 2002, the Partnership, Ashland Joint Venture, CNL Restaurants II Joint Venture, and Katy Joint Venture each acquired a property from CNL Funding 2001-A, LP, an affiliate of the general partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the properties in order to facilitate the acquisition of the properties by the Partnership and the joint ventures. The purchase price paid by the Partnership and the joint ventures represented the costs incurred by CNL Funding 2001-A, LP to acquire the properties.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
9. Related Party Transactions - Continued:
In September 2002, the Partnership acquired a property in Jackson, Michigan from CNL Net Lease Investors, L.P. ("NLI"). In addition, in September 2002, the Partnership and CNL VIII acquired a property in Buffalo Grove, Illinois from NLI. During 2002, and prior to the Partnership's acquisition of these properties, CNL Financial LP Holding, LP ("CFN") and CNL Net Lease Investors GP Corp. ("GP Corp") 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 properties. Each CNL entity is an affiliate of the Partnership's general partners.
The amount due to related parties at December 31, 2002 and 2001, totaled $16,426 and $5,878, respectively.
10. Concentration of Credit Risk:
The following schedule presents total rental revenues and mortgage interest income from individual lessees, each representing 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 held as tenants-in-common with affiliates) for each of the years ended December 31:
In addition, the following schedule presents total rental revenues and mortgage interest income from individual restaurant chains, each representing 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 held as tenants-in-common with affiliate) for each of the years ended December 31:
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
10. Concentration of Credit Risk - Continued:
Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant concepts, default by any one of these lessees or restaurant chains could significantly impact the results of operations of the Partnership if the Partnership is not able to re-lease the properties in a timely manner.
11. Selected Quarterly Financial Data:
The following table presents selected unaudited quarterly financial data for each full quarter during the years ended December 31, 2002 and 2001.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001, and 2000
11. Selected Quarterly Financial Data - Continued:
(1) Certain items in the quarterly financial data have been reclassified to conform to the 2002 presentation. This reclassification 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 for all periods presented. The results of operations relating to properties that were identified for sale as of December 31, 2001 but sold subsequently are reported as continuing operations.
12. Commitment:
In December 2002, the Partnership entered into an agreement with a third party to sell the Denny's property in Grand Prairie, Texas.
13. Subsequent Event:
In February 2003, the Partnership sold the Property in Grand Prairie, Texas 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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The General Partners of the Registrant are James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, a Florida corporation. The General Partners manage and control the Partnership's affairs and have general responsibility and the ultimate authority in all matters affecting the Partnership's business. The Partnership has available to it the services, personnel and experience of CNL American Properties Fund, Inc. ("APF"), CNL Fund Advisors, Inc., CNL Financial Group, Inc. and their affiliates, all of which are affiliates of the General Partners.
James M. Seneff, Jr., age 56. Since 1971, Mr. Seneff has been active in the acquisition, development, and management of real estate projects and, directly or through an affiliated entity, has served as a general partner or co-venturer in over 100 real estate ventures. These ventures have involved the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Seneff has served as Director and Chairman of the Board of APF, a public, unlisted real estate investment trust, since 1994. Mr. Seneff served as Chief Executive Officer of APF from 1994 through August 1999, and has served as co-Chief Executive Officer of APF since December 2000. Mr. Seneff served as Chairman of the Board and Chief Executive Officer of CNL Fund Advisors, Inc., formerly the Partnership's advisor, until it merged with a wholly-owned subsidiary of APF in September 1999, and in June 2000, was re-elected to those positions of CNL Fund Advisors, Inc. Mr. Seneff is a principal stockholder of CNL Holdings, Inc., the parent company of CNL Financial Group, Inc. (formerly CNL Group, Inc.), a diversified real estate company, and has served as a Director, Chairman of the Board and Chief Executive Officer of CNL Financial Group, Inc. since its formation in 1980. CNL Financial Group, Inc. is the parent company, either directly or indirectly through subsidiaries, of CNL Real Estate Services, Inc., CNL Capital Markets, Inc., CNL Investment Company and CNL Securities Corp., all of which are engaged in the business of real estate finance. Mr. Seneff also serves as a Director, Chairman of the Board and Chief Executive Officer of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust, as well as, CNL Hospitality Corp., its advisor. In addition, he serves as a Director, Chairman of the Board and Chief Executive Officer of CNL Retirement Properties, Inc., a public, unlisted real estate investment trust and its advisor, CNL Retirement Corp. Since 1992, Mr. Seneff has also served as a Director, Chairman of the Board and Chief Executive Officer of Commercial Net Lease Realty, Inc., a public real estate investment trust that is listed on the New York Stock Exchange. Mr. Seneff has also served as a Director, Chairman of the Board and Chief Executive Officer of CNL Securities Corp. since 1979; CNL Investment Company since 1990; and CNL Institutional Advisors, Inc., a registered investment advisor for pension plans, since 1990. Mr. Seneff formerly served as a Director of First Union National Bank of Florida, N.A., and currently serves as the Chairman of the Board of CNL Bank, an independent, state-chartered commercial bank. Mr. Seneff previously served on the Florida State Commission on Ethics and is a former member and past Chairman of the State of Florida Investment Advisory Council, which recommends to the Florida Board of Administration investments for various Florida employee retirement funds. The Florida Board of Administration, Florida's principal investment advisory and money management agency, oversees the investment of more than $60 billion of retirement funds. Mr. Seneff received his degree in Business Administration from Florida State University in 1968.
Robert A. Bourne, age 55. Mr. Bourne has participated as a general partner or co-venturer in over 100 real estate ventures involved in the financing, acquisition, construction, and leasing of restaurants, office buildings, apartment complexes, hotels, and other real estate. Mr. Bourne is a Director of APF. Mr. Bourne served as President of APF from 1994 through February 1999. He also served as Treasurer from February 1999 through August 1999 and from May 1994 through December 1994. He also served in various executive positions with CNL Fund Advisors, Inc. prior to its merger with a wholly-owned subsidiary of APF including, President from 1994 through September 1997, and Director from 1994 through August 1999. Mr. Bourne serves as President and Treasurer of CNL Financial Group, Inc.; Director, Vice Chairman of the Board, and Treasurer , and from 1997 until June 2002 served as President, of CNL Hospitality Properties, Inc., a public, unlisted real estate investment trust; as well as, Director, Vice Chairman of the Board, and Treasurer, and from 1997 until June 2002 served as President, of CNL Hospitality Corp., its advisor. In addition, Mr. Bourne serves as Director, Vice Chairman of the Board, and Treasurer, and from 1997 until June 2002 served as President, of CNL Retirement Properties, Inc., a public, unlisted real estate investment trust; as well as, a Director, Vice Chairman of the Board, and Treasurer, and from 1997 until June 2002 served as President, of its advisor, CNL Retirement Corp. Mr. Bourne also serves as a Director of CNL Bank. He has served as a Director since 1992, Vice Chairman of the Board since February 1996, Secretary and Treasurer from February 1996 through 1997, and President from July 1992 through February 1996, of Commercial Net Lease Realty, Inc., a public real estate investment trust listed on the New York Stock Exchange. Mr. Bourne also serves as Director, President and Treasurer for various affiliates of CNL Financial Group, Inc. including, CNL Investment Company, CNL Securities Corp. and CNL Institutional Advisors, Inc., a registered investment advisor for pension plans. Mr. Bourne began his career as a certified public accountant employed by Coopers & Lybrand, Certified Public Accountants, from 1971 through 1978, where he attained the position of Tax Manager in 1975. Mr. Bourne graduated from Florida State University in 1970 where he received a B.A. in Accounting, with honors.
Curtis B. McWilliams, age 47. Mr. McWilliams has served as Co-Chief Executive Officer of APF since December 2000 and previously served as Chief Executive Officer from September 1999 through December 2000. Prior to the acquisition of CNL Fund Advisors, Inc., Mr. McWilliams served as President of APF from February 1999 until September 1999. From February 1998 to February 1999, he served as Executive Vice President of APF. Mr. McWilliams joined CNL Financial Group, Inc. in April 1997 and served as an Executive Vice President from October 1997 until September 1999. In addition, Mr. McWilliams served as President of CNL Fund Advisors, Inc. and CNL Financial Services, Inc., a corporation engaged in the business of real estate financing, from April 1997 until the acquisition of such entities by wholly-owned subsidiaries of APF in September 1999. From September 1983 through March 1997, Mr. McWilliams was employed by Merrill Lynch & Co. The majority of his career at Merrill Lynch & Co. was in the Investment Banking division where he served as a Managing Director. Mr. McWilliams received a B.S.E. in Chemical Engineering from Princeton University in 1977 and a Master of Business Administration degree with a concentration in finance from the University of Chicago in 1983.
Steven D. Shackelford, age 39. Mr. Shackelford was promoted to Executive Vice President of APF in June 2000. He served as Senior Vice President from September 1999 until his promotion in June 2000. Mr. Shackelford has served as Chief Financial Officer since January 1997 and has served as Secretary and Treasurer of APF since September 1999. He also served as Chief Financial Officer of CNL Fund Advisors, Inc. from September 1996 to September 1999. From March 1995 to July 1996, Mr. Shackelford was a senior manager in the national office of Price Waterhouse LLP where he was responsible for advising foreign clients seeking to raise capital and a public listing in the United States. From August 1992 to March 1995, he was a manager in the Paris, France office of Price Waterhouse, serving several multi-national clients. Mr. Shackelford was an audit staff and senior from 1986 to 1992 in the Orlando, Florida office of Price Waterhouse. Mr. Shackelford received a Bachelor of Arts degree in Accounting, with honors, and a Master of Business Administration degree from Florida State University and is a certified public accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the General Partners, the officers of the corporate General Partner, and persons who own more than ten percent of a registered class of the Partnership's equity securities (collectively, the "Reporting Persons"), to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Reporting Persons are required by SEC regulation to furnish the Partnership with copies of all Forms 3, 4 and 5 that they file.
Based solely on the General Partners' review of the copies of such forms the Partnership has received and written representations from certain Reporting Persons that they were not required to file Forms 5 for the last fiscal year, the General Partners believe that all Reporting Persons complied with all filing requirements applicable to them with respect to transactions during fiscal 2002.
Item 11.
Item 11. Executive Compensation
Other than as described in Item 13, the Partnership has not paid and does not intend to pay any executive compensation to the General Partners or any of their affiliates. There are no compensatory plans or arrangements regarding termination of employment or change of control.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of March 10, 2003, no person was known to the Registrant to be a beneficial owner of more than five percent of the Units.
The following table sets forth, as of March 10, 2003, the beneficial ownership interests of the General Partners in the Registrant.
Neither the General Partners, nor any of their affiliates, owns any interest in the Registrant, except as noted above.
The Partnership does not have any equity compensation plans.
Item 13.
Item 13. Certain Relationships and Related Transactions
The table below summarizes the types, recipients, methods of computation and amounts of compensation, fees and distributions paid or payable by the Partnership to the General Partners and their affiliates for the year ended December 31, 2002, exclusive of any distributions to which the General Partners or their affiliates may be entitled by reason of their purchase and ownership of Units.
In June 2002, the Partnership, Ashland Joint Venture, CNL Restaurants II Joint Venture, and Katy Joint Venture each acquired a Property from CNL Funding 2001-A, LP, an affiliate of the General Partners for an aggregate cost of approximately $4,563,000. 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 price paid by the Partnership and the joint ventures represented the costs incurred by CNL Funding 2001-A, LP to acquire the properties. In September 2002, the Partnership acquired a property in Jackson, Michigan from CNL Net Lease Investors, L.P. ("NLI") for an aggregate cost of approximately $961,400. In addition, in September 2002, the Partnership and CNL VIII acquired a property in Buffalo Grove, Illinois from NLI for an aggregate cost of approximately $1,588,800. During 2002, and prior to the Partnership's acquisition of these properties, CNL Financial LP Holding, LP ("CFN") and CNL Net Lease Investors GP Corp. ("GP Corp") 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 properties. Each CNL entity is an affiliate of the Partnership's general partners.
Item 14.
Item 14. Controls and Procedures
The General Partners maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the Partnership's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The principal executive and financial officers of the corporate General Partner have evaluated the Partnership's disclosure controls and procedures within 90 days prior to the filing of this Annual Report on Form 10-K and have determined that such disclosure controls and procedures are effective.
Subsequent to the above evaluation, there were no significant changes in internal controls or other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2002 and 2001
Statements of Income for the years ended December 31, 2002, 2001, and 2000
Statements of Partners' Capital for the years ended December 31, 2002, 2001, and 2000
Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000
Notes to Financial Statements
2. Financial Statement Schedules
Schedule II -Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000
Schedule III - Real Estate and Accumulated Depreciation at December 31, 2002
Notes to Schedule III - Real Estate and Accumulated Depreciation at December 31, 2002
Schedule IV - Mortgage Loans on Real Estate at December 31,
All other Schedules are omitted as the required information is inapplicable or is presented in the financial statements or notes thereto.
3. Exhibits
3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund IX, Ltd. (Included as Exhibit 3.1 to Registration Statement No. 33-35049 on Form S-11 and incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund IX, Ltd. (Included as Exhibit 3.1 to Registration Statement No. 33-35049 on Form S-11 and incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund IX, Ltd. (Included as Exhibit 4.6 to Post-Effective Amendment No. 1 to Registration Statement No. 33-35049 on Form S-11 and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund IX, Ltd. and CNL Investment Company (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on March 17, 1998, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL Investment Company to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form 10-K filed with the Securities and Exchange Commission on March 30, 1995, and incorporated herein by reference.)
10.3 Assignment of Management Agreement from CNL Income Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Included as Exhibit 10.4 to Form 10-Q filed with the Securities Exchange Commission on August 9, 2001, and incorporated herein by reference).
10.5 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002, and incorporated herein by reference.)
99.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
99.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
(b) The Registrant filed no reports on Form 8-K during the period October 1, 2002 through December 31, 2002.
(c) Not applicable.
(d) Other Financial Information
The Partnership is required to file audited financial information of its tenant, Carrols Corporation, as a result of this tenant leasing more than 20% of the Partnership's total assets for the year ended December 31, 2002. Carrols Corporation is a public company and as of the date hereof, had not filed their Form 10-K; therefore, the financial statements are not available to the Partnership to include in this filing. The Partnership will file this financial information under cover of a Form 10-K/A as soon as it is available.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of March, 2003.
CNL INCOME FUND IX, LTD.
By:CNL REALTY CORPORATION General Partner
/s/ Robert A. Bourne --------------------------- ROBERT A. BOURNE, President
By:ROBERT A. BOURNE General Partner
/s/ Robert A. Bourne --------------------------- ROBERT A. BOURNE
By:JAMES M. SENEFF, JR. General Partner
/s/ James M. Seneff, Jr. --------------------------- JAMES M. SENEFF, JR.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CORPORATE GENERAL PARTNER
PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James M. Seneff, Jr., the Chief Executive Officer of CNL Realty Corporation, the corporate general partner of CNL Income Fund IX, Ltd. (the "registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ James M. Seneff, Jr. - -------------------------- James M. Seneff, Jr. Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CORPORATE GENERAL PARTNER
PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert A. Bourne, President and Treasurer of CNL Realty Corporation, the corporate general partner of CNL Income Fund IX, Ltd. (the "registrant") certify that:
1. I have reviewed this annual report on Form 10-K of the registrant;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Robert A. Bourne - ------------------------- Robert A. Bourne President and Treasurer
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2002, 2001, and 2000
(a) Deducted from receivables and accrued rental income on the balance sheet.
(b) Reduction of rental and other income.
(c) Amounts written off as uncollectible.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(a) Transactions in real estate and accumulated depreciation are summarized below. The balances in 2001, 2000, and 1999 have been adjusted to reflect the reclassification of properties accounted for as discontinued operations.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2002
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2002
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
December 31, 2002
(b) Depreciation expense is computed for buildings and improvements based upon estimated lives of 30 years.
(c) As of December 31, 2002, the aggregate cost of the Properties owned by the Partnership and joint ventures for federal income tax purposes was $18,878,784 and $19,312,602, respectively. All of the leases are treated as operating leases for federal income tax purposes.
(d) The portion of the lease relating to the building has been recorded as a direct financing lease. The cost of the building has been included in net investment in direct financing leases; therefore, depreciation is not applicable.
(e) The lease for the land and building has been recorded as a direct financing lease. The cost of the land and building has been included in net investment in direct financing leases; therefore, depreciation is not applicable.
(f) Certain components of the lease relating to land and building have been recorded as a direct financing lease. Accordingly, costs relating to these components of this lease are not shown.
(g) During the year ended December 31, 2001, the Partnership purchased a real estate Property from CNL Funding 2001-A, LP, an affiliate of the General Partners, for an aggregate cost of approximately $1,357,600.
(h) This Property was exchanged for a Burger King Property previously owned and located in Woodmere, Ohio, during 1996.
(i) Effective August 1, 1998, the lease for this Property was amended, resulting in the reclassification of the building portion of the lease to an operating lease. The building was recorded at net book value as of August 1, 1998, and is being depreciated over its remaining estimated life of approximately 22 years.
(j) During the year ended December 31, 2000, the Partnership and an affiliate of the General Partners, as tenants-in-common, purchased a real estate Property from CNL BB Corp., an affiliate of the General Partners, for an aggregate cost of approximately $1,454,600. In September 2002, the Partnership and the affiliate sold this Property. As a result, the assets relating to the Property were reclassified from real estate with operating leases to real estate held for sale.
(k) Effective July 16, 2001, the lease for this Property was terminated, resulting in the reclassification of the building portion of the lease to an operating lease. The building was recorded at net book value as of July 16, 2001, and is being depreciated over its remaining estimated life of approximately 20 years.
(l) During the year ended December 31, 2002, the Partnership purchased a real estate Property from CNL Net Lease Investors, LP, an affiliate of the General Partners, for an aggregate cost of approximately $961,400.
(m) Effective August 1, 2002, the lease for this Property was amended, resulting in the reclassification of the building portion of the lease to an operating lease. The building was recorded at net book value as of August 1, 2002, and is being depreciated over its remaining estimated life of approximately 19 years.
(n) During the year ended December 31, 2002, the Partnership purchased a real estate Property from CNL Funding 2001-A, LP, an affiliate of the General Partners, for an aggregate cost of approximately $1,030,800.
(o) During the year ended December 31, 2002, CNL Restaurant Investments II, in which the Partnership owns a 45.2% interest, purchased a real estate Property from CNL Funding 2001-A, LP, an affiliate of the General Partners, for an aggregate cost of approximately $1,147,400.
(p) During the year ended December 31, 2002, Ashland Joint Venture, in which the Partnership owns 27.33% interest, purchased a real estate Property from CNL Funding 2001-A, LP, an affiliate of the General Partners, for an aggregate cost of approximately $1,343,000.
(q) During the year ended December 31, 2002, the Partnership and an affiliate purchased a real estate Property from CNL Net Lease Investors, LP, an affiliate of the General Partners, for an aggregate cost of approximately $1,588,800.
(r) During the year ended December 31, 2002, Katy Joint Venture, in which the Partnership owns a 60% purchased a real estate Property from CNL Funding 2001-A, LP, an affiliate of the General Partners, for an aggregate cost of approximately $1,041,800.
(s) In June 2002, Ashland Joint Venture, in which the Partnership owns a 27.33% interest, sold its Property in Ashland, New Hampshire. As a result, the joint venture reclassified the assets relating to this Property from real estate with operating leases to real estate held for sale.
CNL INCOME FUND IX, LTD. (A Florida Limited Partnership)
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
December 31, 2002
(1) Carrying amount consists of outstanding principal plus accrued interest. The tax carrying value of the notes are $464,352.
(2) Monthly payments of principal and interest at an annual rate of 9.00% with a balloon payment at maturity of $123,102.
(3) Monthly payments of principal and interest at an annual rate of 9.00%, with a balloon payment at maturity of $184,652.
(4) The changes in the carrying amounts are summarized as follows:
EXHIBIT INDEX
Exhibit Number
(a) Exhibits
3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund IX, Ltd. (Included as Exhibit 3.1 to Registration Statement No. 33-35049 on Form S-11 and incorporated herein by reference.)
4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund IX, Ltd. (Included as Exhibit 3.1 to Registration Statement No. 33-35049 on Form S-11 and incorporated herein by reference.)
4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund IX, Ltd. (Included as Exhibit 4.6 to Post-Effective Amendment No. 1 to Registration Statement No. 33-35049 on Form S-11 and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund IX, Ltd. and CNL Investment Company (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on March 17, 1998, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL Investment Company to CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form 10-K filed with the Securities and Exchange Commission on March 30, 1995, and incorporated herein by reference.)
10.3 Assignment of Management Agreement from CNL Income Fund Advisors, Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form 10-K filed with the Securities and Exchange Commission on April 1, 1996, and incorporated herein by reference.)
10.4 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Included as Exhibit 10.4 to Form 10-Q filed with the Securities Exchange Commission on August 9, 2001, and incorporated herein by reference.)
10.5 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.5 to Form 10-Q filed with the Securities and Exchange Commission on August 14, 2002, and incorporated herein by reference.)
99.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
99.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
EXHIBIT 99.1
EXHIBIT 99.2