FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
0-19144
----------------------------
CNL Income Fund VI, Ltd.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-2922954
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4
Notes to Condensed Financial Statements 5-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-16
Part II
Other Information 17
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- ------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,472,247
and $3,327,334 $18,673,683 $20,785,684
Net investment in direct financing leases 3,944,272 4,708,841
Investment in joint ventures 4,848,127 1,130,139
Cash and cash equivalents 1,353,864 1,614,759
Restricted cash -- 709,227
Receivables, less allowance for doubtful
accounts of $341,604 and $363,410 31,765 157,989
Prepaid expenses 4,463 4,235
Lease costs, less accumulated
amortization of $6,768 and $5,581 10,932 12,119
Accrued rental income, less allowance for
doubtful accounts of $9,697 in 1998 and 1997 762,705 843,345
Other assets 26,731 26,731
----------------- -----------------
$29,656,542 $29,993,069
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 9,130 $ 14,138
Accrued construction costs payable -- 125,000
Accrued and escrowed real estate taxes payable 18,117 38,025
Due to related parties 5,250 32,019
Distributions payable 787,500 787,500
Rents paid in advance 27,598 57,663
----------------- -----------------
Total liabilities 847,595 1,054,345
Minority interest 143,546 144,475
Partners' capital 28,665,401 28,794,249
----------------- -----------------
$29,656,542 $29,993,069
================= =================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C>
Revenues:
Rental income from operating leases $ 601,109 $ 603,263 $1,884,112 $1,889,623
Adjustments to accrued rental income -- -- (155,528 ) --
Earned income from direct
financing leases 106,936 98,328 363,720 369,865
Contingent rental income 4,882 7,946 39,361 34,554
Interest and other income 25,316 43,483 92,998 76,748
------------- ------------ ----------- ------------
738,243 753,020 2,224,663 2,370,790
------------- ------------ ----------- ------------
Expenses:
General operating and administrative 42,989 41,177 129,031 113,543
Bad debt expense -- -- 12,854 13,102
Professional services 6,494 6,030 23,285 17,569
Real estate taxes -- 1,790 -- 11,754
State and other taxes -- -- 10,392 8,968
Depreciation and amortization 114,253 117,383 344,306 359,714
------------- ------------ ----------- ------------
163,736 166,380 519,868 524,650
------------- ------------ ----------- ------------
Income Before Minority Interest in Loss
(Income) of Consolidated Joint Venture,
Equity in Earnings of Unconsolidated
Joint Ventures and Gain on Sale of Land
and Buildings 574,507 586,640 1,704,795 1,846,140
Minority Interest in Loss (Income) of
Consolidated Joint Venture (4,133 ) 1,715 (28,673 ) 5,783
Equity in Earnings of Unconsolidated
Joint Ventures 94,509 24,723 212,408 194,079
Gain on Sale of Land and Buildings -- 626,804 345,122 547,027
------------- ------------ ----------- ------------
Net Income $ 664,883 $1,239,882 $2,233,652 $2,593,029
============= ============ =========== ============
Allocation of Net Income:
General partners $ 6,649 $ 7,692 $ 20,455 $ 21,492
Limited partners 658,234 1,232,190 2,213,197 2,571,537
------------- ------------ ----------- ------------
$ 664,883 $1,239,882 $2,233,652 $2,593,029
============= ============ =========== ============
Net Income Per Limited Partner Unit $ 9.40 $ 17.60 $ 31.62 $ 36.74
============= ============ =========== ============
Weighted Average Number of Limited
Partner Units Outstanding 70,000 70,000 70,000 70,000
============= ============ =========== ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
--------------------------- ----------------
<S> <C>
General partners:
Beginning balance $ 229,363 $ 204,010
Net income 20,455 25,353
---------------- ---------------
249,818 229,363
---------------- ---------------
Limited partners:
Beginning balance 28,564,886 28,840,357
Net income 2,213,197 2,874,529
Distributions ($33.75 and
$45.00 per limited partner
unit, respectively) (2,362,500 ) (3,150,000 )
---------------- ---------------
28,415,583 28,564,886
---------------- ---------------
Total partners' capital $28,665,401 $28,794,249
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------------- --------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities $ 2,445,813 $ 2,375,171
--------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings 2,832,253 4,003,985
Additions to land and buildings on
operating leases (125,000 ) (1,112,647 )
Investment in joint ventures (3,716,209 ) --
Return of capital from joint venture -- 69,997
Decrease (increase) in restricted cash 697,650 (2,400,061 )
Payment of lease costs (3,300 ) (3,300 )
--------------- ---------------
Net cash provided by (used in)
investing activities (314,606 ) 557,974
--------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,362,500 ) (2,432,500 )
Distributions to holder of minority interest (29,602 ) (8,832 )
--------------- ---------------
Net cash used in financing activities (2,392,102 ) (2,441,332 )
--------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents (260,895 ) 491,813
Cash and Cash Equivalents at Beginning of Period 1,614,759 1,127,930
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 1,353,864 $ 1,619,743
=============== ===============
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of period $ 787,500 $ 787,500
=============== ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund VI, Ltd. (the "Partnership") for the year ended December
31, 1997.
The Partnership accounts for its 66 percent interest in the accounts of
Caro Joint Venture using the consolidation method. Minority interest
represents the minority joint venture partner's proportionate share of
the equity in the Partnership's consolidated joint venture. All
significant intercompany accounts and transactions have been
eliminated.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
Interim Financial Periods." Adoption of this consensus did not have a
material effect on the Partnership's financial position or results of
operations.
2. Land and Buildings:
In January 1998, the Partnership sold its property in Deland, Florida,
to the tenant for $1,250,000 and received net sales proceeds of
$1,234,122, resulting in a gain of $345,122 for financial reporting
purposes. This property was originally acquired by the Partnership in
October 1989 and had a cost of approximately $1,000,000, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $234,100 in excess of
its original purchase price.
In February 1998, the Partnership sold its property in Melbourne,
Florida, for $590,000 and received net sales proceeds of $552,910. Due
to the fact that during 1997, the Partnership recorded an allowance for
loss of $158,239 for this property, no gain or loss was recognized for
financial reporting purposes in February 1998, relating to the sale.
5
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Land and Buildings - Continued:
In February 1998, the Partnership sold its property in Liverpool, New
York, for $157,500 and received net sales proceeds of $145,221. Due to
the fact that in prior years the Partnership recorded an allowance for
loss of $181,970 for this property, no gain or loss was recognized for
financial reporting purposes in February 1998, relating to the sale.
In June 1998, the Partnership sold its property in Bellevue, Nebraska,
and received sales proceeds of $900,000. Due to the fact that during
1998, the Partnership wrote off $155,528 in accrued rental income,
representing a portion of the accrued rental income that the
Partnership had recognized since the inception of the lease relating to
the straight-lining of future scheduled rent increases in accordance
with generally accepted accounting principles, no gain or loss was
recorded for financial reporting purposes in June 1998 relating to this
sale. This property was originally acquired by the Partnership in
December 1989 and had a cost of approximately $899,500, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the property for approximately $500 in excess of its
original purchase price.
3. Net Investment in Direct Financing Leases:
In February and June 1998, the Partnership sold its properties in
Melbourne, Florida and Bellevue, Nebraska, respectively, for which the
building portions had been classified as direct financing leases. In
connection therewith, the gross investments (minimum lease payments
receivable and estimated residual values) and unearned income relating
to these properties were removed from the accounts (see Note 2).
4. Investment in Joint Ventures:
In January 1998, the Partnership contributed $558,064 and $694,806 to
acquire a 34.74% interest and a 46.2% interest, respectively, in a
property in Overland Park, Kansas, and a property in Memphis,
Tennessee, respectively, as tenants-in-common with affiliates of the
general partners. In June 1998, the Partnership contributed $1,250,350
to acquire an 85.07% interest in a property in Fort Myers, Florida, as
tenants-in-common with an affiliate of the general partners. The
Partnership accounts for its investments in these properties using the
equity method since the Partnership shares control with affiliates, and
amounts relating to its investments are included in investment in joint
ventures.
6
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
4. Investment in Joint Ventures - Continued:
In April 1998, the Partnership entered into a joint venture
arrangement, Melbourne Joint Venture, with an affiliate of the general
partners, to construct and hold one restaurant property. As of
September 30, 1998, the Partnership had contributed $314,011 to
purchase land and pay construction costs relating to the property owned
by the joint venture. The Partnership has agreed to contribute
approximately $212,300 in additional construction costs to the joint
venture. The Partnership will have an approximate 50 percent interest
in the profits and losses of the joint venture. The Partnership
accounts for its investment in this joint venture under the equity
method since the Partnership shares control with the affiliate.
In September 1998, the Partnership entered into a joint venture
arrangement, Warren Joint Venture, with an affiliate of the general
partners to hold one restaurant property. As of September 30, 1998, the
Partnership had contributed $898,092 to the joint venture to acquire
the restaurant property. As of September 30, 1998, the Partnership
owned approximately a 64 percent interest in the profits and losses of
the joint venture. The Partnership accounts for its investment in this
joint venture under the equity method since the Partnership shares
control with the affiliate.
Auburn Joint Venture, Show Low Joint Venture, Asheville Joint Venture,
Melbourne Joint Venture, Warren Joint Venture and the Partnership and
affiliates as tenants-in-common in five separate tenancy-in-common
arrangements, each own and lease one
7
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
4. Investment in Joint Ventures - Continued:
property to an operator of national fast-food and family-style
restaurants. The following presents the combined, condensed financial
information for the joint ventures and the five properties held as
tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- -------------------
<S> <C>
Land and buildings on
operating leases, less
accumulated depreciation $ 8,793,422 $ 4,568,842
Net investment in direct
financing leases 3,338,134 911,559
Cash 31,598 7,991
Receivables 20,370 22,230
Accrued rental income 215,813 160,197
Other assets 1,178 414
Liabilities 181,530 7,557
Partners' capital 12,218,985 5,663,676
Revenues 771,965 471,627
Gain on sale of land
and building -- 488,372
Net income 672,525 889,883
</TABLE>
The Partnership recognized income totalling $212,048 and $194,079 for
the nine months ended September 30, 1998 and 1997, respectively, from
these joint ventures, $94,509 and $24,723 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively.
8
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine Months Ended September 30, 1998 and 1997
6. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual lessees, each representing more than ten percent of the
Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from joint
ventures and the properties held as tenants-in-common with affiliates),
for at least one of the nine month periods ended September 30:
1998 1997
------------- -------------
Golden Corral Corporation $515,995 $513,408
Mid-America Corporation 329,639 329,639
IHOP Properties, Inc. 325,863 --
Restaurant Management
Services, Inc. 312,956 376,597
The following schedule presents total rental and earned income from
individual restaurant chains, each representing more than ten percent
of the Partnership's total rental and earned income (including the
Partnership's share of total rental and earned income from joint
ventures and the properties held as tenants-in-common with affiliates),
for at least one of the nine month periods ended September 30:
1998 1997
------------- -------------
Golden Corral Family
Steakhouse Restaurants $515,995 $513,408
Burger King 341,006 382,532
IHOP 325,863 --
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. However, the general partners believe that the risk
of such a default is reduced due to the essential or important nature
of these properties for the on-going operations of the lessees.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund VI, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on August 17, 1988, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed, which are leased primarily to operators of selected national and
regional fast-food and family-style restaurant chains (collectively, the
"Properties"). The leases are triple-net leases, with the lessees generally
responsible for all repairs and maintenance, property taxes, insurance and
utilities. As of September 30, 1998, the Partnership owned 41 Properties, which
included six Properties owned by joint ventures in which the Partnership is a
co-venturer and five Properties owned with affiliates as tenants-in-common.
Liquidity and Capital Resources
During the nine months ended September 30, 1998 and 1997, the
Partnership generated cash from operations (which includes cash received from
tenants, distributions from joint ventures, and interest and other income
received, less cash paid for expenses) of $2,445,813 and $2,375,171. The
increase in cash from operations for the nine months ended September 30, 1998,
is primarily a result of changes in the Partnership's working capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1998.
In July 1997, the Partnership entered into a new lease for the Property
in Greensburg, Indiana, with a new tenant to operate the Property as an Arby's
restaurant. In connection therewith, the Partnership paid $125,000 during the
nine months ended September 30, 1998, in renovation costs, which had been
incurred and accrued as construction costs payable at December 31, 1997.
In January 1998, the Partnership used the net sales proceeds from the
1997 sale of several Properties to acquire a Property in Overland Park, Kansas,
and a Property in Memphis, Tennessee, as tenants-in-common with affiliates of
the general partners. In connection therewith, the Partnership and the
affiliates entered into separate agreements whereby each co-venturer will share
in the profits and losses of each Property in proportion to its applicable
percentage interest. As of September 30, 1998, the Partnership had contributed
$558,064 and $694,806 to own a 34.74% and 46.2% interest, respectively, in the
Properties in Overland Park, Kansas, and Memphis, Tennessee, respectively.
In January 1998, the Partnership sold its Property in Deland, Florida,
to the tenant, for $1,250,000 and received net sales proceeds of $1,234,122,
resulting in a gain of $345,122 for financial reporting purposes. This Property
was originally acquired by the Partnership in October 1989 and had a cost of
approximately $1,000,000, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the Property for
approximately $234,100 in excess of its original purchase price. In June 1998,
the Partnership
10
<PAGE>
Liquidity and Capital Resources - Continued
reinvested $1,250,350 of the net sales proceeds in a Property in Fort Myers,
Florida, with an affiliate of the general partners as tenants-in-common. The
general partners believe that the transaction, or a portion thereof, relating to
the sale of the Property in Deland, Florida, and the reinvestment of the net
sales proceeds, will qualify as a like-kind exchange transaction for federal
income tax purposes. However, the Partnership will distribute amounts sufficient
to enable the limited partners to pay federal and state income taxes, if any (at
a level reasonably assumed by the general partners), resulting from the sale.
In February 1998, the Partnership sold its Property in Melbourne,
Florida, for $590,000 and received net sales proceeds of $552,910. Due to the
fact that during 1997, the Partnership recorded an allowance for loss of
$158,239 for this Property, no gain or loss was recognized for financial
reporting purposes in February 1998, relating to the sale. In April 1998, the
Partnership contributed a portion of the net sales proceeds in Melbourne Joint
Venture, with an affiliate of the general partners, to construct and hold one
restaurant Property. As of September 30, 1998, the Partnership had contributed
$314,011 to purchase land and pay construction costs relating to the property
owned by the joint venture. The Partnership has agreed to contribute
approximately $212,300 in additional construction costs to the joint venture.
The Partnership expects to have a 50 percent interest in the profits and losses
of the joint venture.
In addition, in February 1998, the Partnership sold its Property in
Liverpool, New York, for $157,500 and received net sales proceeds of $145,221.
Due to the fact that in prior years the Partnership recorded an allowance for
loss of $181,970 for this Property, no gain or loss was recognized for financial
reporting purposes in February 1998, relating to the sale. The Partnership
intends to reinvest the net sales proceeds from the sale of this Property in an
additional Property.
In June 1998, the Partnership sold its Property in Bellevue, Nebraska,
to a third party and received sales proceeds of $900,000. Due to the fact that
during 1998 the Partnership wrote off $155,528 in accrued rental income,
representing a portion of the accrued rental income that the Partnership had
recognized since the inception of the lease relating to the straight-lining of
future scheduled rent increases in accordance with generally accepted accounting
principles, no gain or loss was recorded for financial reporting purposes in
June 1998 relating to this sale. This Property was originally acquired by the
Partnership in December 1989 and had a cost of approximately $899,500, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the Property for approximately $500 in excess of its original
purchase price. In September 1998, the Partnership contributed $898,094 of the
net sales proceeds in Warren Joint Venture. The Partnership has an approximate
64 percent interest in the profits and losses of Warren Joint Venture and the
remaining interest in this joint venture is held by an affiliate of the general
partners.
Currently, rental income from the Partnership's Properties is invested
in money market accounts or other short-term, highly liquid investments pending
the Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At September 30, 1998, the Partnership had
$1,353,864 invested in such short-term investments as compared to $1,614,759 at
December 31, 1997. The decrease in cash and cash equivalents during the nine
11
<PAGE>
Liquidity and Capital Resources - Continued
months ended September 30, 1998, is primarily attributable to the payment of
construction costs accrued at December 31, 1997, relating to the Partnership's
Property located in Greensburg, Indiana, as described above. The funds remaining
at September 30, 1998, after payment of distributions and other liabilities,
will be used to meet the Partnership's working capital and other needs and to
acquire additional Properties.
Total liabilities of the Partnership, including distributions payable,
decreased to $847,595 at September 30, 1998, from $1,054,345 at December 31,
1997, primarily as the result of a decrease in construction costs payable as a
result of the payment during the nine months ended September 30, 1998 of
construction costs accrued at December 31, 1997, relating to the Partnership's
Property in Greensburg, Indiana, as described above. The decrease in liabilities
was also partially due to a decrease in rents paid in advance and amounts due to
related parties at September 30, 1998, as compared to December 31, 1997. The
general partners believe the Partnership has sufficient cash on hand to meet the
Partnership's current working capital needs.
Based on cash from operations, the Partnership declared distributions
to the limited partners of $2,362,500 for each of the nine months ended
September 30, 1998 and 1997 ($787,500 for each of the quarters ended September
30, 1998 and 1997). This represents distributions for each applicable nine
months of $33.75 per unit ($11.25 per unit for each of the quarters ended
September 30, 1998 and 1997). No distributions were made to the general partners
for the quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the limited partners for the nine months ended September 30, 1998
and 1997, 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 to the limited partners on a quarterly basis.
The general partners have been informed by CNL American Properties
Fund, Inc. ("APF"), an affiliate of the general partners, that it intends to
significantly increase its asset base by proposing to acquire affiliates of the
general partners which have similar restaurant property portfolios, including
the Partnership. APF is a real estate investment trust whose primary business is
the ownership of restaurant properties leased on a long-term, "triple-net" basis
to operators of national and regional restaurant chains. Accordingly, the
general partners anticipate that APF will make an offer to acquire the
Partnership in exchange for securities of APF. The general partners have
recently retained financial and legal advisors to assist them in evaluating and
negotiating any offer that may be proposed by APF. However, at this time, APF
has made no such offer. In the event that an offer is made, the general partners
will evaluate it and if the general partners believe that the offer is worth
pursuing, the general partners will promptly inform the limited partners. Any
agreement to sell the Partnership would be subject to the approval of the
limited partners in accordance with the terms of the partnership agreement.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
12
<PAGE>
Liquidity and Capital Resources - Continued
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.
Results of Operations
During the nine months ended September 30, 1997, the Partnership and
its consolidated joint venture, Caro Joint Venture, owned and leased 38 wholly
owned Properties (including four Properties which were sold in 1997), and during
the nine months ended September 30, 1998, the Partnership and Caro Joint Venture
owned and leased 35 wholly owned Properties (including four Properties which
were sold in 1998) to operators of fast-food and family-style restaurant chains.
In connection therewith, the Partnership and Caro Joint Venture earned
$2,092,304 and $2,259,488 during the nine months ended September 30, 1998 and
1997, respectively, in rental income from operating leases (net of adjustments
to accrued rental income) and earned income from direct financing leases from
these Properties, $708,045 and $701,591 of which was earned during the quarters
ended September 30, 1998 and 1997, respectively. The decrease in rental and
earned income for the nine months ended September 30, 1998 was partially due to
a decrease in rental and earned income as a result of the sales of four
Properties during 1997 and the sales of four Properties during 1998. During the
nine months ended September 30, 1998, the decrease in rental income was
partially offset by an increase in rental income, due to the reinvestment of the
net sales proceeds from the 1996 sale of the Property in Dallas, Texas, in a
Property in Marietta, Georgia, in February 1997 and the reinvestment of the net
sales proceeds from the 1997 sales of two Properties in two additional
Properties, one in each of Elgin, Illinois and Manassas, Virginia, in 1997.
The decrease in rental and earned income for the nine months ended
September 30, 1998 was partially offset by an increase in rental income due to
the fact that during the nine months ended September 30, 1997, the Partnership
increased its allowance for doubtful accounts for the Property located in
Greensburg, Indiana, due to financial difficulties the tenant was experiencing.
No such allowance was recorded during the nine months ended September 30, 1998,
due to the fact that in October 1997 a new tenant began operating this Property
for which rent commenced in October 1997. In addition, the decrease in rental
and earned income for the nine months ended September 30, 1998 was partially
offset by the fact that during the nine months ended September 30, 1998, the
Partnership's consolidated joint venture collected and recognized as income past
due rental amounts for which the Partnership had previously established an
allowance for doubtful accounts.
For the nine months ended September 30, 1997, the Partnership owned and
leased four Properties indirectly through joint venture arrangements (including
one Property in Show Low Joint Venture, which was sold in January 1997) and two
Properties as tenants-in-common with an affiliate of the general partners. For
the nine months ended September 30, 1998, the Partnership owned and leased five
Properties indirectly through joint venture arrangements and five Properties as
tenants-in-common with affiliates of the general partners. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the
Partnership earned $212,408 and $194,079, respectively, attributable to net
income earned by these joint ventures,
13
<PAGE>
Results of Operations - Continued
$94,509 and $24,723 of which was earned for the quarters ended September 30,
1998 and 1997, respectively. The increase in net income earned by joint ventures
during the quarter and nine months ended September 30, 1998, as compared to the
quarter and nine months ended September 30, 1997, is primarily due to the fact
that in 1998, the Partnership reinvested the net sales proceeds it received from
the 1997 and 1998 sales of the Properties in Whitehall, Michigan; Plattsmouth,
Nebraska and Deland, Florida, in additional Properties in Overland Park, Kansas;
Memphis, Tennessee and Fort Myers, Florida, with affiliates of the general
partners as tenants-in-common. The increase in net income earned by joint
ventures during the nine months ended September 30, 1998, as compared to the
nine months ended September 30, 1997, is partially offset by the fact that in
January 1997, Show Low Joint Venture, in which the Partnership owns a 36 percent
interest, recognized a gain of approximately $360,000 for financial reporting
purposes as a result of the sale of its Property. Show Low Joint Venture
reinvested the majority of the net sales proceeds in a replacement Property in
June 1997.
During at least one of the nine months ended September 30, 1998 and
1997, four of the Partnership's lessees, Golden Corral Corporation, Restaurant
Management Services, Inc., Mid-America Corporation and IHOP Properties, Inc.,
each contributed more than ten percent of the Partnership's total rental income
(including rental income from the Partnership's consolidated joint venture and
the Partnership's share of the rental income from Properties owned by
unconsolidated joint ventures in which the Partnership is a co-venturer and
Properties owned with affiliates as tenants-in-common). As of September 30,
1998, Golden Corral Corporation and IHOP Properties Inc., were each lessees
under leases relating to five restaurants, Restaurant Management Services, Inc.
was the lessee under leases relating to seven restaurants and Mid-America
Corporation was the lessee under leases relating to four restaurants. It is
anticipated that, based on the minimum annual rental payments required by the
leases, these four lessees each will continue to contribute more than ten
percent of the Partnership's total rental income during the remainder of 1998
and subsequent years. In addition, three Restaurant Chains, Golden Corral Family
Steakhouse Restaurants, IHOP and Burger King, each accounted for more than ten
percent of the Partnership's total rental income during at least one of the nine
months ended September 30, 1998 and 1997 (including the Partnership's
consolidated joint venture and the Partnership's share of the rental income from
the Properties owned by unconsolidated joint ventures in which the Partnership
is a co-venturer and Properties owned with affiliates as tenants-in-common).
During the remainder of 1998 and in subsequent years, it is anticipated that
these three Restaurant Chains each will continue to account for more than ten
percent of the Partnership's total rental income to which the Partnership is
entitled under the terms of the leases. Any failure of these lessees or
Restaurant Chains could materially affect the Partnership's income.
Operating expenses, including depreciation and amortization expense,
were $519,868 and $524,650 for the nine months ended September 30, 1998 and
1997, respectively, $163,736 and $166,380 of which were incurred for the
quarters ended September 30, 1998 and 1997.
14
<PAGE>
Results of Operations - Continued
As a result of the sale of the Property in Deland, Florida, as
described above in "Liquidity and Capital Resources," the Partnership recognized
a gain of $345,122 during the nine months ended September 30, 1998, for
financial reporting purposes. As a result of the sales of the Properties in
Naples, Florida; Plattsmouth, Nebraska, and Venice, Florida, the Partnership
recognized a gain of $626,804 during the quarter and nine months ended September
30, 1997, for financial reporting purposes. The gain for the nine months ended
September 30, 1997, was partially offset by a loss of $79,777 for financial
reporting purposes, resulting from the July 1997 sale of the Property in
Whitehall, Michigan.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim
Financial Periods." Adoption of this consensus did not have a material effect on
the Partnership's financial position or results of operations.
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
The Partnership does not have any information technology systems.
Affiliates of the general partners provide all services requiring the use of
information technology systems pursuant to a management agreement with the
Partnership. The maintenance of embedded systems, if any, at the Partnership's
properties is the responsibility of the tenants of the properties in accordance
with the terms of the Partnership's leases. The general partners and affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Partnership, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Partnership's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of the affiliates of the
general partners consists of a network of personal computers and servers that
were obtained from major suppliers. The affiliates utilize various
administrative and financial software applications on that infrastructure to
perform the business functions of the Partnership. The inability of the general
partners and affiliates to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of the Partnership's business activities
or operations. Accordingly, the general partners and affiliates have requested
and are evaluating documentation from the suppliers of the affiliates regarding
the Year 2000 compliance of their products that are used in the business
activities or operations of the Partnership. The costs expected to be incurred
by the general partners and affiliates to become Year 2000 compliant will be
incurred by the general partners and affiliates; therefore, these costs will
have no impact on the Partnership's financial position or results of operations.
15
<PAGE>
Results of Operations - Continued
The Partnership has material third party relationships with its
tenants, financial institutions and transfer agent. The Partnership depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash and its transfer agent to maintain and track investor
information. If any of these third parties are unable to meet their obligations
to the Partnership because of the Year 2000 deficiencies, such a failure may
have a material impact on the Partnership. Accordingly, the general partners
have requested and are evaluating documentation from the Partnership's tenants,
financial institutions, and transfer agent relating to their Year 2000
compliance plans. At this time, the general partners have not yet received
sufficient certifications to be assured that the tenants, financial
institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, the general
partners do not, at this time, know of the potential costs to the Partnership of
any adverse impact or effect of any Year 2000 deficiencies by these third
parties.
The general partners currently expect that all year 2000 compliance
testing and any necessary remedial measures on the information technology
systems used in the business activities and operations of the Partnership will
be completed prior to June 30, 1999. Based on the progress the general partners
and affiliates have made in identifying and addressing the Partnership's Year
2000 issues and the plan and timeline to complete the compliance program, the
general partners do not foresee significant risks associated with the
Partnership's Year 2000 compliance at this time. Because the general partners
and affiliates are still evaluating the status of the systems used in business
activities and operations of the Partnership and the systems of the third
parties with which the Partnership conducts its business, the general partners
have not yet developed a comprehensive contingency plan and are unable to
identify "the most reasonably likely worst case scenario" at this time. As the
general partners identify significant risks related to the Partnership's Year
2000 compliance or if the Partnership's Year 2000 compliance program's progress
deviates substantially from the anticipated timeline, the general partners will
develop appropriate contingency plans.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 10th day of November, 1998.
CNL INCOME FUND VI, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
-----------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
-----------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund VI, Ltd. at September 30, 1998, and its statement of
income for the nine months then ended and is qualified in its entirety by
reference to the Form 10Q of CNL Income Fund VI, Ltd. for the nine months ended
September 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,353,864
<SECURITIES> 0
<RECEIVABLES> 373,369
<ALLOWANCES> 341,604
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 22,145,930
<DEPRECIATION> 3,472,247
<TOTAL-ASSETS> 29,656,542
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 28,665,401
<TOTAL-LIABILITY-AND-EQUITY> 29,656,542
<SALES> 0
<TOTAL-REVENUES> 2,224,663
<CGS> 0
<TOTAL-COSTS> 507,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,854
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,233,652
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,233,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,233,652
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund VI, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
