UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19144
CNL INCOME FUND VI, LTD.
(Exact name of registrant as specified in its charter)
Florida 59-2922954
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407)422-1574
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of limited partnership interest ($500 per Unit)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended. Since no established market for such Units exists, there is no
market value for such Units. Each Unit was originally sold at $500 per Unit.
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
The Form 10-K of CNL Income Fund VI, Ltd. for the year ended December
31, 1997 is being amended to provide additional disclosure under Item 1.
Business, Item 2. Properties and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources, Short-Term
Liquidity and Long-Term Liquidity.
PART I
Item 1. Business
CNL Income Fund VI, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on August 17, 1988. The general partners of the Partnership are Robert
A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners"). Beginning on June 8, 1989, the Partnership
offered for sale up to $35,000,000 in limited partnership interests (the
"Units") (70,000 Units at $500 per Unit) pursuant to a registration statement on
Form S-11 under the Securities Act of 1933, as amended, effective December 16,
1988. The offering terminated on January 22, 1990, at which date the maximum
offering proceeds of $35,000,000 had been received from investors who were
admitted to the Partnership as limited partners (the "Limited Partners").
The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties upon which restaurants
were to be constructed (the "Properties"), which are leased primarily to
operators of selected national and regional fast-food and family-style
restaurant chains (the "Restaurant Chains"). Net proceeds to the Partnership
from its offering of Units, after deduction of organizational and offering
expenses, totalled $30,975,000, and were used to acquire 42 Properties,
including interests in four Properties owned by joint ventures in which the
Partnership is a co-venturer. During the year ended December 31, 1994, the
Partnership sold its Properties in Batesville and Heber Springs, Arkansas, to
the tenant and reinvested the net sales proceeds in a Jack in the Box Property
in Dallas, Texas, and a Jack in the Box Property in Yuma, Arizona, which is
owned as tenants-in-common with an affiliate of the General Partners. In
addition, during the year ended December 31, 1995, the Partnership sold its
Property in Little Canada, Minnesota, and reinvested the majority of the net
sales proceeds in a Denny's Property in Broken Arrow, Oklahoma. During the year
ended December 31, 1996, the Partnership reinvested the remaining net sales
proceeds from the sale of the Property in Little Canada, Minnesota, in a
Property located in Clinton, North Carolina, with affiliates of the General
Partners as tenants-in-common. Also, during the year ended December 31, 1996,
the Partnership sold its Property in Dallas, Texas. During the year ended
December 31, 1997, the Partnership reinvested the net sales proceeds from the
sale of the Property in Dallas, Texas, in a Bertucci's Property located in
Marietta, Georgia. In addition, during 1997, the Partnership sold its Properties
in Plattsmouth, Nebraska; Venice,
1
<PAGE>
Florida; Naples, Florida, and Whitehall, Michigan, and the Property in Yuma,
Arizona, which was held as tenants-in-common with an affiliate of the General
Partners, and reinvested a portion of these net sales proceeds in two IHOP
Properties, one in each of Elgin, Illinois, and Manassas, Virginia, and in a
Property in Vancouver, Washington, as tenants-in-common with affiliates of the
General Partners. In addition, Show Low Joint Venture, a joint venture in which
the Partnership is a co-venturer with an affiliate of the General Partners, sold
its Property in Show Low, Arizona. The joint venture reinvested the net sales
proceeds in a Property in Greensboro, North Carolina. As a result of the above
transactions, as of December 31, 1997, the Partnership owned 41 Properties. The
41 Properties include interests in four Properties owned by joint ventures in
which the Partnership is a co-venturer and two Properties owned with affiliates
as tenants-in-common. During January 1998, the Partnership reinvested the net
sales proceeds from the sales of the Properties in Whitehall, Michigan and
Plattsmouth, Nebraska in one Property in Overland Park, Kansas and one Property
in Memphis, Tennessee, as tenants-in-common, with affiliates of the General
Partners. In addition, in January 1998, the Partnership sold its Property in
Deland, Florida. In February 1998, the Partnership sold its Properties in
Liverpool, New York and Melbourne, Florida. Generally, the Properties are leased
on a triple-net basis with the lessees responsible for all repairs and
maintenance, property taxes, insurance and utilities.
The Partnership will hold its Properties until the General Partners
determine that the sale or other disposition of the Properties is advantageous
in view of the Partnership's investment objectives. In deciding whether to sell
Properties, the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations. Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified portion of the lease term
has elapsed. In general, the General Partners plan to seek the sale of some of
the Properties commencing seven to 12 years after their acquisition. The
Partnership has no obligation to sell all or any portion of a Property at any
particular time, except as may be required under property or joint venture
purchase options granted to certain lessees.
Leases
Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases. The leases of the Properties owned by the Partnership and
the joint ventures in which the Partnership is a co-venturer provide for initial
terms, ranging from five to 20 years (the average being 17 years), and expire
between 2003 and 2017. All leases are on a triple-net basis, with the lessees
responsible for all repairs and maintenance, property taxes, insurance and
utilities. The leases of the Properties provide for minimum base annual rental
payments (payable in monthly installments) ranging from approximately $38,100 to
$185,700. Generally, the leases provide for
2
<PAGE>
percentage rent based on sales in excess of a specified amount. In addition,
some of the leases provide that, commencing in the fourth to sixth lease year,
the percentage rent will be an amount equal to the greater of the percentage
rent calculated under the lease formula or a specified percentage (ranging from
one to five percent) of the purchase price or gross sales.
Generally, the leases of the Properties provide for two, three or four
five-year renewal options subject to the same terms and conditions as the
initial lease. Certain lessees also have been granted options to purchase
Properties at the Property's then fair market value, or pursuant to a formula
based on the original purchase price of the Property, after a specified portion
of the lease term has elapsed.
The leases also generally provide that, in the event the Partnership
wishes to sell the Property subject to that lease, the Partnership first must
offer the lessee the right to purchase the Property on the same terms and
conditions, and for the same price, as any offer which the Partnership has
received for the sale of the Property.
The tenant of the Property in Melbourne, Florida vacated the Property
in October 1997. The Partnership sold this Property in February 1998.
During the year ended December 31, 1997, the Partnership reinvested the
net sales proceeds from the sale of its Property in Dallas, Texas in 1996, in a
Bertucci's Property located in Marietta, Georgia. In addition, during 1997, the
Partnership sold its Properties in Plattsmouth, Nebraska; Venice, Florida;
Naples, Florida, and Whitehall, Michigan, and the Property in Yuma, Arizona,
which was held as tenants-in-common with an affiliate of the General Partners,
and reinvested a portion of these net sales proceeds in two IHOP Properties, one
in each of Elgin, Illinois, and Manassas, Virginia, and in a Property in
Vancouver, Washington, as tenants-in-common with affiliates of the General
Partners as described below in "Joint Venture Arrangements." In addition, Show
Low Joint Venture, a joint venture in which the Partnership is a co-venturer
with an affiliate of the General Partners, sold its Property in Show Low,
Arizona. The joint venture reinvested the net sales proceeds in a Property in
Greensboro, North Carolina. The lease terms for all of these new Properties are
substantially the same as the Partnership's other leases as described above in
the first three paragraphs of this section.
During January 1998, the Partnership reinvested the net sales proceeds
from the sales of the Properties in Whitehall, Michigan, and Plattsmouth,
Nebraska, in one Property in Overland Park, Kansas and one Property in Memphis,
Tennessee, as tenants-in-common, with affiliates of the General Partners as
described below in "Joint Venture Arrangements." The lease terms for these
Properties are substantially the same as the Partnership's other leases as
described above in the first three paragraphs of this section.
3
<PAGE>
Major Tenants
During 1997, three lessees of the Partnership and its consolidated
joint venture, Golden Corral Corporation, Restaurant Management Services, Inc.
and Mid-America Corporation, each contributed more than ten percent of the
Partnership's total rental income (including rental income from the
Partnership's consolidated joint venture in which the Partnership is a
co-venturer and the Partnership's share of the rental income from the three
Properties owned by unconsolidated joint ventures and two Properties owned with
affiliates as tenants-in-common). As of December 31, 1997, Golden Corral
Corporation was the lessee 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 rental payments
required by the leases, these three lessees each will continue to contribute
more than ten percent of the Partnership's total rental income in 1998 and
subsequent years. In addition, four Restaurant Chains, Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), Hardee's, Burger King and Denny's,
each accounted for more than ten percent of the Partnership's total rental
income in 1997 (including the Partnership's consolidated joint venture and the
Partnership's share of the rental income from the three Properties owned by
unconsolidated joint ventures in which the Partnership is a co-venturer and two
Properties owned with affiliates as tenants-in-common). In subsequent years, it
is anticipated that these four 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.
No single tenant or group of affiliated tenants lease Properties with an
aggregate carrying value in excess of 20 percent of the total assets of the
Partnership.
Joint Venture Arrangements and Tenancy in Common Arrangements
The Partnership has entered into a joint venture arrangement, Caro
Joint Venture, with an unaffiliated entity to purchase and hold one Property. In
addition, the Partnership has entered into three separate joint venture
arrangements: Auburn Joint Venture with CNL Income Fund IV, Ltd., an affiliate
of the General Partners, to purchase and hold one Property; Show Low Joint
Venture with CNL Income Fund II, Ltd., an affiliate of the General Partners, to
purchase and hold one Property; and Asheville Joint Venture with CNL Income Fund
VIII, Ltd.,an affiliate of the General Partners, to purchase and hold one
Property. Each of the affiliates is a limited partnership organized pursuant to
the laws of the State of Florida. The joint venture arrangements provide for the
Partnership and its joint venture partners to share in all costs and benefits
associated with the joint venture in accordance with their respective percentage
interests in the joint venture. The Partnership has a 66 percent interest in
Caro Joint Venture, a 3.9% interest in Auburn Joint Venture, a 36 percent
interest in
4
<PAGE>
Show Low Joint Venture, and a 14 percent interest in Asheville Joint Venture.
The Partnership and its joint venture partners are jointly and severally liable
for all debts, obligations and other liabilities of the joint venture.
Each joint venture has an initial term of 20 years and, after the
expiration of the initial term, continues in existence from year to year unless
terminated at the option of either joint venturer or by an event of dissolution.
Events of dissolution include the bankruptcy, insolvency or termination of any
joint venturer, sale of the Property owned by the joint venture and mutual
agreement of the Partnership and its joint venture partner to dissolve the joint
venture.
The Partnership has management control of Caro Joint Venture and shares
management control equally with affiliates of the General Partners for Auburn
Joint Venture, Show Low Joint Venture and Asheville Joint Venture. The joint
venture agreements restrict each venturer's ability to sell, transfer or assign
its joint venture interest without first offering it for sale to its joint
venture partner, either upon such terms and conditions as to which the venturers
may agree or, in the event the venturers cannot agree, on the same terms and
conditions as any offer from a third party to purchase such joint venture
interest.
Net cash flow from operations of Auburn Joint Venture, Show Low Joint
Venture, Caro Joint Venture and Asheville Joint Venture is distributed 3.9%,
36.0%, 66.0% and 14.0%, respectively, to the Partnership and the balance is
distributed to each of the other joint venture partners in accordance with its
respective percentage interest in the joint venture. Any liquidation proceeds,
after paying joint venture debts and liabilities and funding reserves for
contingent liabilities, will be distributed first to the joint venture partners
with positive capital account balances in proportion to such balances until such
balances equal zero, and thereafter in proportion to each joint venture
partner's percentage interest in the joint venture.
In addition to the above joint venture agreements, the Partnership
entered into an agreement to hold a Jack in the Box Property as
tenants-in-common with CNL Income Fund VII, Ltd., an affiliate of the General
Partners. The agreement provided for the Partnership and the affiliate to share
in the profits and losses of the Property in proportion to each co- tenant's
percentage interest. As of December 31, 1996, the Partnership owned a 51.67%
interest in this Property. In October 1997, the Partnership and the affiliate as
tenants-in-common, sold the Jack in the Box Property in Yuma, Arizona. In
December 1997, the Partnership entered into an agreement to hold a Property in
Vancouver, Washington, as tenants-in-common with CNL Income Fund, Ltd., CNL
Income Fund II, Ltd., and CNL Income Fund V, Ltd., affiliates of the General
Partners and in conjunction therewith, reinvested its portion of the net sales
proceeds received from the sale of the Property in Yuma, Arizona. The agreement
provides for the Partnership and the affiliate to share in the profits and
losses of the Property in proportion to each co-venturer's percentage interest.
The Partnership owns a 23.04%
5
<PAGE>
interest in the Property in Vancouver, Washington.
In addition, in January 1996, the Partnership entered into an agreement
to hold a Golden Corral Property as tenants-in-common with CNL Income Fund IV,
Ltd., CNL Income Fund X, Ltd., and CNL Income Fund XV, Ltd., each of which is an
affiliate of the General Partners. The agreement provides for the Partnership
and the affiliates to share in the profits and losses of the Property in
proportion to each co-venturer's percentage interest. The Partnership owns a
17.93% interest in this Property.
During January 1998, the Partnership entered into separate agreements
to hold an IHOP Property in Overland Park, Kansas , as tenants-in-common, with
CNL Income Fund II, Ltd., and CNL Income Fund III, Ltd., affiliates of the
General Partners, and to hold a Property in Memphis, Tennessee, as
tenants-in-common, with CNL Income Fund II, Ltd. and CNL Income Fund XVI, Ltd.,
affiliates of the General Partners. The agreements provide for the Partnership
and the affiliates to share in the profits and losses of the Property and net
cash flow from the Properties, in proportion to each co- tenant's percentage
interest. The Partnership owns a 34.74% and 46.2% interest in the Properties in
Overland Park, Kansas,and Memphis, Tennessee, respectively.
Each of the affiliates is a limited partnership organized pursuant to
the laws of the State of Florida. The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.
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
CNL Income Fund Advisors, Inc., an affiliate of the General Partners,
provided certain services relating to management of the Partnership and its
Properties pursuant to a management agreement with the Partnership through
September 30, 1995. Under this agreement, CNL Income Fund Advisors, Inc. was
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. CNL Income Fund Advisors, Inc. also
assisted the General Partners in negotiating the leases. For these services, the
Partnership had agreed to pay CNL Income Fund Advisors, Inc.
6
<PAGE>
an annual fee of one percent of the sum of gross rental revenues from Properties
wholly owned by the Partnership plus the Partnership's allocable share of gross
revenues of joint ventures in which the Partnership is a co-venturer and the
Property held as tenants-in-common with an affiliate, but not in excess of
competitive fees for comparable services. Under the management agreement, the
management fee is subordinated to receipt by the Limited Partners of an
aggregate, ten percent, cumulative, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return"), calculated in
accordance with the Partnership's limited partnership agreement (the
"Partnership Agreement").
Effective October 1, 1995, CNL Income Fund Advisors, Inc. assigned its
rights in, and its obligations under, the management agreement with the
Partnership to CNL Fund Advisors, Inc. All of the terms and conditions of the
management agreement, including the payment of fees, as described above, remain
unchanged.
The management agreement continues until the Partnership no longer owns
an interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.
Employees
The Partnership has no employees. The officers of CNL Realty
Corporation and the officers and employees of CNL Fund Advisors, Inc. 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 Group, Inc., a diversified real estate company, and its affiliates, who may
also perform certain services for the Partnership.
Item 2. Properties
As of December 31, 1997, the Partnership owned, 41 Properties. Of the
41 Properties, 35 are owned by the Partnership in fee simple, four are owned
through joint venture arrangements and two are owned through a tenancy in common
arrangement. 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 filed with this report for a listing of
the Properties and their respective costs, including acquisition fees and
certain acquisition expenses. Reference is made to the Schedule of Real Estate
and Accumulated Depreciation filed with this report for a listing of the
Properties and their respective costs, including acquisition fees and certain
acquisition expenses.
7
<PAGE>
Description of Properties
Land. The Partnership's Property sites range from approximately 11,500
to 88,200 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.
8
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
State Number of Properties
Florida 11
Georgia 1
Illinois 1
Indiana 1
Massachusetts 1
Michigan 2
North Carolina 3
Nebraska 1
New Mexico 1
New York 1
Ohio 1
Oklahoma 2
Pennsylvania 1
Tennessee 7
Texas 3
Virginia 2
Washington 1
Wyoming 1
------
TOTAL PROPERTIES: 41
======
Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. The buildings
generally are rectangular and are constructed from various combinations of
stucco, steel, wood, brick and tile. Building sizes range from approximately
1,200 to 10,700 square feet. All buildings on Properties are freestanding and
surrounded by paved parking areas. Buildings are suitable for conversion to
various uses, although modifications may be required prior to use for other than
restaurant operations. As of December 31, 1997, the Partnership had no plans for
renovation of the Properties. Depreciation expense is computed for buildings and
improvements using the straight line method using depreciable lives of 31.5 and
39 years for federal income tax purposes. As of December 31, 1997, the aggregate
cost basis of the Properties owned by the Partnership and its consolidated joint
venture, and the unconsolidated joint ventures (including Properties held
through tenancy in common arrangements) for federal income tax purposes was
$28,598,561 and $3,023,805, respectively.
Generally, a lessee is required, under the terms of its
9
<PAGE>
lease agreement, to make such capital expenditures as may be reasonably
necessary to refurbish buildings, premises, signs and equipment so as to comply
with the lessee's obligations, if applicable, under the franchise agreement to
reflect the current commercial image of its Restaurant Chain. These capital
expenditures are required to be paid by the lessee during the term of the lease.
10
<PAGE>
The following table lists the Properties owned by the Partnership as of
December 31, 1997 by Restaurant Chain.
Restaurant Chain Number of Properties
Arby's 1
Bertucci's 1
Burger King 5
Captain D's 1
Chevy's Fresh Mex 1
Church's 2
Darryl's 1
Denny's 3
Golden Corral 5
Hardee's 3
IHOP 2
Jack in the Box 1
KFC 3
Perkins 1
Popeyes 4
Shoney's 1
Taco Bell 1
Waffle House 3
Wendy's 1
Other 1
------
TOTAL PROPERTIES 41
======
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.
The terms of the leases of the Properties owned by the
Partnership are described in Item 1. Business -Leases.
At December 31, 1997, 1996, 1995, 1994, and 1993, the Properties were
95%, 98%,100%,100%, and 100% occupied, respectively. The following is a schedule
of the average annual rent for each of the five years ended December 31:
<TABLE>
<CAPTION>
For the Year Ended December 31:
1997 1996 1995 1994 1993
------------- ----------- ------------ ----------- -----------
<S> <C>
Rental Revenues (1) $3,139,283 $3,568,754 $3,431,074 $3,465,440 $3,641,644
Properties (2) 39 42 42 42 42
Average Rent per Unit $80,494 $84,970 $81,692 $82,510 $86,706
</TABLE>
(1) Rental revenues includes the Partnership's share of rental revenues
from the four Properties owned through joint venture arrangements and
the two properties owned through a tenancy in common arrangement.
Rental revenues have been adjusted, as applicable, for any amounts for
which the Partnership has established an allowance for doubtful
accounts.
(2) Excludes Properties that were vacant at December 31 which 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, 1997 for each of the ten years beginning with 1998 and
thereafter.
<TABLE>
<CAPTION>
Percentage of
Number Annual Rental Gross Annual
Expiration Year of Leases Revenues Rental Income
<S> <C>
1998 1 54,000 1.83%
1999 - - -
2000 - - -
2001 - - -
2002 - - -
2003 - - -
2004 4 624,648 21.17%
2005 5 533,411 18.08%
2006 1 111,414 3.78%
2007 - - -
Thereafter 28 1,627,599 55.14%
------- ------------- -------------
Totals 39 2,951,072 100.00%
======= ============= =============
</TABLE>
Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1997 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.
Restaurant Management Services leases five Popeyes restaurants, one
Church's Fried Chicken restaurant and one other restaurant (formerly operated as
a Captain D's). The initial term of each lease is 20 years (expiring between
2009 and 2010) and the average minimum base annual rent is approximately $53,000
(ranging from approximately $46,000 to $61,900).
12
<PAGE>
Golden Corral Corporation leases five Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2004 and 2011) and the
average minimum base annual rent is approximately $152,900 (ranging from
approximately $88,000 to $185,700).
Mid-America Corporation leases four Burger King restaurants.
The initial term of each lease is between 14 and 16 years
(expiring between 2004 and 2006) and the average minimum base annual rent is
approximately $105,000 (ranging from approximately $102,700 to $105,800).
The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.
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.
At the time the Partnership elects to dispose of its Properties,
other than as a result of the exercise of tenant options to purchase Properties,
the Partnership will be in competition with other persons and entities to locate
purchasers for its Properties.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Partnership was organized on August 17, 1988, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains. The
leases are triple-net leases, with the lessees generally responsible for all
repairs and maintenance, property taxes, insurance and utilities. As of December
31, 1997, the Partnership owned 41 Properties, either directly or indirectly
through joint venture or tenancy in common arrangements.
Capital Resources
The Partnership's primary source of capital for the years ended
December 31, 1997, 1996 and 1995, was cash from operations (which includes cash
received from tenants, distributions from joint ventures and interest received,
less cash paid for
13
<PAGE>
expenses). Cash from operations was $3,156,041, $3,310,762 and $3,222,430 for
the years ended December 31, 1997, 1996 and 1995, respectively. The decrease in
cash from operations during 1997, as compared to 1996, and the increase during
1996, as compared to 1995, are primarily a result of changes in income and
expenses as discussed in "Results of Operations" below and changes in the
Partnership's working capital during each of the respective years.
Other sources and uses of capital included the following during the
years ended December 31, 1997, 1996 and 1995.
In June 1995, the Partnership sold its Property in Little Canada,
Minnesota, for $904,000 and received net sales proceeds of $899,503, resulting
in a gain of $103,283 for financial reporting purposes. This Property was
originally acquired by the Partnership in October 1989 and had a cost of
approximately $823,900, excluding acquisition fees and miscellaneous acquisition
expenses; therefore, the Partnership sold the Property for approximately $75,600
in excess of its original purchase price. In August 1995, the Partnership
reinvested $724,612 in a Property in Broken Arrow, Oklahoma. In addition, in
August 1995, the Partnership sold a small parcel of vacant land adjacent to its
Property in Orlando, Florida, for $7,500, resulting in a loss of $7,370 for
financial reporting purposes. In connection therewith, the Partnership accepted
a promissory note for $6,000. The promissory note was collateralized by a
mortgage on the Property, bore interest at a rate of nine percent per annum and
was scheduled to be collected in six monthly installments of $1,026, with
collections commencing September 1995. Receivables include $3,056 from the note
at December 31, 1995. The receivable was collected in full during 1996.
In January 1996, the Partnership reinvested the remaining net sales
proceeds from the 1995 sale of the Property in Little Canada, Minnesota, in a
Golden Corral Property located in Clinton, North Carolina, with affiliates of
the General Partners as tenants-in-common. In connection therewith, the
Partnership and its affiliates entered into an agreement whereby each co-tenant
will share in the profits and losses of the Property in proportion to its
applicable percentage interest. As of December 31, 1997, the Partnership owned a
17.93% interest in this Property.
In March 1996, the Partnership entered into an agreement with the
tenant of the Properties in Chester, Pennsylvania, and Orlando, Florida, for
payment of certain rental payment deferrals the Partnership had granted to the
tenant through March 31, 1996. Under the agreement, the Partnership agreed to
abate approximately $42,700
14
<PAGE>
of the rental payment deferral amounts. The tenant made payments of
approximately $18,600 in each of April 1996 and March 1997 in accordance with
the terms of the agreement, and has agreed to pay the Partnership the remaining
balance due of approximately $90,900 in six remaining annual installments
through 2002.
In December 1996, the Partnership sold its Property in Dallas, Texas,
to an unrelated third party for $1,016,000 and received net sales proceeds of
$982,980. This Property was originally acquired by the Partnership in June 1994
and had a cost of approximately $980,900, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the Property
for approximately $2,100 in excess of its original purchase price. Due to the
fact that the Partnership had recognized accrued rental income since the
inception of the lease relating to the straight-lining of future scheduled rent
increases in accordance with generally accepted accounting principles, the
Partnership wrote off the cumulative balance of such accrued rental income at
the time of the sale of this Property, resulting in a loss on land and building
of $1,706 for financial reporting purposes. Due to the fact that the
straight-lining of future rent increases over the term of the lease is a
non-cash accounting adjustment, the write-off of these amounts is a loss for
financial statement purposes only. As of December 31, 1996, the net sales
proceeds of $977,017, plus accrued interest of $739, were being held in an
interest bearing escrow account pending the release of funds by the escrow agent
to acquire an additional Property. In February 1997, the Partnership reinvested
the net sales proceeds, along with additional funds, in a Bertucci's Property
located in Marietta, Georgia, for a total cost of approximately $1,112,600. The
General Partners believe that the transaction, or a portion thereof, relating to
the sale of the Property in Dallas, Texas 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 January 1997, Show Low Joint Venture, in which the Partnership owns
a 36 percent interest, sold the Property to the tenant for $970,000, resulting
in a gain to the joint venture of approximately $360,000 for financial reporting
purposes. The Property was originally contributed to Show Low Joint Venture in
July 1990 and had a total cost of approximately $663,500, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the joint venture sold
the Property for approximately $306,500 in excess of its original purchase
price. In June 1997, Show Low Joint Venture reinvested $782,413 of the net sales
proceeds in a Property in Greensboro, North Carolina. As of December 31, 1997,
the Partnership had received approximately $70,000 representing a return of
capital for its pro-rata share of the uninvested net sales proceeds.
In July 1997, the Partnership sold the Property in Whitehall, Michigan,
to an unrelated third party, for $665,000
15
<PAGE>
and received net sales proceeds (net of $2,981 which represents amounts due to
the former tenant for prorated rent) of $626,907, resulting in a loss of $79,777
for financial reporting purposes, as described below in "Results of Operations."
The net sales proceeds were reinvested in a Property in Overland Park, Kansas,
with affiliates of the General Partners as tenants-in-common, in January 1998.
In addition, in July 1997, the Partnership sold its Property in Naples,
Florida, to an unrelated third party, for $1,530,000 and received net sales
proceeds (net of $9,945 which represents amounts due to the former tenant for
prorated rent) of $1,477,780, resulting in a gain of $186,550 for financial
reporting purposes. This Property was originally acquired by the Partnership in
December 1989 and had a cost of approximately $1,083,900, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold the
Property for approximately $403,800 in excess of its original purchase price. In
December 1997, the Partnership reinvested the net sales proceeds in an IHOP
Property in Elgin, Illinois, for a total cost of approximately $1,484,100. The
General Partners believe that the transaction, or a portion thereof, relating to
the sale of the Property in Naples, 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 addition, in July 1997, the Partnership sold its Property in
Plattsmouth, Nebraska, to the tenant, for $700,000 and received net sales
proceeds (net of escrow fees of $1,750) of $697,650, resulting in a gain of
$156,401 for financial reporting purposes. This Property was originally acquired
by the Partnership in January 1990 and had a cost of approximately $561,000,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the Property for approximately $138,400 in excess of its
original purchase price. In January 1998, the Partnership reinvested the net
sales proceeds in an IHOP Property in Memphis, Tennessee, with affiliates 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
Plattsmouth, Nebraska, 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 June 1997, the Partnership terminated the lease with the tenant of
the Property in Greensburg, Indiana. In connection therewith, the Partnership
accepted a promissory note from this former tenant for $13,077 for amounts
relating to past due real estate taxes the Partnership had incurred as a result
of the former tenant's financial difficulties. The promissory note,
16
<PAGE>
which is uncollateralized, bears interest at a rate of ten percent per annum,
and is being collected in 36 monthly installments. Receivables at December 31,
1997, included $13,631 of such amounts, including accrued interest of $554. 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 agreed to fund $125,000 in
renovation costs. The renovations were completed in October 1997, at which time
rent commenced.
In September 1997, the Partnership sold its Property in Venice,
Florida, to an unrelated third party, for $1,245,000 and received net sales
proceeds (net of $5,048 which represents amounts due to the former tenant for
prorated rent) of $1,201,648, resulting in a gain of $283,853 for financial
reporting purposes. This Property was originally acquired by the Partnership in
August 1989 and had a cost of approximately $1,032,400, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Partnership sold the
Property for approximately $174,300 in excess of its original purchase price. In
December 1997, the Partnership reinvested the net sales proceeds in an IHOP
Property in Manassas, Virginia, for a total cost of approximately $1,126,800.
The General Partners believe that the transaction, or a portion thereof,
relating to the sale of the Property in Venice, 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 October 1997, the Partnership and an affiliate, as
tenants-in-common, sold the Property in Yuma, Arizona, in which the Partnership
owned a 51.67% interest, for a total sales price of $1,010,000 and received net
sales proceeds of $982,025, resulting in a gain, to the tenancy-in-common, of
approximately $128,400 for financial reporting purposes. The Property was
originally acquired in July 1994 and had a total cost of approximately $861,700,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Property was sold for approximately $120,300 in excess of its original
purchase price. The Partnership received approximately $455,000, representing a
return of capital for its pro-rata share of the net sales proceeds. In December
1997, the Partnership reinvested the amounts received as a return of capital
from the sale of the Yuma, Arizona Property, in a Property in Vancouver,
Washington, as tenants-in-common with affiliates of the General Partners. The
General Partners believe that the transaction, or a portion thereof, relating to
the sale of the Property in Yuma, Arizona 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.
17
<PAGE>
In January 1998, the Partnership sold its Property in Deland, Florida,
to the tenant, for $1,250,000 and received net sales proceeds of $1,234,617,
resulting in a gain of approximately $345,100 for financial reporting purposes.
The Partnership intends to reinvest the sales proceeds in an additional Property
during 1998. 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 proceeds will be structured to qualify as a like-kind
exchange transaction for federal income tax purposes.
In February 1998, the Partnership sold its Property in Melbourne,
Florida, for $590,000 and received net sales proceeds of $542,477, resulting in
a loss of $158,239 for financial reporting purposes, which the Partnership
recorded at December 31, 1997, as described below in "Results of Operations." In
addition, in February 1998, the Partnership sold its Property in Liverpool, New
York, for $157,500 and received net sales proceeds of approximately $150,700,
resulting in a loss of $181,970 for financial reporting purposes, which the
Partnership recorded at December 31, 1997, as described below in "Results of
Operations." The Partnership intends to reinvest the net sales proceeds from the
sale of both Properties in additional Properties.
None of the Properties owned by the Partnership, or the joint ventures
or the tenancy in common arrangements in which the Partnership owns an interest,
is or may be encumbered. Under its Partnership Agreement, the Partnership is
prohibited from borrowing for any purpose; provided, however, that the General
Partners or their affiliates are entitled to reimbursement, at cost, for actual
expenses incurred by the General Partners or their affiliates on behalf of the
Partnership. Affiliates of the General Partners from time to time incur certain
operating expenses on behalf of the Partnership for which the Partnership
reimburses the affiliates without interest.
Currently, rental income from the Partnership's Properties and net
sales proceeds from the sale of Properties pending reinvestment in additional
Properties, are invested in money market accounts or other short-term, highly
liquid investments such as demand deposit accounts at commercial banks, CDs and
money market accounts with less than a 30-day maturity date, pending the
Partnership's use of such funds to pay Partnership expenses or to make
distributions to the partners. At December 31, 1997, the Partnership had
$1,614,759 invested in such short-term investments as compared to $1,127,930 at
December 31, 1996. The increase in cash and cash equivalents during 1997, is
primarily due to the receipt of $626,907 in net sales proceeds form the sale of
the Property in Whitehall, Michigan in July 1997. This increase is partially
offset by a decrease in cash and cash equivalents due to the Partnership
investing approximately $134,900 in a Bertucci's Property, as described above.
As of December 31, 1997, the average interest rate earned on the rental income
deposited in demand deposit accounts at commercial banks was approximately three
percent annually. The funds remaining at December 31, 1997, after payment of
18
<PAGE>
distributions and other liabilities, will be used to invest in an additional
Property as described above and to meet the Partnership's working capital and
other needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The General Partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
Due to low operating expenses and ongoing cash flow, the General
Partners do not believe that working capital reserves are necessary at this
time. In addition, because the leases of the Partnership's Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.
The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
The Partnership generally distributes cash from operations remaining
after the payment of the operating expenses of the Partnership, to the extent
that the General Partners determine that such funds are available for
distribution. Based on cash from operations, and cumulative excess operating
reserves for the year ended December 31, 1996, the Partnership declared
distributions to the Limited Partners of $3,150,000, $3,220,000 and $3,150,000
for the years ended December 31, 1997, 1996 and 1995, respectively. This
represents distributions of $45, $46 and $45 per Unit for the years ended
December 31, 1997, 1996 and 1995, respectively. No amounts distributed to the
Limited Partners for the years ended December 31, 1997, 1996 and 1995, 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 1997, 1996 and 1995, affiliates of the General Partners,
incurred on behalf of the Partnership $82,503, $96,112 and $95,898,
respectively, for certain operating expenses. As of December 31, 1997 and 1996,
the Partnership owed $32,019 and $2,633, respectively, to affiliates for such
amounts and accounting and administrative services. As of February 28, 1998, the
Partnership had reimbursed the affiliates all such amounts. Other liabilities of
the Partnership, including distributions payable, increased to $1,022,326 at
December 31, 1997, from $917,704 at December 31, 1996. The increase in other
liabilities is partially attributable to the Partnership accruing renovation
costs for the Property in Greensburg, Indiana, in connection with the new lease
entered into in July 1997, as described above. In addition, the increase in
other liabilities for 1997 was due to an increase in accrued and escrowed real
estate taxes payable due to the Partnership accruing current real estate taxes
relating to its Property in Melbourne, Florida, due to the fact that the tenant
vacated the Property in October 1997. Other liabilities also increased due to an
increase in rents paid in advance. The increase in other liabilities is
partially offset by a decrease in distributions payable as a result of the
Partnership accruing a special distribution payable to the Limited Partners of
$70,000 at December 31, 1996, which was paid in January 1997 from excess
operating reserves. The General Partners believe that the Partnership has
sufficient cash on hand to meet its current working capital needs.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During 1995, the Partnership owned and leased 38 wholly owned
Properties (including one Property in Little Canada, Minnesota, which was sold
in June 1995), during 1996, the Partnership owned and leased 37 wholly owned
Properties (including one Property in Dallas, Texas, which was sold in December
1996), and during 1997, the Partnership owned and leased 39 wholly owned
Properties (including three Properties, one in each of Naples, Florida;
Plattsmouth, Nebraska and Whitehall, Michigan, which were sold in July 1997 and
one Property in Venice, Florida, which was sold in September 1997). In addition,
during 1995 and 1996, the Partnership was a co-venturer in four separate joint
ventures that each owned and leased one Property, and during 1997, the
Partnership was a co-venturer in four separate joint ventures that owned and
leased a total of five Properties (including one Property in Show Low, Arizona,
which was sold in January, 1997). During 1995, the Partnership owned and leased
one Property with an affiliate as tenants-in-common, during 1996, the
Partnership owned and leased two properties with affiliates as tenants-in-common
and during 1997, the Partnership owned and leased four Properties with
affiliates as tenants-in-
20
<PAGE>
common (including one Property in Yuma, Arizona, which was sold in October,
1997). As of December 31, 1997, the Partnership owned, either directly, as
tenants-in-common with affiliates, or through joint venture arrangements, 41
Properties which are subject to long-term, triple-net leases. The leases of the
Properties provide for minimum base annual rental amounts (payable in monthly
installments) ranging from approximately $38,100 to $185,700. Generally, the
leases provide for percentage rent based on sales in excess of a specified
amount. In addition, some of the leases provide that, commencing in the fourth
to sixth lease year, the percentage rent will be an amount equal to the greater
of the percentage rent calculated under the lease formula or a specified
percentage (ranging from one to five percent) of the purchase price or gross
sales. For further description of the Partnership's leases and Properties, see
Item 1. Business - Leases and Item 2. Properties, respectively.
During the years ended December 31, 1997, 1996 and 1995, the
Partnership and its consolidated joint venture, Caro Joint Venture, earned
$2,897,402, $3,333,665 and $3,207,860, respectively, in rental income from
operating leases and earned income from direct financing leases. The decrease in
rental and earned income during the year ended December 31, 1997, as compared to
1996, was partially attributable to a decrease of approximately $159,400 during
1997, as a result of the sales during 1997 of the Properties in Whitehall,
Michigan; Naples, Florida; Plattsmouth, Nebraska and Venice, Florida. The
decrease in rental and earned income during 1997, as compared to 1996, was
partially attributable to, and the increase in rental and earned income during
1996, as compared to 1995, was partially offset by, a decrease of $103,100 and
$6,800, respectively, of rental and earned income from the sale of the Property
in Dallas, Texas in December 1996. The decrease in rental income during 1997 was
partially offset by an increase of approximately $109,400 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. The
decrease in rental and earned income during 1997 was partially offset by an
increase of approximately $1,600 in rental and earned income due to the fact
that the Partnership reinvested the net sales proceeds from the sales of the
Properties in Naples and Venice, Florida in two IHOP Properties in Elgin,
Illinois and Manassas, Virginia in December 1997.
The decrease in rental income during 1997, as compared to 1996, is also
attributable to the fact that during 1997 the Partnership's consolidated joint
venture established an allowance for doubtful accounts for rental amounts unpaid
by the tenant of the Property in Caro, Michigan totalling approximately $84,500
due to financial difficulties the tenant is experiencing. No such allowance was
established during 1996. The Partnership's consolidated joint venture will
continue to pursue collection of past due rental amounts relating to this
Property and will recognize such amounts as income if collected.
In addition, the decrease in rental and earned income during 1997, as
compared to 1996, is partially attributable to the
21
<PAGE>
Partnership increasing its allowance for doubtful accounts during 1997 by
approximately $40,500 for rental amounts relating to the Hardee's Property
located in Greensburg, Indiana, due to financial difficulties the tenant was
experiencing. Rental and earned income also decreased by approximately $43,700
during 1997 due to the fact that the Partnership terminated the lease with the
former tenant of the Property in Greensburg, Indiana, in June 1997, as described
above in "Capital Resources." The General Partners have agreed that they will
cease collection efforts on past due rental amounts once the former tenant of
this Property pays all amounts due under the promissory note for past due real
estate taxes described above in "Capital Resources." The decrease in rental and
earned income was slightly offset by an increase of $14,200 in rental income
from the new tenant of this Property who began operating the Property after it
was renovated into an Arby's Property.
In addition, rental and earned income decreased during 1997, as a
result of the Partnership establishing an allowance for doubtful accounts during
1997 totalling approximately $107,100 for rental amounts relating to the
Property located in Melbourne, Florida, due to the fact that the tenant vacated
the Property in October 1997. The Partnership will continue to pursue collection
of past due rental amounts relating to this Property and will recognize such
amounts as income if collected. The Partnership sold this Property in February
1998, as described above in " Capital Resources."
In addition, rental and earned income decreased by approximately
$35,300 during 1997, as a result of the fact that in December 1996, the tenant
ceased operations and vacated the Property in Liverpool, New York. The
Partnership sold this Property in February 1998, as described above in "Capital
Resources."
The decrease in rental and earned income during 1997, as compared to
1996, was offset by, and the increase in rental and earned income for 1996, was
partially attributable to, the fact that the Partnership collected and recorded
as income approximately $18,600 and $5,300, respectively, in rental payment
deferrals for the two Properties leased by the same tenant in Chester,
Pennsylvania, and Orlando, Florida. Previously, the Partnership had established
an allowance for doubtful accounts for these amounts. These amounts were
collected in accordance with the agreement entered into in March 1996, with the
tenant to collect the remaining balance of the rental payment deferral amounts
as discussed above in "Capital Resources." The increase in rental and earned
income during 1996, as compared to 1995, was partially attributable to the fact
that during the year ended December 31, 1995, the Partnership established an
allowance for doubtful accounts of approximately $52,900, for rental payment
deferral amounts relating to these Properties deemed uncollectible. No such
allowance was established during the year ended December 31, 1996 or 1997.
Rental and earned income increased during 1996, as compared
to 1995, by approximately $43,700 due to the acquisition of a
22
<PAGE>
Property located in Broken Arrow, Oklahoma, in August 1995 with the net sales
proceeds from the sale of the Property in Little Canada, Minnesota, in June
1995. The increase in rental income was partially offset by a decrease of
approximately $6,800 during the year ended December 31, 1996, due to the sale of
the Property in Little Canada, Minnesota, in June 1995.
In addition, the increase in rental income during 1996, as compared to
1995, was partially attributable to an increase of approximately $35,300 during
1996, due to the fact that in April 1995, the Partnership entered into a new
lease for the Property in Hermitage, Tennessee, for which rent commenced in June
1995.
For the years ended December 31, 1997, 1996 and 1995, the Partnership
also earned $147,434, $110,073 and $115,946, respectively, in contingent rental
income. The increase in contingent rental income during 1997 is primarily
attributable to increases in gross sales relating to certain Properties. The
decrease in contingent rental income for 1996, as compared to 1995, is primarily
attributable to the decreases in gross sales relating to certain Properties.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Partnership earned $280,331, $97,381 and $83,483, respectively, attributable to
net income earned by joint ventures in which the Partnership is a co-venturer.
The increase in net income earned by joint ventures in 1997, as compared to
1996, is primarily attributable to 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 in January 1997, as described above in "Capital Resources."
Show Low Joint Venture reinvested the majority of the net sales proceeds in a
replacement Property in June 1997. In addition, in October 1997, the Partnership
and an affiliate, as tenants-in-common, sold the Property in Yuma, Arizona, and
recognized a gain of approximately $128,400 for financial reporting purposes, as
described above in "Capital Resources." The Partnership owned a 51.67% interest
in the Property in Yuma, Arizona, held as tenants-in-common with an affiliate.
The Partnership reinvested its portion of the net sales proceeds in a Property
in Vancouver, Washington, in December 1997, as described above in "Capital
Resources." The increase in net income earned by these joint ventures during
1996, as compared to 1995, is primarily attributable to the fact that in January
1996, the Partnership acquired an interest in a Golden Corral Property in
Clinton, North Carolina, with affiliates as tenants-in-common, as described
above in "Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, three of the
Partnership's lessees, Golden Corral Corporation, Restaurant Management
Services, Inc. and Mid-America Corporation, 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 the three Properties owned by unconsolidated joint ventures
in which the Partnership is a co-venturer and two
23
<PAGE>
Properties owned with affiliates as tenants-in-common). As of December 31, 1997,
Golden Corral Corporation was the lessee 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 three lessees each
will continue to contribute more than ten percent of the Partnership's total
rental income during 1998 and subsequent years. In addition, three Restaurant
Chains, Golden Corral, Hardee's and Burger King, and in 1997, an additional
Restaurant Chain, Denny's, each accounted for more than ten percent of the
Partnership's total rental income in 1997, 1996 and 1995 (including the
Partnership's consolidated joint venture and the Partnership's share of the
rental income from the three Properties owned by unconsolidated joint ventures
in which the Partnership is a co-venturer and two Properties owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these four 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.
For the years ended 1997, 1996 and 1995, the Partnership also earned
$119,961, $49,056 and $51,130, respectively, in interest and other income. The
increase in interest and other income during the year ended December 31, 1997,
was primarily attributable to interest earned on the net sales proceeds received
and held in escrow relating to the sales of the Properties in Dallas, Texas;
Naples, Florida; Plattsmouth, Nebraska and Venice, Florida.
Operating expenses, including depreciation and amortization expense,
were $840,365, $683,163 and $672,818 for the years ended December 31, 1997, 1996
and 1995, respectively. The increase in operating expenses during 1997, as
compared to 1996, is partially due to the fact that the Partnership recorded
approximately $122,400 in bad debt expense and approximately $19,400 in real
estate tax expense for the Property located in Melbourne, Florida, due to the
fact that the tenant vacated the Property in October 1997. The Partnership sold
this Property in February 1998, as described above in "Capital Resources." In
addition, the Partnership's consolidated joint venture, Caro Joint Venture,
recorded bad debt expense and real estate tax expense of approximately $26,200
relating to the Property located in Caro, Michigan, representing past due rental
and other amounts. The joint venture partners intend to continue to pursue the
collection of such amounts relating to the Property in Caro, Michigan. The
increase in operating expenses during 1996, as compared to 1995, was partially a
result of an increase in accounting and administrative expenses associated with
operating the Partnership and its Properties and an increase in insurance
expense as a result of the General Partners' obtaining contingent liability and
Property coverage for the Partnership beginning in May 1995.
24
<PAGE>
The increase in operating expenses during 1997 was partially offset by
the decrease in depreciation expense which resulted from the sale of the
Property in Dallas, Texas in December 1996, the sale of the Property in
Whitehall, Michigan, in July 1997, and the sale of the Property in Venice,
Florida, in September 1997. The decrease in depreciation expense was partially
offset by an increase in depreciation expense attributable to the purchase of
the Property in Marietta, Georgia, in February 1997.
As a result of the sales of the Properties in Naples, Florida;
Plattsmouth, Nebraska and Venice, Florida, as described above in "Capital
Resources," the Partnership recognized a gain of $626,804 during 1997 for
financial reporting purposes. The gain for 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, as described above in " Capital
Resources."
As a result of the sale of the Property in Dallas, Texas, in December
1996, the Partnership recognized a loss for financial reporting purposes of
$1,706 for the year ended December 31, 1996, as discussed above in "Capital
Resources." In addition, as a result of the sale of the Property in Little
Canada, Minnesota, during 1995 the Partnership recognized a gain of $103,283,
and as a result of the sale during 1995 of a portion of the land of the Property
in Orlando, Florida, the Partnership recognized a loss of $7,370 for the year
ended December 31, 1995, as described above in "Capital Resources."
During the years ended December 31, 1996 and 1997, the Partnership
recorded provisions for losses on land and building in the amounts of $77,023
and $104,947, respectively, for financial reporting purposes for the Property in
Liverpool, New York. The allowance at December 31, 1996, represented the
difference between the Property's carrying value at December 31, 1996 and the
estimated net realizable value for this Property based on an anticipated sales
price to an interested third party. The allowance at December 31, 1997,
represents the difference between the Property's carrying value at December 31,
1997 and the net realizable value of the Property based on the net sales
proceeds received in February 1998 from the sale of the Property.
During the year ended December 31, 1997, the Partnership established an
allowance for loss on land and on allowance for impairment in carrying value of
net investment in direct financing lease for its Property in Melbourne, Florida,
in the amount of $158,239. The allowance represents the difference between the
Property's carrying value at December 31, 1997 and the net sales proceeds
received in February 1998 from the sale of the Property, as described above in
"Capital Resources."
The General Partners of the Partnership are in the process of assessing
and addressing the impact of the year 2000 on their computer package software.
The hardware and built-in software
25
<PAGE>
are believed to be year 2000 compliant. Accordingly, the General Partners do not
expect this matter to materially impact how the Partnership conducts business
nor its current or future results of operations or financial position.
The Partnership's leases as of December 31, 1997, 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. Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time. Continued inflation also 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.
26
<PAGE>
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 29th day of
July, 1999.
CNL INCOME FUND VI, 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.
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ Robert A. Bourne President, Treasurer and Director July 29, 1999
- -------------------------- (Principal Financial and Accounting
Robert A. Bourne Officer)
/s/ James M. Seneff, Jr. Chief Executive Oficer and Director July 29, 1999
- -------------------------- (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>
